A Critique of Creative Shari’ah Compliance in the Islamic Finance Industry
CRITIQUE SHARI’AH COMPLIANCE IN THE ISLAMIC FINANCE – Book Sampl
Introduction – CRITIQUE SHARI’AH COMPLIANCE IN THE ISLAMIC FINANCE
Over the past few decades, the Islamic financial services industry has witnessed a rapid increase in size, with an annual growth rate of 10% to 20%.1 Currently, more than 300 Islamic financial institutions (IFIs) are spread over 51 countries around the world.2 Standard & Poor’s estimates that the industry is worth approximately $1.4 trillion,3 a number projected to reach $2.8 trillion by 2015.4 These market figures have motivated a number of global financial institutions such as Citibank, Goldman Sachs, HSBC, and BNP Paribas to start offering Sharīʿah-compliant financial services.5
However, claims have arisen that many institutions offer Sharīʿah-compliant financial services which in practise appear to risk undermining the spirit and objectives of Islamic finance.6 This fear has been increasingly echoed by Sharīʿah scholars, academics, and investors with particular interest in Islamic finance.7
For instance, Sheikh Saleh Kamel,8 one of the principal architects of the Islamic finance industry and the chairman and founder of many Islamic banks, lamented in a recent interview that many so-called Islamic banking products and services are not actually Islamic.9
Similarly, in 2008, the ṣukūk (Islamic bond) market suffered a loss of about $15 billion in the wake of a re- nowned scholar’s remark that 85% of the ṣukūk traded in the market are not Sharīʿah compliant.10 This phenomenon is so prevalent that in 2011,11 a popular Saudi Arabian television comedy called Tāsh Mā Tāsh (No Big Deal) provoked a huge controversy after accusing Islamic banks of being no different from con- ventional banks. The episode was titled Zayd akhū ʿUbayda, an Arabic idiom that means “cut from the same cloth”.
Moreover, the issue has been openly dis- cussed in various newspapers which characterise the practise of institutions offering Islamic financial services (IIFS) as tadlīs (fraud).12 Khan suggests that an IIFS “replaces conventional banking terminology with terms from classical Arabic and offers near-identical services to its clients but at a higher cost”.13 Bedoui and Mansour note that the Islamic finance industry “is simply the same conventional industry but with makeup”.14
The issue has even been noted by anti-Sharīʿah campaigners such as David Yerushalmi.15 In 1999, the US Office of the Comptroller of the Currency (OCC) reviewed and approved murābaḥah (a mark-up sale), the most common product offered by IIFS, concluding that “the economic substance of the murābaḥah financing transaction is function- ally equivalent to either a real estate mortgage transaction or an inventory or equipment loan agreement”.16
The gap between the theory and the practise of Islamic finance has been pointed out by many researchers17 and characterised by some as constituting a kind of “Sharīʿah arbitrage”18 or “pseudo-Islamic product”.19 In theory, financial instruments which are based on the principle of profit- and loss-sharing (PLS) are the ideal form of financing in Islamic law.20
However, IIFS offer primarily debt-based instruments,21 which Sharīʿah actively discourages.22 The permis- sibility of several heavily used financing instruments in the industry, such as tawarruq, bayʿ al-ʿīnah, and murābaḥah,23 is strongly disputed, as many Sharīʿah scholars see them as incompatible with the objectives of Islamic finance.24
These transactions have been vilified as opening a “back door” to usurious prohibited transactions.25
The practise which this book calls “creative Sharīʿah compliance”, drawing on the term “creative compliance” coined by McBarnet and Whelan,26 starts when a ḥīlah (legal ruse) is employed to circumvent Islamic finance rules and thus to provide a fatwā (Islamic legal opinion) that suits the institution’s products, regardless of the fact that these products blatantly contravene the spirit of Islamic law.
Creative Sharīʿah compliance might involve restructuring con- ventional products in a way that satisfies Sharīʿah requirements in form but not in substance.27 This revised structure usually consists of multiple complex contracts and sub-agreements branded with Arabic names.28
The aim of these combined contracts is “breaking down the overall questionable transaction into two segments—each of which, individually, being Sharīʿah compliant— whose combination ends up recreating the overall effect of the forbidden transaction”.29
The complexity of such an instrument sometimes makes it hard for experts to verify its compliance with Sharīʿah law. Howladar, “Shariah Risk: Understanding Recent Compliance Issues in Islamic Finance”. This procedure has been called “Black Box Syndrome” by Shaykh Yusuf Talal DeLorenzo, Y usuf Talal DeLorenzo, “The Black Box Syndrome: A New Challenge for Shariah Supervisory Boards,” Islamic Finance news, … Continue reading an A ican
Sharīʿah scholar and a renowned figure within the industry. He writes:
I would like to see more faith in what true and diligent Sharīʿah compli- ance actually means to our industry. I am dismayed by quick fixes and shortcuts which in many cases circumvent the Sharīʿah. The industry has proved time and again that adherence to the principles of Sharīʿah can be profitable, and that such adherence does not spell hardship. We have no need of “black boxes” and of arm’s length transactions that miraculously produce e spirit of the Sharīʿah to the letter of the law.
The deployment of creative compliance practises to avoid standards is not a new phenomenon, especially in relation to standards of practise in account- ing and taxationMcBarnet and Whelan, “The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control.” See also: Doreen J. McBarnet, Crime, … Continue reading as well as in various legal areas such as environmental lawDaniel A. Farber, “Taking Slippage Seriously: Noncompliance and Creative Compliance inEnvironmental Law,” Harvard Environmental Law Review 23, … Continue reading and labour law. Amanda Pyman, “Creative Compliance in Labour Relations: ‘Turning the Law on its Head’,” in Advances in Industrial & Labor Relations, ed. … Continue reading
McBarnet and Whelan distinguish between “rule compliance”, which adheres only to the letter of the law, and “substantive compliance”, which is compatible with the law’s overall objectives. Karen Yeung, Securing Compliance: a Principled Approach (Oxford: Hart Pub, 2004), p. 11. While creative compliance does not impugn the validity of the standard of practise in conventional finance, it does run the risk of making contracts and agreements void in Islam pose a greater legal risk than conventional finance.
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References / Footnotes
|⇧01||Howladar, “Shariah Risk: Understanding Recent Compliance Issues in Islamic Finance”.|
|⇧02||Y usuf Talal DeLorenzo, “The Black Box Syndrome: A New Challenge for Shariah Supervisory Boards,” Islamic Finance news, http://www.shariahfunds.com/pubs/news/Islamic%20Finance%20News%20V4i14.pdf. accessed 11 March 2014.|
|⇧03||McBarnet and Whelan, “The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control.” See also: Doreen J. McBarnet, Crime, Compliance and Control (Aldershot: Ashgate/Dartmouth, 2004).|
|⇧04||Daniel A. Farber, “Taking Slippage Seriously: Noncompliance and Creative Compliance inEnvironmental Law,” Harvard Environmental Law Review 23, no. 2 (1999).|
|⇧05||Amanda Pyman, “Creative Compliance in Labour Relations: ‘Turning the Law on its Head’,” in Advances in Industrial & Labor Relations, ed. David Lewin and Bruce E. Kaufman (Emerald Group Publishing Limited, 2005).|
|⇧06||Karen Yeung, Securing Compliance: a Principled Approach (Oxford: Hart Pub, 2004), p. 11.|