Shariah Boards and Modern Islamic Finance: From the Jurisprudence of Revival and Recovery to the Jurisprudence of Transformation and Adaptation Over
IFSB Conference Presentation: London: May 2004: Yusuf Talal DeLorenzo
If there is a success story to be associated with Islamic jurisprudence in modern times, that story will certainly include mention of modern Islamic Finance. From little more than a concept in the first decades after most Muslim countries regained their independence following the Second World War, modern Islamic Finance took the form of Islamic banks and investment houses in the 1970s and 1980s, and a growing body of scholarship was generated by the practical needs of those institutions as they began to proliferate. Then, as deposits accumulated, and demands for product diversity grew more insistent, Islamic jurisprudence and a new generation of Muslim jurists were faced with a significant challenge. Indeed, without the juristic expertise required to achieve Shariah compliance, Islamic banks would never have become feasible or profitable. It is as much a testament to qualified and informed Shariah scholarship as it is to dedicated management and visionary entrepreneurship that our modern Islamic banks, funds, home finance companies, takaful companies, and investment houses are now well on their way to success.
No legal system can remain viable without a subject, without an object for its application. In recent centuries, throughout much of the Muslim world, the only significant finance available to Muslims was what Western commercial banks had to offer. Without active commerce, the Shariah rules for transacting would become no more than a subject of academic concern, like a dead language. Without renewal, without constant attention on the part of qualified jurists to changing circumstances and realities, those rules, like any other system, would atrophy and eventually lose relevance.
Even so, given the inherent depth and breadth of classical Islamic commercial law, modern jurists found a veritable ocean of practical and theoretical jurisprudence from which to draw upon while confronting the challenges of the modern marketplace. Then, while it might be possible to characterize the first few decades of modern Islamic Finance as a period of revival, the last decade might better be understood as a period of significant innovation. Using the nominate contracts for trade and exchange as their building blocks, modern Muslim jurists have provided Shariah-compliant solutions to an ever-expanding spectrum of needs.
Foundations of Islamic Commercial Law
“The Lawful is self evident and the Unlawful is self evident,” the Prophet said to his followers some fourteen centuries ago. Then he added, “Yet between the two are matters that may give rise to confusion; not well understood by many people.”
In making this statement, the Prophet of Islam (upon him be peace) laid the foundations for the legal system of Islam, generally known as the Shariah. Since that time, generations of jurists throughout the Muslim world have applied themselves to the explication and interpretation of Shariah rules. The role of the jurist in Islam has been to focus attention on what is less than self evident, the gray areas between what is clearly lawful or unlawful, or, as the Prophet put it, “the sort of matters that may give rise to confusion; those not well understood by many people.”
The Shariah may be said to govern every aspect of a Muslim’s life and, as such, it is also concerned with social justice. In the marketplace, the role of the Shariah is a prominent one because the business of earning of a living is one that concerns everyone, as individuals, as groups within society, and as citizens of nations and the world. The logic of Islamic teachings on the subject is that when people earn their livings in a wholesome and lawful manner, everyone will benefit; and that social stability is supported by commercial society. Thus, at the core of Islamic finance are religious precepts governing what is good and permitted, or lawful, and what is harmful and forbidden, or unlawful. It is the responsibility of the jurist to help distinguish the one from the other. As markets grow in sophistication, and transactions become increasingly more complex, that responsibility becomes more and more challenging.
The Shariah, literally “the way”, is the Muslim’s “way of life”, the rules by which Muslims conduct the business of their lives. When Islam is understood to mean “commitment,” that means that a life lived in accordance with Islamic norms is a life of commitment; and the Shariah may be said to be the divine delineation of the life of commitment. Then, if one is truly to live that life, one must come to terms with how that life is actually delineated by the Divine. It is precisely that “coming to terms” that is known in classical Muslim scholarship as “fiqh” or Islamic jurisprudence.
It may also be helpful to think of the Shariah as a “shared endeavor”. It is shared, in the first place, between God and humankind. God is the Lawgiver and humans have the responsibility to receive, understand, and observe the Divine Law. They are also responsible for preserving it, and for endowing it with renewed relevance in changing times and in a variety of settings. So, in this wise, the Shariah is an endeavor shared between jurists and the texts of revelation, through their understanding and interpretation of their meanings. The same endeavor is then shared by jurists among themselves, whether through applying themselves collectively for the solution to a particular problem, or whether through their reference to the works of distinguished jurists, both past and present. In the world of modern finance it is shared with authorities and experts from the business world, with lawyers from numerous practice areas (often several for a single project), with regulators and their authorities, and, finally, with the investing public.
Islamic Commercial Law in Modern Times
No legal system can remain viable without a subject, without an object for its application. In recent centuries, over much of the Muslim world, the Shariah of Islam was marginalized when Islam’s social and economic institutions were displaced by Western models. For example, in the Indian subcontinent the British imported their own legal system; leaving little more than what amounted to “marrying and burying” as the legitimate concerns of what they termed Muhammadan Law. Under those circumstances it is hardly surprising that a century or two later, when Muslims finally gained independence, their own Islamic legal institutions were woefully unprepared to deal with twentieth century realities. The same was true of Islamic political, educational, and economic institutions. Thus, during the decades and even centuries in which Islam’s institutions were marginalized by colonial and other powers, it is not surprising that Islamic jurisprudence, with no place to apply its dynamic of ijtihad, was relegated to a long confinement in exclusively academic settings. In order for it to break out of the confines of academia it required a real subject, a practical and living application, and practitioners who were not only conversant with the classical discipline but who, in addition, were cognizant and appreciative of the changes the world had undergone in the intervening centuries.
It was perhaps the wealth generated by oil that provided the real impetus for the revival of Islamic jurisprudence on the subject of commercial law. In the decades of the 50’s and 60’s, at a time when newly-independent Muslim states were attempting to come to terms with their cultural and religious identities, a handful of Muslim thinkers began speculating on the theoretical foundations of an Islamic economic system, often as an afterthought to their musings about an ideal Islamic state. The state banks of a few Muslim countries held conferences to discuss the subject, a few scholars published papers in journals and, in general, the interest in the subject was academic. But with the wealth from oil, the petrodollars of the 70’s, a number of banks and investment houses were established with the clear mandate to operate in accordance with Shariah. This is what marks the beginnings of modern Islamic Finance.
At the time, to be candid, there was little that was clear in regard to banking operations conducted in accordance with the Shariah; in fact, the two, Shariah and banking, seemed particularly unsuited to any sort of collaboration. The Quranic prohibition of riba, equating in a general sense to interest and predicated on the understanding that money is a measure of value and possesses no intrinsic value of its own, precluded any sort of dealing with banks and banking. Indeed, throughout the Muslim world, the common understanding was that there was nothing lawful about banks. Even employment in banks was shunned in religious circles.
When the new Islamic banks were established, the first matter for consideration was deposits and saving accounts. How might these operate if no interest was to be paid? And, on the other side of the balance sheet, how would the Islamic banks invest and earn returns, if no interest was to be earned? … if interest was not even a part of earnings? How, finally, could the Islamic banks become profitable?
The Jurisprudence of Revival and Recovery
It was then that the new Islamic banks called upon scholars of the Shariah for answers. In those early days, there were not many scholars with knowledge of finance and banking. The handful of scholars that had published on related subjects were without practical experience, having had no exposure whatsoever to modern banks and financial markets. In many cases, the scholars were brought in by the banks on the basis of their reputations alone, reputations as authors and authorities on Islamic subjects in general; not as experts or authors of works on finance! Thus, as in any fledgling industry, there was a period of adjustment and learning. The process was a rewarding one, however, and though there were difficulties, a good deal of progress was achieved. I believe that it is possible, and not unfair, to characterize the jurisprudence of this early period, perhaps the first two decades, as the jurisprudence of revival and recovery. During this period, scholars looked to the past and reestablished meaningful connections between the Shariah and the practical world of modern commerce and trade. In this undertaking they turned to the vast body of legal literature created by earlier generations, to the rules of commerce in the legal handbooks and glosses, and to the digests of case law or fatwa literature. In many cases, the sources they referenced were of their own particular legal schools of thought madhahib, though there appears to have been, early in this process, a general understanding among most scholars that consideration would have to be given to the opinions and methodologies of at least the four major legal schools.
At this time, too, perhaps owing to the extraordinary demands placed upon individual scholars hired as advisors, and partially in order to bring in a wider range of legal opinion representing each of the four major schools of classical legal thought, as well as regional and cultural trends, Islamic banks began to establish Shariah supervisory boards, often with as many as six or eight members. The interesting thing is that such a collective and inclusive approach was not new to Islamic Law, ever a shared endeavor. In fact, the classical schools of legal thought themselves grew out of academies. The Hanafi school, for example, though named for an individual, Abu Hanifah, was developed over several decades during which regular assemblies in the city of Kufah were attended by a core group of about forty scholars from a variety of disciplines. Much the same process took place in Madinah, where Imam Malik presided; in Bagdad and then Cairo where Imam Shafii led similar groups of the learned; and again in Bagdad, over a half century later, where Imam Ahmad ibn Hanbal became the focal point of still another such academy.
Then, throughout the formative period of the 70s and 80s, Shariah deliberations on issues related to modern banking were carried out collectively by formally constituted Shariah boards. Papers were written and discussed, both internally among Shariah supervisory boards and externally at conferences and seminars. The most important factor in everything that took place at the time, however, was that the jurisprudence had a real subject with which to deal and interact. The deliberations of Shariah boards were more than speculation, or theoretical musings, or academic exercises. Real issues were involved and, perhaps more importantly, real peoples’ money. For, from the day the Islamic banks opened for business they have attracted deposits from average Muslim consumers, in addition to their high net worth and institutional clientele. For Muslims, the Islamic banks have come as a godsend, allowing them the opportunity to invest and transact in ways that leave their consciences clear. This has come as a great relief to Muslims the world over; and the numbers speak for themselves.
Another factor was at work at the time the Islamic banks opened their doors for business. Shariah scholarship on matters of finance had found a patron. Up until that time if scholars were actively engaged in the jurisprudence of finance, they did so on their own and generally within the context of academic pursuits. A growing industry, however, cannot progress if it has to rely on the random output of a scattered and unassociated number of scholars. Orientalists like Schacht, Udovitch and Goitein made significant contributions on the subject of Islamic commercial law (and, in particular, on the classical nominate contracts) in the two decades after WWII, and their work motivated and guided a handful of Muslim university students and professors who followed. Yet the demands of Islamic banks were specific, and time sensitive, and could not be allowed to depend on the personal schedules and agendas of academics. Through the establishment of formal Shariah Supervisory Boards, whose members were compensated for their efforts, the Islamic banks brought scholarship to bear directly upon the issues of greatest concern to them and, by doing so, enabled a new generation of jurists to acquire expertise on the subjects of modern banking and finance through research and scholarly exchange.
Then, as a collectivity with incentives, the Shariah boards of the first Islamic banks set about the work of developing ways and means to facilitate the unique and novel operations of those banks. In doing so their first concern was, and remains, with the issue of compliance, Shariah compliance. However, without a process in place for their deliberations, their beginnings were tentative at best as the problems before them were complex and challenging.
Adjusting to Modern Trade and Commerce
To begin with, there was the fact that conventional Western finance had advanced considerably during the centuries while Islamic jurisprudence had remained marginalized and inert. There were no ready solutions to be had from the classical legal literature because, for the most part, the classics never dealt with the sorts of issues facing the modern Islamic banks. Advances in technology facilitated commercial activity, like cross border investing and correspondent banking on unprecedented scales, while regulatory environments and tax laws made it far more complex. The volume of commerce and the rapidity with which it may be accomplished were to have profound effects on legal systems worldwide. The same was true of modern phenomena like the industrial revolution, the rise of consumerism, the proliferation of debt financing and unsecured lending, and the abandonment of the gold standard. When the modern Islamic banks opened their doors for business in the 70s, the financial community worldwide had already passed through several stages of legislation aimed at regulation of the industry and, ultimately, the protection of the consumer/investor. Modern reforms in US law (and especially in regard to finance and business), for example, included matters restricting the nearly unlimited contracting power of the sort envisioned in the classical law of contract known as the “duties of the common calling”. Likewise, modern law has introduced relational torts and expanded our understanding of bad faith breach. The complexities of today’s financial engineering, as exemplified in over-the-counter (OTC) derivatives are such that securities law is often found lagging. Thus, if modern conventional finance is moving more quickly than the law, it should come as no surprise that modern Muslim jurists discovered themselves confronted by a very steep learning curve when attempting to make sense of the new commercial practices proposed to them by the management of the new Islamic banks in the decades of the 70’s and the 80’s.
In addition, there was no code, not even an outdated one, toward which modern Shariah boards might turn. The one exception, however, was the Ottoman code known as al-Majallah; but it was limited to only one school of jurisprudence. It is the nature of Islamic jurisprudence itself to insist on the freedom of qualified jurists to formulate and hold their own opinions. In fact, the inner dynamic for renewal known as ijtihad ensures the relevance of Islamic law to changing circumstances by empowering jurists to constantly revisit points of law and to improve upon them when and where necessary. What all this means is that there was no uniform code of Islamic Commercial or Transactional Law for Shariah boards to turn to when they first began to take on the issues of modern banking and finance. However, while there was no uniform code, there was also no restriction like stare decisis or the requirement to stand on legal precedent. Indeed, Islamic law resembles in many ways the British and American legal systems based on judicial law or the interpretations of judges as individual jurists. Thus, while Shariah board members found themselves in the midst of new and uncharted legal territory, they at least had the freedom to think for themselves. I believe that this is quite a significant point, and one that has been ignored by many academics and others. For, despite everything else, the fact remains that scholarship on the Shariah and its various sciences and disciplines continued to thrive in Muslim lands, despite its marginalization. Thus, when the time came to apply serious scholarship to the problems of banking, trading, and transacting in accordance with the Shariah, there was no shortage of scholars with the ability and the training to take up the challenge.
Without a requirement to adhere to a defined set of precedents, if these could be found, and without a uniform code of commercial law to turn to, the early Shariah boards sought help in the classical system of nominate contracts (‘uqud musammat). These are contracts that are widely known by specific names, like murabaha, mudaraba, wakala, ijara, and the like. Debates on the provenance of these contracts aside, it is well known that trade and commerce were highly developed in the Arabian peninsula before the advent of Islam. Then, even if the nominate contracts were based on earlier models, their real value was that they were widely known and accepted. By insisting that Muslims transact by means of a specific set of well-defined contracts, the Shariah ensures that all parties have every opportunity to understand what they are getting themselves into when they transact. The classical Islamic system of mu`amalat (transactions) is so highly articulated for precisely this reason. While the scriptural foundations of that system may be abbreviated, owing to their delineation of principles rather than specifics, the dynamic of ijtihad inherent to fiqh has ensured that Muslim jurists, and especially Shariah boards continue to comment and build upon the theoretical constructs.
The Significance of Contracts
There is a further aspect to the nominate contracts that is of importance, and that is as a means for the management of risk. In order to understand this point, think of a contract as a device for stabilizing the uncertainty of the future, risk, by connecting that future to the stability of a known past.
“… the past and the future are to the economy what warf and woof are to a fabric. We make no decision without reference to a past that we understand with some degree of certainty and to a future about which we have no certain knowledge. Contracts and liquidity protect us from unwelcome consequences…”
Relatively speaking, it may be asserted that the contracts defined by Islamic law represent very solid ground. Indeed, it may also be asserted that the reason the institution of banking did not develop in Muslim lands is that it was simply not needed. The nominate contracts prescribed for trade and business by the Shariah were recognized and, most importantly, upheld by Islamic courts from Spain to China and the Phillipines. Thus, within the framework of the Islamic legal system, held together as it were by a set of prescribed contracts, an Islamic system of finance and economics flourished in the Islamic East for centuries. To quote from the work of Dr. Nelly Hanna:
One aspect of trade in the Middle East that has often been emphasized is that there was no system for advancing funds to merchants—that is, there was no equivalent to the European banking system on which European merchants were heavily dependent—and the lack of such a system supposedly handicapped merchants of the Middle East. … but the functions of this institution were in part fulfilled through the legal system, which provided a legal framework for the advancing of funds.
Thus, the contracts upon which transacting in Islam is based function both to stabilize and to promote. By their very nature, all of these contracts act as a hedge against uncertainty. In addition, the circumstance of their standardization contributed significantly to the comfort level of investors and entrepreneurs, and allowed Muslims to finance huge projects and international trade without the need for intermediaries like banks.
The variety of purposes to which these contracts were put to use is worthy of special attention especially in view of the fact that so much has been written about the rigidity of Islamic law and its inability to adapt to various kinds of situations. The experience of seventeenth century merchants who carried out a significant portion of their trade within the framework of the judiciary system gives an entirely different perspective on this matter. Rather than a rigid set of imposed laws that were supposed to have suffocated business, the commercial documents show a legal system that was adaptable to various kinds of situations.
The Nominate Contracts
Even though the classical system of Islamic Finance fell into at least partial disuse during the colonial period, the foundations of that system, the nominate contracts upon which it was predicated remained very well defined. Thus, it was to these that the Shariah boards of the new Islamic banks turned for guidance. The corpus of classical legal literature on the subject of transactions, and particularly the nominate contracts, is immense. The published literature in Arabic alone runs into several thousands of volumes, and educated estimates gauge the size of the unpublished works preserved as manuscripts in libraries around the world as at least three to four times the size of the published works. It is impossible to know how much has been lost over the centuries. In any case, the important thing is that Shariah boards were able to reference hundreds of titles, and many thousands of fatwas, from earlier centuries. This is the direction that facilitated the jurisprudence of revival and recovery alluded to earlier as characterizing the early period of Islamic banking and finance during the decades of the 1970’s and 80’s.
Another result of the extended hiatus endured by Islamic jurisprudence in regard to the subject of finance is that it lost contact with custom and usage. In the classical system, custom (‘urf) played an important role. The legal maxim that “all transactions are to be considered lawful as long as they include nothing that is prohibited“ went hand in hand with custom and mercantile practice in clearing the way for innovation in trade and commerce. However, when the Shariah boards of the modern Islamic banks began their work in the 70’s, there was no significant Shariah-compliant trade taking place, and thus no customary practice in regard to it. Secondly, members of the Shariah boards, with no more than minimal exposure to modern finance, had little understanding of what was customary among modern financial practitioners. Thus, this all-important factor, too, was missing from the equation.
Academic and Linguistic Factors
The early work of the Shariah boards was tentative and, in keeping with the universal bias among jurists toward prudence, clearly conservative. Moreover, as the majority of the Shariah boards’ membership was drawn from the ranks of academics, their work tended toward the academic. Under the circumstances, this was for the best. Seminars and conferences were organized, and papers were presented and debated. Professors directed a handful of graduate students to write on subjects related to Shariah as it pertained to banking, finance, and commerce. Indeed, in the late seventies, a team of primarily Egyptian academics began work on the production of a five volume encyclopedia of Islamic Banks that served as an important introduction to the field in general for the next decade. The work undertaken at this time, like the scholarly exchanges, was almost exclusively conducted in the Arabic language. The language factor was and remains a significant one, and its consequences are discussed later in this paper.
During this initial period of recovery and revival, it is significant that scholars began to reacquaint themselves with the workings of the nominate contracts. The significance of this focus was two-fold. Firstly, the nominate contracts, even in their classical forms (and in the forms they had attained before their development was interrupted) provided immediate solutions to several of the banks’ most pressing needs. Secondly, as scholars and bankers became more familiar with these contracts (or specified ways of transacting), they began coming to terms with how these might be applied in novel ways. Indeed, their facility with the nominate contracts was the key to the next stage of development in modern Islamic Finance. Of course, there were other factors. But this single factor (facility with the nominate contracts), through regular exposure to the day to day business of the Islamic banks, is what provided the tools for the breakthroughs that would occur in the decade of the nineties, and that continue until today.
Before discussing this breakthrough, let us consider for a moment the issue of language and what it has meant to Islamic Finance. There is no denying the merits of the Arabic language or the virtues of those who speak it. Even so, from the day the first Islamic banks opened their doors for business, much of that business was conducted in English. After all, as the language of international trade and commerce, it was only natural that English be used in the Islamic banks. However, while management conversed with correspondent banks, counter parties, trading partners, regulators, and legal counsel in English, Shariah supervision in the initial period conversed almost exclusively in Arabic. In several of the early fatwas issued by Shariah boards, it is clear that the board had given its opinion on the basis of representations made by management. In other words, the Shariah board members themselves did not read the documentation, but relied upon summaries presented to them in translation. The reason for this situation was that Shariah board members, with a very few exceptions, did not know English. To a degree, this remains a problem even today. Even so, the important thing is that in some cases at least Shariah boards were simply unable to see, and therefore to comment upon, every detail of every transaction.
On the other hand, those business and legal professionals who did not speak Arabic had perforce to go to secondary sources to learn about Islamic Finance and, in particular, to the jurisprudence of Islamic Finance. This circumstance was particularly inhibiting. For business professionals, even for those working in the Islamic banks themselves, like non-Arabic speaking, ex-pats, the lack of access to authoritative opinions would clearly have been difficult to deal with, with the result that initiatives toward innovation and improvement were slow to come. Product development and process improvement, under such circumstances, became onerous and cumbersome tasks. For legal professionals, too, the same was true. Without direct access to the Shariah boards, legal counsel needed to rely on management to translate and summarize their work. Feedback from the Shariah boards under those circumstances was little better than hit or miss. None of this was conducive to progress. Instead, the Islamic banks appeared to most western professionals, even to western academics, to work behind a veil of mystery. If the fundamental principles were understood, the details were not. In fact, until books on the subject began to appear in English and other languages, even the fundamentals were incomprehensible to many but the most dedicated and determined individuals.
A New Stage in the Jurisprudence of Islamic Finance
Near the end of the decade of the eighties, however, these situations had begun to change. By this time, Islamic Banking and Finance had grown far beyond the expectations of even the most fervent among its early supporters. In fact, Islamic Finance was now recognized as something of a growth industry; and a number of multinational banks and asset management companies were taking an interest in its development. Internally too, within the industry itself, significant developments were afoot. One of the major reasons for these developments was the progress made by Muslim jurisprudents in understanding the business of commerce and finance and in applying Shariah principles and precepts to it. Another reason was the facility developed by Shariah boards with the nominate contracts, such that they began to feel comfortable with novel configurations. Other reasons for development were the growing discourse on Islamic Finance in the English language and the entry of global asset managers. Finally, the academic discourse on the subject had achieved the equivalent of critical mass and many issues were moving toward consensus, the all important ijma` or general acceptance of the juristic community considered a binding adjudicator (or indicator, dalil) in Islamic law.
Undoubtedly, big players with their human and capital resources did much to spur the development of Islamic Finance. Their influence on the jurisprudence of Islamic Finance, however, has been far more subtle. Then, before discussing the innovations made by scholars with respect to the nominate contracts, it will be well to begin with a discussion of how the multinationals and global asset managers helped the jurisprudence of Islamic Finance to move into a significant new stage of creativity. Certainly a part of this involved the growing facility of Shariah scholars with English. To a degree, these two factors went hand in hand. Clearly it is true in any profession that it is one thing to acquire experience, and quite another to have exposure to the top echelons of that profession. As Shariah scholars began working closely with Wall Street insiders, with some of the most knowledgeable and talented individuals in the business, it was then that the exchange of ideas began in earnest. In some cases, a single member of a Shariah board would take part in such exchanges and then report back, formally or figuratively, to his peers on the board. Exchanges of this nature provided Shariah scholars with valuable, and often key, insights into business procedures and practices that might otherwise have remained obscure and therefore suspect. Nor was this process of exchange a one way street. On the contrary, as their own understanding of modern business concepts and practices increased, Shariah scholars were emboldened to make comments of their own, often pointing out parallels that exist between fundamental Shariah concepts of transacting and modern commercial law; and then moving on to extrapolate shared concepts and to consider their possible applications in modern situations. Through such exchanges many scholars acquired an insiders’ grasp for the context of modern commerce. Clearly, such exposure added perspective and depth to the deliberations of Shariah boards on the jurisprudence of modern Islamic Finance. Finally, while it may be difficult if not impossible to quantify or point directly to such intangibles, it is equally as difficult to deny their influence.
The Jurisprudence of Transformation and Adaptation
The most important factor in the transition from the jurisprudence of recovery and revival to a more proactive and participatory jurisprudence of transformation and adaptation was the reconfiguration of the nominate contracts or, perhaps more exactly, the concept that the nominate contracts may be thought of as building blocks that may be constituted and constructed creatively for the achievement of all manner of objectives. From the very beginnings of the Islamic banks in the 70’s it was apparent that a certain degree of adaptation was required for the successful application of the nominate contracts in modern finance. For example, in order to make the murabaha contract effective in the business of inventory or short term trade financing, it was necessary to depart somewhat from the classical model by combining a promise to buy on the part of a client with the actual purchase by the bank of goods from third party suppliers. Then, in addition to the actual murabaha contract, a further transaction is appended; the promise to purchase that is made by the client or prospective buyer. This arrangement, however innocent in appearance, actually brought up a host of issues for the early Shariah boards. Nonetheless, as the needs of modern trade were such that a Shariah-compliant alternative to trade financing by means of conventional, interest-based financing was required, the classical murabaha was transformed into the modern Murabaha li’l-Amir bi’sh-Shira, murabaha with an order to purchase that has now become commonplace to Islamic banking.
Following the success of this experience, Shariah boards went on to engineer and approve a host of hybrid nominates, using a single nominate like murabaha in different configurations like parallel murabaha, reverse murabaha, back to back murabaha and reverse parallel murabaha contracts; or using a plurality of nominate contracts in combination with one another. In this wise, the nominate mainstays of classical Islamic commercial law, musharaka, ijara, salam, istisna’ mudaraba and others were transformed and adapted in a variety of ways to modern needs and circumstances. In some cases, these were applied to bring about interest-free alternatives to conventional mortgages for the financing of homes; in other cases, these became key elements in investment funds, project finance and, most recently, in sukuk. In fact, the contracts for the financing of homes by one US company have recently been securitized and converted to sukuk issued by Freddie Mac with all the qualities of US government secured paper. It would be interesting, as a case study from a purely academic perspective, to follow and analyze the transformation and adaptation of all the different nominates applied in that one instrument, as it includes the creative application of many disparate elements.
As alluded to earlier, one of the factors in the development of a modern jurisprudence of Islamic Finance has been the ability of scholars to communicate their ideas among themselves and, through debate and discussion with colleagues and peers and, to an extent, through demonstrating by means of actual business applications, to bring about general agreement and approval throughout the scholarly community. The importance of this point, of this process itself, cannot be over emphasized because the concept of ijma` as a legal indicator, dalil, carries very nearly the same authority as the revelational sources themselves. Then, whatever questions, reservations, or doubts the critics of modern scholarship on this subject may have, the fact that Shariah boards have been able to achieve consensus on so many key issues suffices to establish the legitimacy of modern Islamic Finance and, what is more important from a practical perspective, sets the stage for the establishment of industry standards which may, in turn, provide the impetus for real industry growth. Through the efforts of the various academies, especially those with international and regional representation, like the OIC Fiqh Academy, and through the regular exchanges by scholars at seminars and conferences, particularly those like the annual Albaraka seminars in Jeddah, a serious process has been ongoing since the 1970s. Finally, with the establishment of the Auditing and Accounting Organization for Islamic Financial Institutions in the early 1980s, the process for bringing scholarly attention to focus on particular issues was streamlined, with the result that consensus could be brought about through an institution, and then regular standards for a wide spectrum of Shariah-related issues could be approved and implemented. The transparency, thoroughness and inclusiveness of the process employed by AAOIFI have contributed in so many different ways to the growth of this industry that it would require a separate paper to do justice to each. Finally, the newly established Islamic Financial Services Board, IFSB, ensures that the efforts of Shariah scholars for the achievement of consensus and standardization will find a place in legal and regulatory systems worldwide.
In the brief span of a few decades, Shariah scholars across the world have worked together and with others to bring about the revival of one of Islam’s most important institutions, its finance. In the process, Islamic jurisprudence has undergone significant development. Moreover, the revival of Islamic commercial energies has led to an expansion of cooperation and mutually beneficial exchanges between Muslims and the other peoples of the world. This can only lead to a better and a brighter future for all.