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Opalesque Islamic Finance Intelligence

Lex Islamicus: Fatwa Incorporated by Khalil Jarrar, J.D.

Tuesday, February 09, 2010

Religions in general promote self discipline and restraint, a recent conversation lead me to believe that most people - even the self-acclaimed righteous ones - do not realize that religion is a conviction not convenience. The argument was initiated as follows: one person suggests to another "go find the car you like, I will buy it for you with a substantial discount on one condition, give me the cash and I will carry the finance note". When I interjected stating that this type of transaction was forbidden in Islam (as a sale of Ina’ where the intent was Twarruq only) to my surprise my integrity was attacked, as who am I to issue fatwa? My response was, it never was meant to be a Fatwa , it was the right response for the conversation at hand and suggested that they consult an Islamic Jurist to settle the issue.

But what came to mind after such suggestion is that free Fatwas are normally stricter than the ones that are paid for, especially when the client paying for such a fatwa is a conglomerate who only has the bottom-line in mind, with client/customer interests lower in priority.

So is Fatwa incorporated a contradiction in terms? This is not the case. While the controversy continues to boil over the role of Islamic jurists in shaping the basic principles of Islamic Finance houses, a call for the independence of jurists is overdue. There is no issue with regards to paying for such services, but this does not preclude consumers from demanding arms-length transactions and proper firewalls in place to reduce conflicts of interest. Temptation might play a role in decision-making or tailoring a structure to meet a given requirement. Even the mere appearance of impropriety is damaging to the image and role of such jurists (not to mention the image of the industry). There are numerous stories and reports alleging inappropriate conduct by some jurists, among such allegations are lavish gifts by sponsoring banks and demands of first class airline tickets and five star hotels by such jurists. If self-discipline dictated by Islamic principles was not an enough deterrence what results do we expect?

Imagine an entity that is incorporated and adheres to ethics and self-discipline dictated by the tenants of Islam coupled with a strict professional code of conduct. Islamic principles, as we know it, does not have a complete financial system, the guiding principles are a set of negative covenants and prohibitions designed to protect the exploitation of the weaker party. Rather than reinventing the wheel, I believe that conventional banks should lead the efforts in creating Islamic financial institution as the industry has matured over the years in creating a sustainable system. Corporate governance, regulatory reforms and adhering to International law standard will become a moot issue; the only concern will be compliance with Islamic principles. Fatwa incorporated will be playing an advisory role to make sure that new instruments or entities adhere to Islamic principles and prohibitions and commingling of funds. Combined, with regulatory standards in place and ethical Islamic standards as guiding principles will help create more sustainable Islamic Financial Institutions.

The near collapse of some Islamic Banks in the Gulf region was driven by the greed of corporate entities, jurists who lacked subject matter expertise, and bankers conformance with safeguards of the conventional banking industry. Now before some enterprising people jump on the opportunity to create an Islamic Jurist hot-line for financial issues, it is time for Islamic financial entities to rethink the current path and learn from the mistakes of conventional ones and 'bank' on their experience. The only regulation left will be of those working as Islamic Jurists for the finance industry not the recreation of a whole new financial system.

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