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Abdulkhaliq joined BLME in 2008 where he holds the position of legal adviser
and shariah compliance officer. He advises on legal matters as well as
structuring and developing Islamic banking products and services and has been
involved in award winning transactions as BLME has grown to become the largest
Islamic financial institution in Europe. He also manages the bank's relationship
with its shariah supervisory board. Having graduated in law and subsequently
obtaining a masters degree in law (specialising in Islamic law) from the
University of London he worked in the UAE in the Islamic finance team of a major
international law firm before returning to the UK to join BLME in its first
year. Abdulkhaliq has also studied classical and contemporary Islamic
jurisprudence with a focus on economics and financial transactions. With the increased attention on the regulation of the financial sector under the
last two years, there have been concerns that the Islamic finance industry
remains subject to lower standards of regulation. One of the areas often cited
in this regard is shariah risk. A term, which was coined to primarily refer to
instances where a product or transaction originally deemed shariah compliant,
becomes no longer regarded as such. The perceived lack of governance or
regulation of this risk has become an issue of popular discussion following
recent events which will be considered below.
As the Islamic finance industry continues to grow at a remarkable pace, the need
to recognize and appreciate the shariah as the core of the industry is more
important than ever. Thus, not only is it essential for products to be
structured and documented on a shariah compliant basis but the objectives,
spirit and ethos of the shariah must be maintained throughout the industry and
implemented correctly by industry practitioners to ensure that the services
being provided are indeed shariah compliant.
Recently, three landmark events in the industry have renewed the discussion on
shariah risk. The comments by Sheikh Taqi Usmani on the structures of certain
types of sukuk products, the IFA opinion on the use of tawarruq in certain ways
by Islamic financial institutions and The Investment Dar case in the English
courts. Incidentally, the first two are examples of efforts to ensure that the
principles of shariah are upheld and to create greater transparency and regulate
the industry from a shariah perspective. However, these efforts were
overshadowed by issues, including the timing of the events and misinterpretation
of them to great extents led to a call by many of the shariah risk they created.
Subsequently, shariah risk became a popular topic in industry forums and at
conferences, headlines were made looking at how these risks came about while
mostly ignoring the unique nature of the shariah and failing to acknowledge how
these events were not in fact the risks many were purporting them to be.
Notwithstanding the substantial misconception of the first two events, it is
difficult to successfully argue that they in themselves created any significant
risks to the industry as opposed to the risks created by the industry's reaction
to them. It is this reaction which should be considered in order that future
events are not addressed in a similar fashion partly through a deeper
understanding and appreciation of how the shariah provides for ijtihad
(scholarly reasoning by interpretation of primary shariah sources) and talfiq
(the derivation of rules from material of various schools of Islamic
jurisprudence). While following the development of the debate on tawarruq, two
matters came to mind. The first was the practice of the ninth century Hanafi
judge, Ibrahim ibn Al Jarrah of noting the different opinions of Imam Abu Hanifa,
Imam Malik and others before issuing his decrees and judgments and the second
being the shariah maxim on the finality of judgments, (الاجتهاد لا ينقض الاجتهاد)
"By attempting to form a correct opinion [through ijtihad], an existing or
previous such attempt is not invalidated."
As Islamic finance and Islamic economics in the wider sense are religion based
systems, it follows that their primary governance and regulation should stem
from the code they are subject to - the shariah. Add to this the jurisdictional
and local regulatory requirements that are necessary for Islamic financial
institutions to operate under and we are presented with a young, unique system
being tested for the first time in a sophisticated environment during a historic
period for the financial sector. Therefore, aside from the national regulatory
measures which Islamic financial institutions remain subject to, there are the
additional layers of governance which must also be met. At the centre of
ensuring good governance of these institutions is the role that the shariah
supervisory board plays. The growth of the industry saw certain institutions
develop more innovative products to meet the demand of what was becoming a
growing market. In order to deliver such products, the industry sought shariah
scholars with a specific skill set to meet the demands of the contemporary
Islamic finance market.
However, as certain capabilities became more desired by financial institutions
and were marketed from Malaysia to Bahrain rather than just locally, the
industry came to realise that such products were not always acceptable to all
scholars and that certain practices which were becoming common market practice
were at the same time deemed non shariah compliant by certain scholars, albeit
having been approved by others. Far from this being a risk or a setback of this
shariah based industry as many practitioners tend to argue, such instances of
difference in opinion are examples of the flexibility and wealth of diversity of
the shariah. At this stage it is important to consider the science of ijtihad.
As classical Muslim jurists applied their ijtihad to matters of their day,
similarly today, the industry is witnessing contemporary issues being the
subject of scholarly ijtihad. Here, it is necessary to make the distinction
between disagreement and rejection of views on unfounded bases (khilaf) and
difference of opinion based on ijtihad derived from sources and supported by
evidence from the shariah (ikhtilaf). It is in fact this diversity of acceptable
opinions which provides the opportunity to fulfill maqasid ash-shariah on a
wider scale and maslaha on a more macro level as Islamic finance is practiced in
numerous diverse communities. The great Maliki judge, philosopher and scientist,
Ibn Rushd (Averroes) explained the reasons for ikhtilaf as six reasons
concluding that these reasons indicate that the difference of opinion on a
particular matter is indeed a natural event which should not be denied nor
should it be seen as opposed to the shariah.
Having said this, and as opposed as this may appear to the efforts being made to
standardise elements of shariah governance, the reality is that both diversity
and standardization work hand in hand. The wealth of diversity between the four
main schools of Islamic jurisprudence provides ample substance on which to
continue to develop modern products which the industry requires. At times, such
juristic reasoning and historic application of decisions is only found in a
single school of thought. Thus, the pragmatic nature of the shariah should be
embraced as a system which facilitates the development of ijtihad to further
apply shariah tenets towards achieving the objectives of the shariah.
Consequently, the existence of certain practices should not be seen as a
hindrance to harmonisation or regulation of industry practices. This can be
witnessed in the Malaysian approach to the subject as adopted by Bank Negara
Malaysia and the Securities Commission. The progress made in Malaysia in this
regard is widely viewed as a model towards practicing harmonization and
standardization by a regulatory body in a fast moving industry. Other attempts
have been made to achieve the same objectives, for example by the Central Bank
of Bahrain and by standard setting agencies like the AAOIFI and IFSB.
Ikhtilaf when applied correctly in matters of fiqh al muamalat should therefore
not be considered as a risk but as a means to achieve a more ultimate objective
for the industry. It is for this same purpose of striving to maintain shariah
compliance that a realistic approach to standardisation should be adopted
without compromising shariah principles.
Your feedback and comments are very important to us, please feel free to contact
the author via email.
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