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Opalesque Islamic Finance Intelligence

Lex Islamicus: A Brief Look at Ikhtilaf - Diversity of Ijtihad in Islamic Finance by Abdulkhaliq Elshayyal

Monday, October 04, 2010

    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.

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