In this article, Dr Inam Ulllah Khan discusses the juristic differences in Islamic banking and finance. He highlights several products on which there has been much discussion regarding Shari’a compliance and emphasises the need for the industry to adopt a maqasid-orientated approach in creating products.
Islamic banking is slowly emerging as an important area of applied Islamic law and jurisprudence. The relationship between classical Islamic law and Islamic finance has created a new system of law-making under the Shari’a, one that has evolved remarkably over the last 40 years. The syncretic process of mining the classical texts, considering modern sensibilities and accommodating state-law prescriptions has undoubtedly made Islamic finance a thoroughfare of progression in the
Islamic legal derivation process.
Original interpretation and ijtihad are most essential today for the development of Islamic law generally and of Islamic commercial law in particular. Despite the existing weaknesses concerning ijtihad, if there is a success story to be associated with the revival of Islamic jurisprudence in modern times, that story will certainly include Islamic finance. From little more than a concept and an ideal, modern Islamic finance grew rapidly, with the last two decades seeing the establishment of a variety of financial institutions and the creation of a legal and governance framework.
However, a constant concern for Islamic finance is the differences of opinion on product structures. There is a pressing need for harmonisation in the long run, especially in today’s interlinked global market. If one country prohibits one product, while another permits it, then this could have an effect on cross-border transactions, and on the efficiency and efficacy of the industry.
Maqasid Al-Shari’a
Zaki Badawi, former principal of the Muslim College in London, emphasised the importance of the use of maqasid-oriented ijtihad for the development of an Islamic financial system. He stated that little attention was paid by most fuqaha to the basic objectives of the Shari’a. He pointed out that Al-Shatibi as well as Al- Ghazali, Ibn Taymiyyah, and Ibn Qayyim advised the fuqaha to take into consideration the purposes of the Shari’a to address
the individual and society’s needs when issuing a fatwa. Badawi added that the task of identifying the real needs of society, along with their relevance to the purpose of the Shari’a is not easy. It pushes the scholar to consider the literal text on one hand and the abstract purposes of the Shari’a on the other. He concludes that a new ijtihad must begin by adopting the post-Al- Shatibi approach to usul al-fiqh.
Hashim Kamali argues that usul al-fiqh has become a theoretical discipline studied as a part of the legal heritage rather than a tool to regulate and encourage ijtihad. He added that usul al-fiqh is not without weaknesses and some of the weaknesses are not new but existed for almost as long as the usul al-fiqh itself. A legitimate use of human intellect in dealing with emerging circumstances is guided only by the general principles of Shari’a-based on justice and benevolence (al-adl wa ihsan).
Al-Shatibi has emphasised the importance of maqasid for ijtihad. He advocated a sound knowledge of the goals and objectives of the Shari’a as a prerequisite to reaching
the rank of a mujtahid. Sano Koutoub argued that the protection and preservation of wealth is one of the essential elements of maqasid al-Shari’a. There- fore, the continuity and growth of wealth in society should be encouraged and maintained. The continuous distribution of wealth insociety should also be enhanced to bring happiness and financial stability. To achieve these objectives, a supportive Islamic jurisprudential framework is required based on the concept of maslaha and the broader objectives of the Shari’a.
There is no doubt Islamic banking and finance has gained greater importance over the last two decades but the soundness and stability of its infrastructure can be secured through the robustness of its regulatory framework supported by the sophistication of its products and services. While it was initially developed to fulfil the needs of Muslims, Islamic banking and finance has gained universal acceptance as there has always been a demand amongst Muslims for financial products and services that conform to the Shari’a. With the development of workable Islamic alternatives to conventional finance, Muslims are beginning to find Shari’a-compliant solutions for their financial needs.
Differences of opinion
Although Islamic banking has made significant headway in a short period of time, juristic disagreements still exist. Debt financing is one of the core areas of concern, where disagreements exist over products such as murabaha, bay bithaman ajil, bay al-dayn and bay al-ina. Generally speaking, Middle Eastern scholars prohibit debt trading while the Malaysian scholars in official rulings permit it.
Apart from this, there are many issues that have to be addressed by Islamic banks both in terms of documentation and transactional structure. The general legal framework in many countries will need to be modified to promote Islamic banking. The current governor of Bank Negara, Zeti Akhtar Aziz argued that at present Islamic banking and financial institutions have, to a large extent, been governed by the conventional regulatory framework, supplemented and reinforced by the Shari’a framework and Islamic accounting standards. However, Islamic banking is distinct from conventional finance in terms of its philosophy of prohibiting interest, Which in turn shapes the nature of its financial transactions and its risk attributes. Therefore, she suggested the development of a separate regulatory framework in view of the unique risks associated with Islamic financial transactions to provide for their effective assessment and management. The focal point that needs to be analysed is the presiding regulatory framework: does it affect the process of fatwa and ijtihad or not?
Sudin Haroon stated that there is no uniformity of laws and procedures in the practice of Islamic banks around the world. Islamic banks have to conform basically to two types of laws: the Shari’a and positive laws. While Shari’a law is based on religious foundations, positive laws are promulgated by sovereign bodies to safeguard the public interest. The positive laws, in most cases, are under the supervision of the Central Banks. In Malaysia, for example, the establishment of an Islamic bank is governed by the Companies Act 1965, and its operations are subjected to the Islamic Banking Act 1983 and, to some extent, the Banking and Financial Institutions Act 1989. Islamic banks must conform to all requirements as stipulated in the above-stated Acts.
Similarly, other governments have passed special laws that govern the operations of Islamic banks in their countries. Islamic banks in Malaysia are subject to the Malaysian Companies Act 1965; the Islamic banks of Bahrain are subject to the Bahrain Commercial Companies Law 1975 and the Kuwait Finance House (KFH) is subject to the Kuwait Commercial Companies Laws 1960. Whilst Malaysia and Kuwait have recently legislated on Islamic Banks, Bahrain has no special laws on the subject.
Diversity in Fiqh
The social changes in modern times have introduced complexities in the application of Islamic law. The prevailing diversity in the contemporary application of Islamic law as a response to social change on one hand is perhaps a welcome development; but on the other hand, it creates new challenges too. The Islamic banking industry is the most prominent example, where the emerging challenges are significant and need to be addressed urgently.
While the diversity in fiqh opinion is presently contributing to global growth, it may soon become a constraining factor if the challenges arising out of it are not properly addressed. The two distinct mechanisms that operate side by side to carry out business according to the divine revelation are equity financing and debt financing. Equity financing is affected through profit-sharing contracts, while debt financing is affected through deferred contracts of exchange. The Quran further elaborates on debt financing with the contracts of deferred exchange allowed and interest-based lending forbidden. The main disagreement which prevails between the two regions under review, Malaysia and the Gulf, is over debt-based financial products such as murabaha, bay al-bithaman ajil, bay al-dayn and bay al-ina.
Murabaha
Murabaha in fiqh literature is considered as a type of sale. The only feature in murabaha distinguishing it from other kinds of sale is that the seller expressly informs the purchaser of his cost and the profit he intends to make. The main objections to murabaha are that there is a chance for partaking in bay al-ina as practised by some Islamic financial institutions and that it combines two sales in one. There are also differences of views among scholars regarding the binding nature of a promise to purchase.
Ta’widh
The imposition of a compensation rate (ta’widh) is contentious. A consensus has been reached in this regard as contemporary jurists have allowed banks to stipulate late fees on those clients who were able to pay but were nonetheless delinquent. However, this amount shall not become a part of the income of the bank. This opinion is being followed in the Gulf. On the other hand, the Shari’a Advisory Council of Bank Negara Malaysia has permitted the imposition of a one percent compensation rate on late payment and unlike the opinion from the Gulf, this money can form part of the income of the bank. This is regarded as ta’widh (compensation) for the bank and cannot be compounded.
Rebate
Another important area is the rebate. The majority of the jurists agree that a rebate can neither be stipulated in a murabaha transaction affected by an Islamic bank nor can the client claim it as a right. However, the bank can give the customer a rebate on its own as a gratuity. Nonetheless, the Shari’a Advisory Council (SAC) of the Securities Commission in Malaysia has issued a fatwa declaring that a rebate clause and formula to calculate the amount for an early settlement can be stipulated in the primary legal document of Islamic bonds based on the contract of exchange.
Bay al-bithaman ajil
There are controversies amongst Muslim scholars as to whether the price charged by the seller under bay al- bithaman ajil can be higher than the spot price. Even scholars, who are of the view that charging a higher price than the spot price is permissible under Shari’a, do not recommend a heavy reliance on it. Although
the validity of bay al-bithaman ajil is proven from the Quran and Sunna, certain practices are not accepted internationally, specifically in the Middle East, Pakistan and Europe because of the danger attached to it of opening a back door to riba. The act of deferring the payment of price in a sale is also accepted in the rest of the world and the contract of murabaha is being used predominantly. The main issue in certain types of bay al- bithama ajil as practised in Malaysia by some Islamic financial institutions is that they use bay al-ina under the guise of bay al-bithaman ajil. In this case, the contract of bay al-bithaman ajil is preceded by a purchase of assetsby the bank from the same customer.
Bay al-dayn
Bay al-dayn has always been an issue amongst past and present Muslim jurists. The jurists who do not allow bay al-dayn have premised their objections mainly on the prohibition of riba, and the increased risk to the buyer in the event of a default. There were differences amongst the classical Muslim jurists regarding the sale of debt from the creditor to the debtor and the sale of debt from the creditor to the third party.
Bay al-ina
The majority of the classical Muslim jurists were of the opinion that it was not permissible because it was a legal excuse to legitimise riba. This opinion is being followed by the jurists of Islamic finance of the Middle East. The Shari’a advisors from the Middle East and Gulf region consider it as a ‘back door’ to riba. However, bay al-ina is being practiced by Islamic financial institutions in Malaysia. It is considered valid by the Shari’a Advisory Council of Bank Negara Malaysia and the Shari’a Advisory Council of the Securities Commission of Malaysia.
To sum up, the central issue pertaining to existing disagreements between the scholars of Malaysia and those of the Middle East is the interpretation of Shari’a injunctions. Disagreements exist in juristic views and rulings, particularly between Malaysia and the Middle East. The issue of disagreement is very important and has a far-reaching impact on the Islamic banking and financial industry worldwide. It can be said that disagreement is inevitable, but at the same time, there subsists a reconciliatory mechanism in Islamic law to harmonise different interpretations from either jurisprudential or administrative perspective or both. Nevertheless, harmonisation of the different views amongst the scholars from the different schools of thought is necessary to enhance the global development of Islamic banking and finance. It is recommended that any further move in this direction be made under the purview of siyasah Shari’a. This will create a much more robust system.
