REGULATING SHARI’A: IS IT GOOD OR BAD?
It is absolutely imperative to disallow any kind of Islamic financial business outside the regulatory net to protect the industry from reputation loss. There have been many scandals around Islamic finance. Starting from the scandal of the so-called Islamic money changers in Egypt, Shari’a gold scandal in Indonesia and the most recently hundreds of million dollars of fraud in India in the name of Islamic finance, unregulated or loosely regulated Islamic financial businesses have only inflicted harm. India, being a very large country, is prone to Ponzi schemes. It is, therefore, tempting even for a Muslim to defraud Muslims in the name of religion. The secular government in India does not want to regulate Shari’a and it is consequently losing credibility to run an Islamic financial business in the country. Although the UK has so far opted not to intervene in Shari’a matters related with Islamic banking and finance, the recognition of Islamic banking and finance as a regulated form of business by the financial regulators have provided the required certainty about it. Consequently, Islamic banking and finance continues to attract attention in the country.
In many Muslim-majority countries, the governments have also shied away from playing a role in Shari’a governance. It is only recent that some governments have decided to introduce Shari’a Governance Frameworks (SGFs) to introduce discipline to Shari’a assurance relevant to Islamic financial operations and businesses.
In the absence of Islamic financial regulations in a country, no ‘aalim or someone who attempts to leverage their association with a scholar or seminary should ever be trusted to start any financial business without getting regulatory permissions. Needless to say, no one else should also be allowed to do any regulated activity without proper permissions. The need for a tight control of financial businesses run by ‘ulama or their close associates is even more paramount as general public is easily influenced by a religious sentiment.
The case of unregulated Mudaraba business in Pakistan by a Mufti and defrauding thousands of investors is an example of the regulators turning a blind eye to malpractices in the name of Islamic finance. The end result was loss of billions of rupees of the innocent general public who trusted the ‘aalim. It also raised questions on the credibility of otherwise very tightly- regulated and well-run Mudaraba sector in the country.
It is also true that any wrongdoing by an ‘aalim or Shari’a scholar is scrutinised too brutally by the market players, which in a way is unfair. This, however, allows stakeholders in Islamic banking and finance to preserve sanctity of Shari’a and its torch-bearers.
There are some Shari’a advisory firms owned by scholars. This has in the past given rise to some issues concerning conflict of interest. With an increasing focus on Shari’a governance and adoption of Shari’a Governance Frameworks by regulators, the threat of malpractices in the Shari’a advisory businesses owned by scholars will be minimised.
Having said that, there are some success stories of ‘ulama or Shari’a scholars pursuing their commercial interests.
One such example is described in my forthcoming book, How to Succeed in Islamic Banking and Finance. Dr. Mohd Daud Bakar, founder of Amanie Group of Companies and recently appointed as president of International Islamic
University Malaysia, pioneered what he termed as Shari’a entrepreneurship. Many other businesses owned by Shari’a scholars, although successful in their own right, may not necessarily be fully transparent. It is also true that most of the widely respected Shari’a scholars refrain from setting up their own businesses. It is only the tier-2 Shari’a scholars who have struggled in their businesses and hence are prone to failure. Their failure poses a risk to Islamic banking and finance industry and its credibility.
In a number of Muslim-majority countries, Shari’a is regulated for a variety of reasons. The most paramount of such reasons is political in nature. Privatisation of fatwa in Islamic banking and finance (through independent Shari’a advisory boards set up by Islamic banks) has worked to an extent but the market and regulators have fast realised that keeping it further in private domain is not going to help. Therefore, following the tradition set by Malaysia by way of developing a comprehensive Shari’a Governance Framework, an increasing number of regulators are now adopting rules and regulations to regulate Shari’a matters related with Islamic financial institutions and transactions.
It will certainly help to curb the tendency of some of the players to unilaterally proclaim them Shari’a-compliant or Shari’a repugnant when it suits them. The recent Dana Gas is an excellent example of the latter.
