In judging the present Islamic finance industry, there are perhaps three broad points of view:
(1) It is a religiously sanctioned alternative to the conventional system, which is evolving and improving at a gradual rate; (2) the current guise is deeply flawed with many products contravening Shari’a principles and laws but at least offers an alternative and can be tweaked as the industry matures; and (3) it is merely a replication of conventional finance and offers no real value relying instead on sophistry not on substance.
The author, a lawyer by trade, Michael McMillen holds the first point of view, and in Islamic Finance and the Shari’ah, he attempts to tackle the criticisms offered by those holding the latter views, in particular the third. There is no shortage of individuals within the second and third groups.
Anecdotally, many people have expressed this point of view based on the little knowledge they have of the industry and its products. A more informed and erudite formulation of this view was offered by Mahmud El Gamal, the economist at Rice University.
From Gamal’s economic vantage point, Islamic finance is inefficient, and complex and increases transactional costs. Haider El Hamoudi, a legal scholar at the University of Pittsburgh, offers his own searing critique of the industry from a legal point of arguing in a number of articles that Islamic finance is highly formalistic, adhering to Shari’a principles and laws that are rigid and inflexible – in the end highly anachronistic to modern day exigencies – which has resulted in confused rulings and occasional divergence from their own defined parameters.
McMillen tasks himself to respond to these critiques (he aggregates the two’s point of view as IF- Critique). To do this, McMillen categorises seven criticisms offered by the aforementioned critics
- The formalism of Islamic finance
- The lack of juridical discretion
- Increased complexity and transactional costs
- Failure to address commercial realities
- Failing to respond to changing economic circumstances
- A lack of consideration for the public interest
- Insensitivity to social justice even if Islamic finance argues otherwise.
To challenge these criticisms, he uses the Dow Jones Islamic Market Index (DJIMI) fatwa issued in 1998 as evidence of Shari’a scholars responding to commercial realities. This fatwa alone was pivotal in the way the industry progressed over the next decade. Its four key principles – permissibility of a small proportion of impurity in a transaction, screening businesses according to their activity and financial structure, and the requirement for purification – serves as a foundation for how the Islamic finance has responded to commercial realities, what he describes as “permissible variances”. McMillen finds six clusters of developments – as he terms them “sequelae”- that transpired thereafter. In his discussion of these developments, McMillen relies heavily on his own experience as a transactional lawyer to show how criticisms, particularly in relation to the way ijara and Murabaha-based products are structured, are overblown and not entirely reflective of the transactions. On a number of occasions, McMillen stresses how Islamic financial products are not overtly complex and, in general, the transaction costs are much lower than expected. This directly opposes Gamal’s own critique.
The structure of the book, and therefore the structure of his overall argument, is well organised. As compared to Gamal’s own work published in 2006, Islamic Finance: Law, Economics and Practice, McMillen is far more disciplined and objective in his appreciation of the industry than Gamal is in his disapproval. He offers enough evidence from his own experience to justify his point of view. More than that, this book is a respectful defence of the work of Shari’a scholars who have often been criticised for their interpretation of Shari’a. Indeed, Shari’a scholars have often found themselves in a quandary. On the one hand they are criticised for their loose interpretation of the Shari’a, whereas on the other they are denounced for not being responsive to changes in commercial reality.
McMillen, in his anecdotes of working with Shari’a scholars, evinces the point that Shari’a scholars are serious in upholding their tradition but all law requires some nexus to social reality. Getting the balance right is an unenviable task but it is one that needs to be undertaken.
Islamic Finance and the Shari’ah is, to my knowledge, one of the first to directly address the criticisms levelled by Gamal and respond with erudition, evidence and reason – the triumvirate foundations for any lawyer. As a practitioner who has worked closely with Shari’a scholars, McMillen is in a position to argue objectively, not relying on condescension or insouciance which can often typify responses to Gamal’s damning indictment. He is not a Shari’a scholar, yet his knowledge of Islamic law built from academic research and experience shows an acute understanding. In Part II he discusses the history of Shari’a and usul ul fiqh, relying on the works of experts such as Professor Wael Hallaq. Moreover, McMillen is well aware of jurisprudential issues of his own legal tradition, making mention of legal pluralism and legal culture. Tackling different but related disciplines and traditions allows a much broader discussion in which he is able to convey the applicability of the Shari’a through Islamic finance to modern-day philosophical and practical questions. The book is therefore not only an articulate defence of Islamic finance, but also provides a strong argument for the importance of the Shari’a in today’s world.
The strength of McMillen’s argument finds support from one of his interlocutors, Haider al Hamoudi. He offers a respectful counter to McMillen in his blog where he admits that the sophisticated practices on which McMillen works are closer to Islamic financial rules. Instead, he states that his criticisms are more reserved for retail banking. Whether this is a concession to McMillen’s argument is not immediately evident as the latter does not approach retail banking. However, reading Hamoudi’s corpus one cannot find the distinction between retail and corporate banking and his statement appears to indicate a clutching of straws. This is not to say that there is no value in Hamoudi’s criticism; rather it is to show that with a well-articulated defence of Islamic finance, the discussion can move beyond parochialism and emotion. There has, unfortunately, been very little by way of defence with many authors simply explicating what Islamic finance is and what it promotes. More work has to be produced to directly challenge criticisms. If valid, then there has to be change in the way products are structured, as was the case following Mufti Taqi Usmani’s own criticism of sukuk in 2008.
McMillen recognises that Islamic finance is far from perfect, and he too shares some of Gamal’s and Hamoudi’s criticisms. Nevertheless, in this book he manages to show that Islamic finance is very much its own field with its own unique rules and processes although his usage of the Dow Jones fatwa as a pivotal point can at times be tenuous. His discussion of legal changes in murabaha and the ijara has very little connection to the fatwa, and perhaps McMillen is attempting to use the fatwa as a thread to connect in order to save him from making mighty conceptual leaps in the book. One final concern is that in supporting the endeavours of the scholars and showing that Islamic finance products are not as complicated or as expensive as some would consider, it begs the question as to the point of Islamic finance. If the products offer the same economic result, then why bother? For the lawyer, the answer is obvious as any variance in the legal architecture makes a product different; the layman may disagree. This conflict remains with many Muslims in the non-Muslim world hesitant about procuring Islamic financial products simply because they are deemed Islamic. For them, they can see little difference, but this is a far deeper discussion,
