Is Syariah compliance enough?

Dr Humayon Dar

ISLAMIC and finance has emerged as a legalistic phenomenon, perceived to be different from conventional banking and finance primarily in its legal form. It attempts to achieve the economic effects of almost all banking and financial products in ways that comply with the requirements of Islamic law (Syariah). Critics view most Islamic financial products as Syariah-compliant caricatures of conventional products. While these products may offer mental satisfaction to religiously motivated users of financial services, they have yet to appeal to the Muslim masses. An estimated 75 per cent of Muslims reject Islamic banking and finance on the grounds that it does not offer any real economic value, different from what conventional products otherwise provide. In some countries (particularly Pakistan), some sort of organised movement by religious leaders (‘Ulama) against the current practices in Islamic banking has already started taking shape.

Given the current downturn in financial markets, Islamic banking and finance faces an even greater challenge than what many Islamic banking practitioners and observers yet perceive. This is the time for those involved in Islamic banking to take a pause and reflect on the developments in the industry, to assess both its progress and shortcomings. Although many analysts argue that Islamic banking & finance is more resilient to financial crises, the real question to ask is: which Islamic banking?

While one can unambiguously claim that Islamic banking in theory works better than conventional banking, the answer is not necessarily straight forward when we refer to the practice of Islamic banking.

Some industry observers have for some time called for developing more Syariah-based rather than mere Syariah-compliant products to add authenticity to the Islamic banking practice. Apparently, the notion of Syariah basis is gaining grounds among a new generation of Islamic banking supporters.

A financial product is deemed Syariah-compliant if it fulfils Islamic legal requirements in terms of the prohibition of interest (riba), contractual uncertainty (also called Gharar), gambling and other activities involving unethical products and services.

Some industry analysts suggest that there must be another category that of Syariah tolerance even before Syariah compliance. They say most of the Islamic financial products offered at present in the market are merely tolerated in Syariah due to the lack of development of Islamic financial infrastructure. A notable example of Syariah tolerance is that of Islamic mutual funds based on the contemporary Syariah screening methodologies. Based on these screenings, certain prohibited activities (like interest-based borrowing and financing) are tolerated to some extent (33 per cent debt equity ratio) in the wake of a lack of Syariah-compliant businesses. This view holds that something tolerated in Syariah (in accordance with the principle of necessity) should not qualify as Syariah-compliant.

The proponents of the Syariah-based approach, nevertheless, maintain that Syariah tolerance of compliancy of a financial product is not sufficient; rather, such a product should offer more than just compliance with the Islamic law. One such view suggests that Islamic financial products should be structured so as to fulfil the Objectives of Syariah (or Maqasid al-Shari’a).

The objectives of Syariah are commonly defined in terms of Imam Ghazali’s classification of unrestricted public interest (known as Maslaha Mursala), in terms of the protection and preservation of religion, life, intellect, property and progeny. Thus, Islamic financial products based on (the objectives of) Syariah must attempt to enhance unrestricted public interest. According to Imam Shatibi, public interest can be divided with respect to: essentials, necessities and what is known as luxuries in economic literature. The preference order on these runs from essentials, to necessities, to luxuries that are least the preferred. Accepting this classification implies that a financial product serving better interest in terms of provision and facilitation of essentials is preferred over another, which serves less in terms of provision and facilitation of essentials or equal interest in terms of provision and facilitation of necessities or luxuries. For example, education for children is an essential, while shelter for family is a necessity. A financial product that facilitates provision of education to children contains more public interest than a home financing product.

Thus the distinction between Syariah compliance and basis with respect to the objectives of Syariah has a social dimension, as evidenced by public interest. Any financial activity or banking product that enhances public interest is deemed Syariah-based. Syariah compliance remains a necessary condition for Syariah basis; while public interest is a sufficient condition. This means that while all Syariah-based products must be Syariah-compliant in addition to offering unrestricted public interest, merely Syariah-compliant products do not contain significant public interest.

A second possible explanation of Syariah basis may refer to a debate of “substance over form”. Many critics object to Islamic financial products on the grounds that they are different only in terms of legal documentation and execution processes that aim to achieve economic effects of conventional products.

A third group believes that Islamic financial products must offer a distinctly different economic value proposition. This, in their view, can only be achieved by observing the spirit of Islam rather than merely relying on Syariah-compliant legal documentation.

The author is regarded as among the world’s foremost Syariah technicians. The CEO of BMB Islamic is renowned for pioneering numerous industry setting innovative techniques in Islamic banking and finance, and publications say his name is synonymous with many of the most sophisticated Islamic products currently on offer.

source : TBT