Register for our free newsletter

Latest News

Is Islamic Finance a failure?

Is Islamic Finance a failure?

More often than you think, people think Islamic finance is a sham, says Oliver Agha, founding partner of a shari'ah-compliant law firm. But Agha says it's all borne from ignorance.

January 28, 2012 2:16 by

Shari’ah scholars have largely done well in handling the inexorable demands placed on them and heavy pressure to yield to structures that are cleverly crafted to appear compliant but lack substantive compliance. However, they need to make some clear strides in certain areas. Their opinions need to be published and clearly set forth with their legal reasoning. Individual diktats that lack basis in Islamic law must be questioned — the doctrine of necessity, which was used sparingly and mostly in life and death situations (e.g. permissibility to eat pork to survive if starving), is not appropriate to sanction instruments that serve economic convenience and would never independently be acceptable under Shari’ah.

The fee arrangements under which the scholars operate need to be transparent to avoid any suggestion of undue compensation or perception of conflict of interest. There needs to be consistency in methodology and approach and acknowledgement of precedent; the hackneyed phrase that “Shari’ah does not acknowledge precedent” is overly simplistic. Islamic Law simply gives the judge greater discretion in determining whether to apply a previous judgment, based on a broad consideration of whether there are any different factors present in the current case. When an Islamic judge (Qadi) applies analogical reasoning (Qiyas) and reviews an earlier case, the earlier ruling is applied if the underlying cause (‘illa) of the old case is present in the one before the court. A judge is not bound to blindly apply precedent, but it would be very unusual for a judge to disregard precedent capriciously and without any ameliorating circumstances.

There is a dearth of human capital in the Islamic finance industry. At the core, there are few western-style Islamic institutions that attract and educate the best and brightest in the Islamic world. Generally, many lawyers practicing as Islamic finance lawyers have little knowledge of Islamic law and have just worked on a subset of transactions without an independent study of the core sources of Islam or Islamic law. Imagine a securities lawyer practicing securities law in the U.S. without having read the securities acts, or a tax lawyer who has never studied the tax code!

Conventional bankers largely seem enthused about the market opportunity which exists, but in most cases without a due appreciation for the spiritual principles that underlie Islamic finance. When you go through the challenges confronting the Islamic finance market, it is a wonder that it has survived at all; in fact, it continues to grow despite the endemic and extraneous pressures. Islamic finance has survived and grown despite the mistakes/inadequacies of stakeholders/practitioners.

The solutions are relatively simple to enumerate — but harder to implement:
— The Islamic world needs visionaries that take on the mantle of ethical finance and seek to develop it along the lines originally intended i.e. a spiritual system of finance that builds partnership and risk-sharing constructs rather than exploitative or adversarial contracts which leave no room for accommodation in a downturn. There is a crying need for prominent magnates to show that money can be made (and success achieved) in this world while preserving spiritual principles.

— Governments need to establish Islamic finance task forces in their countries to critically assess the state of Islamic finance; such groups need to comprehensively review regulatory and legal structures, promulgate laws that fill in gaps, and create proper dispute-resolution centers.

— Governments need to devote significant amounts of funds to developing fine institutions that offerHarvard-, Yale- or Oxford-style educations and train sophisticated and integrated Islamic jurists as well as financiers, lawyers and accountants.
— Conventional dispute resolution centers need to be recalibrated to handle Islamic disputes — with a rework of the applicable rules/procedures.

— Corporations, Islamic banks and insurers need to reflect best practices as suggested by AAOIFI, by having at least three scholars on their boards as well as a financial advisor and a lawyer who is well versed in Shari’ah. Otherwise, opinions/fatwas may reflect problematic gaps.

— As importantly, individual consumers need to examine what they are offered and ask questions if anything seems to be in basic conflict with Shari’ah principles. Islamic finance is not rocket science; it is a simple discipline made unnecessarily complicated, sometimes to achieve impermissible ends. Consumers should make their opinions known and write to Islamic banks and institutions in an effort to help develop the industry, and failing that to the quasi-regulatory bodies mentioned above.

Perhaps the greatest philosopher in Islamic history, Ghazali, noted when asked about his quest to discern truth from error:
(M)y daring in mounting from the lowland of servile conformism to the highland of independent investigation…what I found loathsome among the methods of the devotees of ta’lim, who restrict the truth to uncritical acceptance of the Imam’s pronouncements…what I seek is knowledge of the true meaning of things…sure and certain knowledge is that in which the thing known is made so manifest that no doubt clings to it, nor is it accompanied by the possibility of error and deception, nor can the mind even suppose a possibility. (Abu Hamid Muhammad al-Ghazali, Al-Ghazali’s Path to Sufism 17-20 (R.J. McCarthy trans., Fons Vitae 2000)).

So, is Islamic finance a failure? No; it is never fair to blame a discipline for the failures and shortcomings of its adherents. However, for it to continue to grow in a correct way, it must come back to its spiritual underpinnings best reflected by the motto: “Principle before Profit”.

– Oliver Agha, founding Partner of Agha & Co, a shari’ah-compliant law firm based in the United Arab Emirates (, is a board member of the Accounting and Auditing Organisation for Islamic Financial Institutions, and secretary general of the World Islamic Finance Institute, a body created to develop best practice in the industry.

Pages: 1 2 3 4

Tags: , , , ,

Leave a Comment