A critique of creative shariah compliance in the islamic finance industry

A Critique of Creative Sharīʿah Compliance in the Islamic Finance Industry Brill’s Arab and Islamic Laws Series Editorial board Dr Khaled Abou El Fadl (University of California, Los Angeles, School of Law) VOLUME 11 The titles published in this series are listed at brill.com/bail A Critique of Creative Sharīʿah Compliance in the Islamic Finance Industry By Ahmad Alkhamees LEIDEN | BOSTON Library of Congress Cataloging-in-Publication Data Names: Alkhamees, Ahmad (Ahmad A.), author Title: A critique of creative Sharīʿah compliance in the Islamic finance  industry / By Ahmad Alkhamees Description: Leiden : Brill Nijhoff, 2017 | Series: Brill’s Arab and Islamic  laws series ; 11 | Includes bibliographical references and index | Identifiers: LCCN 2017015874 (print) | LCCN 2017016573 (ebook) | ISBN  9789004344433 (E-book) | ISBN 9789004344396 (hardback : alk paper) Subjects: LCSH: Banking law (Islamic law) | Finance (Islamic law) |  Finance—Religious aspects—Islam Classification: LCC KBP940.2 (ebook) | LCC KBP940.2 A425 2017 (print) | DDC  346/.167082—dc23 LC record available at https://lccn.loc.gov/2017015874 Typeface for the Latin, Greek, and Cyrillic scripts: “Brill” See and download: brill.com/brill-typeface issn 1871-2894 isbn 978-90-04-34439-6 (hardback) isbn 978-90-04-34443-3 (e-book) Copyright 2017 by Koninklijke Brill nv, Leiden, The Netherlands Koninklijke Brill nv incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi and Hotei Publishing All rights reserved No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa Fees are subject to change This book is printed on acid-free paper and produced in a sustainable manner To my dear parents: Abduallah Alkhamees and Moday Al-shamssan ∵ Contents Acknowledgements ix Glossary of Arabic Terms x Table of Cases xiv List of Statutes xv List of Diagrams and Tables xvii Abbreviations xviii Introduction 1 An Overview of Sharīʿah 16 1.1 Introduction 16 1.2 Overview of Sharīʿah and Its Foundation 16 1.3 Schools of Thought 18 1.4 Islamic Legal Ruling 19 1.5 Main Features of Islamic Finance 21 1.6 Sharīʿah-Compliant Financial Instruments 25 1.7 The Objectives of Islamic Law 28 1.8 Conclusion 35 The Form Versus Substance Debate and the Roots of Creative Sharīʿah Compliance in Islamic Finance: Why Reinvent the Wheel? 37 2.1 Introduction 37 2.2 The Definition of Ḥīlah 39 2.3 The Origins and the Evolution of Ḥīlah 41 2.4 Positions on Ḥīlah of Islamic Schools of Thought 46 2.5 Refuting the Pro-Ḥīlah Arguments 58 2.6 Conclusion 65 Tawarruq as a Case Study of Creative Sharīʿah Compliance 67 3.1 Introduction 67 3.2 Definition of Tawarruq and Selection Rationale 67 3.3 The Development of Tawarruq 69 3.4 The Differences between Jurisprudential and Organised Tawarruq 72 3.5 Forms of Tawarruq 72 3.6 Sharīʿah Jurists’ Views on Tawarruq 74 3.7 Conclusion 85 viii contents Standardisation of Fatwās to Reduce Creative Sharīʿah Compliance 87 4.1 Introduction 87 4.2 Standardisation: A Definition 87 4.3 Why Is Standardisation Needed? 88 4.4 Causes of Juristic Differences 96 4.5 Remedies for Inconsistency 108 4.6 Conclusion 115 The Impact of Sharīʿah Governance Practises on Sharīʿah Compliance in Contemporary Islamic Finance 117 5.1 Introduction 117 5.2 Sharīʿah Supervisory Board Definition 118 5.3 The Importance of SSBs 119 5.4 Regulatory Issues Surrounding Sharīʿah Supervisory Boards 122 5.5 Conclusion 170 Public Mechanisms to Remedy Creative Sharīʿah Compliance 172 6.1 Introduction 172 6.2 Overview and Justification of CSSBs 172 6.3 Tasks of CSSBs 176 6.4 The Central Sharīʿah Board in Sudan 177 6.5 The Central Sharīʿah Board in Malaysia 180 6.6 UK Regulators’ Approach towards Sharīʿah Governance 187 6.7 Saudi Regulators’ Approach towards Sharīʿah Governance 196 6.8 Compulsory Disclosure 204 6.9 Conclusion 209 Private Mechanisms to Remedy Creative Sharīʿah Compliance 210 7.1 Introduction 210 7.2 Sharīʿah Compliance Rating 210 7.3 Sharīʿah Indices 216 7.4 Private External Sharīʿah Auditing Firms 218 7.5 International Islamic Financial Standards 222 7.6 Whistle Blowing 227 7.7 Characterising the Articles of Association 229 7.8 Conclusion 230 Conclusion 231 Bibliography 241 Index 277 Acknowledgements Gratitude is due to Allah, The Most Compassionate and The Most Merciful, for giving me patience, strength, and ability to complete this book I would like to express my gratitude and heartfelt thanks to my distinguished supervisor, Professor Dalvinder Singh, for his valuable guidance, encouragement, time, and sincere efforts during the course of my research My gratitude also goes to Mr Nicholas H D Foster, Dr Musa Usman Abubakar, Dr Abou Jeng, Sheikh Faizal Ahmad Manjoo, Salim Al-Ali, and Khiled Al-Muflih for their inspiring comments and encouragement I would like also to thank my former colleagues at Warwick Law School, including Shahbaz A Cheema, Rajnarah Akhtar, Rumana Islam, Joy Malala, Sheharyar Hamid, and Pedro Florencio Raza Saeed deserves special mention for his help and support My heartfelt gratitude goes to my parents and my siblings for their sacrifice, encouragement, and prayers for my success I must extend special gratitude to wife, Reem, and my children, Hassan and Judy, who accompany me through this journey, never failing to provide me with love and warmth, and have helped to ease the pressure of the task of completing this book Glossary of Arabic Terms1 ʿadālah ʿadl aḥād Ahl al-Ḥadīth Ahl al-Raʾy al-ḍarūrah tuqaddar  bi-qadarihā al-ḍarūriyyāt tubīḥ  al-maḥẓūrāt al-siyāsah al-Sharīʿah al-tawarruq al-mubārak al-umūr bi-maqāṣidihā ʿamal ahl al-Madīnah ʿAqīdah ʿaql bayʿ al-dayn bayʿ al-ʿīnah Bayʿ al-Taljiʾah darʾ al-mafsadah ḍarūriyyāt dīn faḍl fāsid fatwā fiqh al-muʿāmalāt fiqh Jalb al-Maṣlaḥah upright character justice single an Islamic school of thought started mainly in Medina; ‘the traditionalists’ an Islamic school of thought that arose in Iraq; literally ‘the people of good sense’ what is permitted due to necessity is restricted to times of necessity (legal maxim) necessity legalises prohibitions (legal maxim) Sharīʿah-based policy or politics the blessed tawarruq; see also tawarruq acts are judged by intentions (legal maxim) the established practice of the people of Medina dogma intellect the selling of debt a form of finance whereby an owner sells his asset on a deferred basis then buys it back from the purchaser on a cash basis at a price that is usually lower than the original selling price fictitious or temporary sale used to avoid seizure of assets by unjust rulers preventing harm necessities religion excess void Islamic legal opinion Islamic commercial jurisprudence Islamic jurisprudence achieving a benefit Please note that the IJMES transliteration system has been generally used for Arabic terms in this book ... brill.com/bail A Critique of Creative Sharīʿah Compliance in the Islamic Finance Industry By Ahmad Alkhamees LEIDEN | BOSTON Library of Congress Cataloging -in- Publication Data Names: Alkhamees, Ahmad (Ahmad... ʿadālah ʿadl a ād Ahl al-Ḥadīth Ahl al-Raʾy al-ḍarūrah tuqaddar  bi-qadarihā al-ḍarūriyyāt tubīḥ  al-maḥẓūrāt al-siyāsah al-Sharīʿah al-tawarruq al-mubārak al-umūr bi-maqāṣidihā ʿamal ahl al-Madīnah... Institute of Islamic Banking and Insurance institution(s) offering Islamic financial services Islamic International Rating Agency International Centre for Education in Islamic Finance International