The Role OF The Shari’ah Boards IN The Development OF Islamic Products

Google+ Pinterest LinkedIn Tumblr +

The role of the Shari’ah Boards in the development of Islamic products

Conformity with the Shari´ah

The definition of an Islamic bank, according to the Islamic Banking Scientific and Practical Encyclopedia of the IAIB, is that it is one which:

“…adheres strictly to the ruling of the Islamic Shari’ah in fields of finance and other dealings. Moreover, the bank, when functioning in this way, must reflect Islamic principles in real life. The bank should work towards the establishment of an Islamic society; hence, one of its primary goals is the deepening of the religious spirit among the people.”

The day-to-day application of the Shari’ah precepts by Shari’ah Boards is twofold:

  • It reviews the operations of the Islamic bank in order to ensure its conformity to the Shari’ah.

  • It plays the role of an innovator.

The first role is largely an investigatory role, looking into what is actually happening in the day-to-day running of the bank. The second role is necessary because in the complex and technically sophisticated world of finance today, theShari’ah Board must always be in a position to answer whether or not new proposals for new varieties of transactions conform to the Shari’ah. TheShari’ah Board can, and does, offer constructive advice and creative recommendations as to how to address the integration of an Islamic bank’s operations into today’s world of financial information and technology.

Let us now look deeper into these two roles.

The Shari’ah Board’s Investigatory Role

One of the most important issues which the Shari’ah Board of an Islamic bank must pay attention to is the subject ofriba, or interest. The definition of this term has been the subject of prolonged, and sometimes heated, jurisprudential debate within the Islamic world. Simply stated, the rule concerning the prohibition of riba can be found in The Holy Qur’an, wherein it states: “God has forbiddenriba (2:275).” The debate was also about the correct interpretation of riba; the literal meaning of riba is stated as increase and growth that could be associated with usury; however, there is unanimity among contemporary Shari’ah scholars that any interest comes within the scope of riba. It is important to note that in money lending transactions, anything recovered, paid or received, in excess of the principal amount, as per agreed arrangements is riba

A classic example of the interpretative role played by the Shari’ah Board can be found in the case of the Faisal Islamic Bank of Sudan, one of the pioneers of Islamic banking. The issue involved the Bank’s relationship with its correspondent banks, wherein the former deposited certain sums with the latter but without requiring interest. However, there were instances where the withdrawals of the Faisal Islamic Bank of Sudan exceeded its balance, the result being a debtor/creditor relationship (in other words a loan transaction) between the Faisal Islamic Bank and the correspondent bank respectively.

In reviewing this issue, the Shari’ah Board was faced with determining whether or not this “loan transaction” resulted in a benefit to only one party, the correspondent bank. The Shari’ah Board was of the opinion that the withdrawal of a sum of money exceeding the amount deposited would fall into the category ofriba, but the ultimate result was to the contrary.

Finding that the circumstance was not acceptable to Islam, the Shari’ah Board turned from its role as interpreter of the Shari’ah to that of innovator and suggested the simple inclusion of an agreement between the Faisal Islamic Bank of Sudan and the correspondent bank to the effect that the former would not pay any interest on this loan; the correspondent bank would derive its compensation from the interest free deposits kept with them by the Faisal Islamic Bank. The end result was that the Faisal Islamic Bank of Sudan continued its relationship with the correspondent bank, and with others, in a similar fashion, thereby avoiding the disruption of its existing and necessary banking relationships.

The ability of the Shari’ah Board of an Islamic Bank to contribute to the success of the bank is a result of the Board’s ability both to monitor the bank’s conformity to the Shari’ah and to provide the necessary expertise to create new or alternative forms of banking transactions which both conform to the Shari’ah and enable the bank to participate in the modern financial world.

The Innovative Role of the Shari’ah Board

Islamic banks owe their origin partly to the innovative thinking of religious scholars. It was the ability of religious scholars and Islamic jurists to develop an alternative, even in a theoretical way, to interest- oriented financial transactions that laid the foundation for the first Islamic banks.

Religious scholars benefited from the ability of the Islamic law to evolve and develop, even in the face of the drastic changes taking place in the economic, social and political world of contemporary Islam. It was the relational basis of the Shari’ah, together with its elasticity and adaptability, which allowed them to apply original thinking to this contemporary problem and find an alternative framework within which Muslims could operate without comprising the Shari’ah essentials. Thus it may be said that the religious thinking which now copes with the developmental problems of Islamic banks was also the seed which created them.

Once the roots of modern Islamic banking took hold, the issue became one of refining theoretical development. Religious scholars and intellectuals from the world of Islamic law worked closely with entrepreneurs, businessmen, prominent Muslims and others and ultimately created a mechanism of finance which was completely different from the West’s interest-based one.

The present forms of financial transactions used by Islamic banks, such as mudarabah, musharakah, murabaha, ijarah and ijarah wa iqtina are concepts born of the past thinking of religious scholars and jurists.  Since the beginning of this alternative financing mechanism, development and refinement have never ceased. The methods and instruments of Islamic finance, being based upon risk and profit sharing, require an ever-evolving adaptation within the paradigm of economic relationships which are defined by the Shari’ah. Islamic banks sought the expertise of religious scholars at the beginning and have continued to seek their expertise in adapting the entire Islamic financial system to the contemporary world. While the definition of the Islamic framework of economics does not change, the innovation required for the survival of Islamic banks necessitates the constant involvement of religious scholars.

Share.

About Author

Leave A Reply