Shari'ah Supervision in Modern Islamic Finance


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Yusuf Talal DeLorenzo: Shari`ah Supervision in Modern Islamic Finance

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Shari'ah Supervision in Modern Islamic Finance

  1. 1. Shari`ah Supervision in Modern Islamic Finance by Yusuf Talal DeLorenzo supervision will be a part of an Islamic legal perspective and is S hari`ah supervision may be thought of as the single Islamic product or service from the time of its development, to its launch, and throughout the period it is offered. At the stage therefore lawful to them.1 Such certification, generally documented in a formal fatwa most important distinction of research and development, (Shari`ah position paper), may between a conventional and a or of drafting contracts or be thought of as a form of due truly Islamic financial venture. offering diligence. In effect, the Shari`ah For, while a business may memorandums, Shari`ah supervisor, or supervisory attempt to represent itself as supervision, in one form or board, performs this due “Islamic,” unless it has qualified another, should be an active diligence Shari`ah supervision, it has no participant. By including on behalf of consumers way of certifying that its Shari`ah supervision and advice who are without access to the services, at the earliest stages, details of what is offered to products, and operations are management them and, likewise, without the actually Shari`ah-compliant. In may save costly legal fees experience or qualifications to the emerging Islamic financial that may be required at a later evaluate those details in light of sector, therefore, Shari`ah stage if elements of the proposed Shari`ah teachings. By assuming supervision is not a matter to business/contracts need responsibility for the be taken lightly. Public to be modified to comply with Shari`ah compliance of an confidence, Shari`ah principles and precepts. Islamic financial institution, in any sector, is always Generally speaking, if including its policies and an important consideration; Shari`ah supervisors are to practices, and in the financial sector its certify Shari`ah supervision importance is paramount. a venture, they will insist places itself in a position of Shari`ah supervision signifies a on being a part of its directly representing the real commitment on the part of development; religious management to the principles or at least to having interests of the Muslim of transparency and access to the details of whatever investor or consumer; and by accountability went into the development or making every possible effort to in the matter of Shari`ah structuring of the product, ensure that an Islamic financial compliance. instrument, service, or product is halal, the services enterprise. performed by Shari`ah supervi- What is Shari`ah Supervision? Moreover, once a product sors are directed toward the While it may be convenient is launched, Shari`ah supervision investor, or the consumer. to explain Shari`ah supervision may take the form of Undoubtedly, as a result of as a religious audit (especially ongoing monitoring through these efforts, Islamic financial to Western observers and periodic audits. Such audits institutions and their regulators), may be undertaken by means management its scope is far more of site visits, document reviews, will also benefit. But certainly comprehensive. In essence, or consultation with the primary beneficiary is Shari`ah supervision is the management the Muslim consumer who can process of ensuring that a at regular intervals. rest assured that his/her money financial is being put to use in ways that product or service complies Purpose accord with the teachings of with Islamic legal precepts and The most obvious and Islam. It is for this reason that principles, either by its immediate purpose of Shari`ah Shari`ah supervision may also conforming supervision is to certify for be characterized as consumer (to one degree or practicing Muslim consumers advocacy. another) to a recognized Islamic and clients that the financial legal norm or by its not violating product or service being offered the same. Ideally, Shari`ah to them is acceptable from an Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo 1
  2. 2. Background Chief among these Obviously, a Shari`ah supervisor Since many if not most of the considerations will be someone with a dealings or operations of Islamic is the product or background in the classical banks may be considered operation itself. An Islamic Shari`ah sciences. In particular, novel, in the sense that these home financing alternative, for however, supervisors need to were unknown in the times of example, is a complex affair have studied the fiqh al the classical jurists, there is a and will undoubtedly benefit mu`amalat or rules concerning very real need for reliable from the collective opinions of transactions developed by the opinions a diversified Shari`ah Board. classical jurists and expanded on these dealings; legal The same will be true of a upon by later generations of and academic opinions derived commercial Shari`ah scholars. Most Shari`ah from authentic Shari`ah sources or investment banking supervisors have produced by the means and methodologies operation. An Islamic mutual academic established by generations fund, on the other hand, may work or studies on one of Muslim jurists. Then, while it require a single supervisor, aspect or another of these rules. may indeed be possible for an especially if it has licensed itself In addition, such a background individual to come up with to an index provider like the presupposes facility in the authoritative opinions on these Dow Jones Islamic Market classical issues, it soon became clear to Indexes, and is set up to do no Arabic language and the the newly established Islamic more than track the index. An ability to deal directly with legal banks that it would be better to actively managed fund, however, texts, glosses, and commen- have the collective opinions of a even if it is licensed to an taries in that language. In group of scholars. Moreover, index, may require more than addition the banks soon learned that it one supervisor. These are to all this, an understanding was best to appoint scholars considerations of modern finance, markets, with specializations in the field that have to do with and economics is also clearly of fiqh al mu`amalat, and who the nature and requirements of required. Finally, an effective also had working knowledge of the supervision itself. At the Shari`ah supervisor must be modern financial markets and same time, marketing familiar with international practices. Then, by means of considerations business qualified Shari`ah supervision, may also be of importance practices (`urf) and have Islamic banks may assure their to management. If a product an appreciation for regulatory clients and investors that the or service is to be marketed environments. For these reasons, operations they undertake are internationally, for example, or the English language is reviewed in all of their details in a market in which Muslims especially important. One more for compliance with the from different parts of the point that should be kept in principles world are found (like the US mind is the supervisor’s ability and precepts of the and UK), then it may be in the to work with a team, oftentimes Shari`ah. By means of such a interest of management to in a cross-disciplinary and review, by such a group of engage several scholars, each cross-cultural environment. experts, the banks and financial from a different part of the Generally speaking, today’s institutions may clearly Muslim world. Whatever the Shari`ah supervisors possess the demonstrate case, prudence dictates that qualifications and characteristics that their transactions there be at least three supervisors discussed above. In addition, and dealings conform to Islamic for any Islamic financial many Shari`ah supervisors legal norms. undertaking. Moreover, have benefited from the experience exposure Elements of Shari`ah has shown that at least afforded by multiple board Supervision: one of the members needs to membership. Then, while at the Numbers reside in the same country or present time there are no Shari`ah supervision may be region as the operation, so as to standard performed by an individual be readily available for qualifications for Shari`ah supervisor/advisor, or by a consultation, supervisors, it is to be hoped board of supervisors/advisors, even on short notice. In that, in the future, and as the commonly known as a Shari`ah some cases, too, a Shari`ah Islamic financial sector grows, Supervisory Board.2 Whether supervisor will maintain an graduate level programs will be an institution has a board or a office and keep regular hours at developed for the specific single supervisor is its own the bank or financial institution. purpose choice. Generally speaking, of preparing new generations however, such a choice is Elements of Shari`ah of scholars with all of the informed by several Supervision: requisite skills. At present, considerations. Qualifications however, the number of people Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo 2
  3. 3. qualified to serve as Shari`ah at the pleasure of the company’s possibilities for enhancing supervisors is limited. Board of Directors, and not be Muslim My own suggestion in regard subject to management. Under consumer awareness of, and to preparing scholars for a such an arrangement, the Board appreciation for, Islamic future in Shari`ah supervision is will be free to approve or financial twofold.3 Firstly, Islamic disapprove services and products. For financial of what management example, the Dow Jones Market operations may appoint, in does, or proposes to do, solely Indexes developed and addition to its full Shari`ah on the basis of Shari`ah/legal supported Board members, junior members considerations. Of course, this a course on the Principles who will participate in is not to say that a Shari`ah of Islamic Investing that discussions, Board will automatically was offered to students of the prepare memos and become a thorn in the side of Dow Jones University on the briefs, take notes, and perform management. On the contrary, internet. Unfortunately, the research and other tasks for the most Shari`ah Boards operate in course is no longer available, Shari`ah Board, but who will the spirit of cooperation and though efforts are underway for not have full status as voting accommodation. its revival at another venue. Shari`ah Board members. Likewise, several Islamic Secondly, Elements of Shari`ah financial junior members may be Supervision: institutions supported the appointed on a rotating basis, Communication effort to produce the Guide to such that each will serve, much An essential element in the Islamic Investing in cooperation like a law clerk for a serving success of any undertaking is with the Lightbulb Press; and judge in the United States, for a communication. This is equally others are supporting the Guide period of one year. By means of true in regard to Shari`ah to Islamic Home Acquisition. In this rotating arrangement, many supervision. short, every institution offering scholars will have an opportunity To begin with, there Islamic financial services needs to learn first hand about must be clearly delineated lines to concern itself, to one degree the workings of Shari`ah of communication between or another, with issues of supervision. management and Shari`ah consumer Moreover, as junior supervision. Oftentimes, an education. Obviously, members become increasingly Islamic financial institution will the chief concern will be to more familiar with modern appoint one of its executives, provide information about their business norms and practices, it whether from business own products. But, generally will become easier for them to operations, speaking, Muslim consumers analyze situations and think finance, or legal, to act as need to know that Islamic through options, with the result liaison with the supervision. financial alternatives exist. They that their contributions to the This person will be responsible need to know that these work of the Shari`ah Supervisory for coordinating and alternatives Boards will become increasingly documenting are viable, from both a valuable. Obviously, such regular meetings, arranging religious viewpoint and a junior members will be for the requirements of Shari`ah practical compensated supervision, following up on one. And they need to for their efforts, decisions and suggestions, and know that these are competitive though not at the same level as processing and channeling and worthy of their trust. These the full board members. communications to and from are the basics of such an supervision. When board education. Elements of Shari`ah members Obviously, there is much Supervision: live on different continents more that can be done. In a Independence and work in different time service-oriented market that is In order to be effective, zones, the work of such a driven by competition, the Shari`ah supervision must be coordinator firms with the better services independent. In addition, the can be challenging. will have the most success. decisions of the supervisor/s Shari`ah supervision that must be binding on management. Elements of Shari`ah engages in consumer education If these steps are not Supervision: enhances service, not to mention taken, the credibility of the Education consumer confidence. supervision, and the company, The correlate of consumer will be in question. The advocacy is consumer education. Shari`ah Supervision Then and recommendation In making this observation Now of AAOIFI is that I mean to refer to the world of As the sector goes, so goes its Shari`ah supervision must serve Shari`ah supervision. Perhaps Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo 3
  4. 4. nothing could be more obvious. welcome step was taken to and Auditing Organization of In the days when Islamic promote Islamic Financial Institutions banking the efforts of individual (AAOIFI) in Bahrain held that it was in its infancy, Shari`ah scholars. This was the “New was sufficient to call such a body supervision, too, was feeling its Voices” competition, sponsored a “Shariah Board.” In order to be way. With little or no exposure by the US-based Guidance more readily understandable to to modern finance, Shari`ah Financial Group, in which regulators in Muslim-minority supervisors faced a very steep scholars were invited to submit countries, such as the US and learning curve. To begin with, their original work to a jury of Europe, there is nothing wrong in the fifties and sixties, there experts; and the best paper was in using another name, like was very little in terms of awarded a substantial dollar Ethical literature prize. Advisory Board. on the subject. The State My own experience has led 3 I am pleased to report that Banks of a handful of Muslim me to a view of the future of one of these suggestions has countries sponsored conferences Shari`ah supervision that been implemented by one of the on “Islamic Economics” includes increasingly informed groups with which I work; and and Shari`ah scholars were discourse by enlightened that the other will be invited to contribute. These Shari`ah scholarship. It may be implemented early papers and presentations difficult to achieve consensus in the coming year by led to more concerted efforts on every issue, but the important another. and scholarship. With the thing is that our Shari`ah advent of Islamic banking in scholars are now able to speak the seventies, and a real with authority on these issues. demand for Shari`ah supervision, Moreover, cross-disciplinary there was more incentive collaboration on projects in for such academic efforts. which there is active Indeed, the development of the participation sector, and the development of by lawyers, Shari`ah scholars, the various sets of expertise and business professionals required to give it momentum will bring more innovation to went hand in hand. Today, after the industry and further enrich the passing of over thirty years the emerging academic since the first Islamic banks discourse. opened their doors for business, Innovation and creative Shari`ah supervision continues thinking have always been a to improve and evolve. part of development; and it is Globally, a number of different clear that the Islamic financial efforts to increase our industry is developing in ways, understanding of Islamic and on a scale, that were finance are underway. unimaginable only a few Universities decades ago. offer courses on various subjects in Islamic Finance __________________________ today, not only Economics; and several important graduate Footnotes dissertations 1 The operative religious/legal have been published principle in this matter is one in English and Arabic. Journals regarding collective and on the subject of Islamic individual finance are published regularly. responsibility. In cases where Websites devoted to the subject expertise is required for the are available on the internet. good of the community, such as Learned academic bodies like expertise in medical, or political, the OIC Fiqh Academy in or military affairs, the principle Jedda, AAOIFI in Bahrain, the is that as long as the community IIBI in London, the IIIT in produces individuals capable of Cairo, and the Fiqh Academy in dealing with such matters, the India have produced volumes community will have performed of literature on the subject; and its duty, or fard kifayah. everywhere scholars are at 2 The First Annual Conference work. Recently, at a conference on Shari`ah Supervision on Islamic Finance in Dubai, a held last year by the Accounting Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo 4