Views of an Islamic scholar
Interview with Dr Mohammad Nejatullah Siddiqi, Islamic scholar, former President of the International Association of Islamic Economics. By Barry Marshall.
Could you explain the role of Sharia scholars in Islamic finance?
Discussing the role of Sharia experts in the development of Islamic economics and Islamic finance calls for a look at the nature of economics and the focus of Sharia. The chief concerns of economics over the ages have been efficiency and equity. Sharia in its broader sense that gives primacy to objectives over rules and regulations shares these concerns. However, the same may not apply to Sharia meaning fiqh: ie, laws codified at a particular time and place. The historical context in which we approach our subject today sends mixed signals.
Why does Islamic finance need scholarly opinion?
Islamic economics were conceived in the early part of the 20th century as an antidote to socialism and capitalism – an Islamic response to what were perceived as Godless western ideologies. The emphasis was on justice. Freedom from colonial rule and all that it meant in terms of exploitation and oppression was to be accompanied by a return to Islam that stood for elimination of poverty and reduction in inequalities in the distribution of income and wealth.
Islam would help in securing these goals without socialistic regimentation depriving people of their freedoms and robbing them of their properties. The appeal in all this was to the objectives of Islam, the maqasid al-Sharia. Even though it was asserted that Islamic economic system would be free from interest and gambling-like speculation, the mechanics of interest-free banking did not occupy the centre of the stage. That came much later, in the 1970s, to be precise.
What distinguishes Islamic economics from conventional economics?
The project of Islamic economics launched in the 20th century was much wider in scope than introduction of Islamic finance, as it was mainly focused on providing a just and humane alternative to the raging ideologies of those times, capitalism and socialism.
And what role did Sharia experts have in this?
The role of Sharia experts in launching that project was at best marginal. I hasten to add that I say this not to belittle the role of Sharia scholars but to put it in proper perspective. They do have a very significant role in the contemporary practice of Islamic banking, much more than what we noted above in the context of the early days of the Islamic economic project. But their role is rather technical.
What precisely are scholars doing when evaluating whether a particular transaction conforms to Islamic law?
Sharia experts have been doing what their training equips them to do, and they have been doing it well. Unfortunately, their training is no longer well designed to serve the maqasid al-Sharia in circumstances very different from the environment reflected in the books they study. This places the entire burden of identifying the technicalities involved in any matter and finding ways and means of securing them on the individual Sharia expert. Furthermore, the Sharia advisory function also involves monitoring the consequences of adopting a certain course and, in the light of lessons learnt, changing course if necessary.
Has the progress of the Islamic finance industry been kept up with by Islamic scholars? Has it become less Islamic?
It is only natural that the progress of the Islamic financial industry be evaluated in the context of the larger project of Islamic economics of which it is an offshoot. That many find Islamic finance failing to serve the larger goals of Islamic economics should not be shocking in view of the short period of time since actual practice started in mid-1970s and the complexity of the task itself.
What were the first fatwa?
The first few fatwa dealing with Islamic banking and finance date from the late 1970s and early 1980s. They originated from the Dubai Islamic Bank, Kuwait Finance House and Faisal Islamic Bank in Sudan. Most of the early fatwa deal with well-known contracts like mudaraba and musharaka along with tijarah (trade). Murabaha was not in the picture in this early phase. I am not sure about leasing (ijara) but it could have been on the agenda of Kuwait Finance House.
Issues relating to trade dominated the scene, giving rise to questions and answers relating to guarantees and bills of trade. There was no conscious effort to find Islamic substitutes for conventional financial products (which is different from what was obviously in focus: finding Islamic ways to do what needed to be done). In the 1980s the two big conglomerates, Dar al-Mal al-Islami and al-Barakah, established in the beginning of the decade, became the most important sources of fatwa, even though smaller entities such as the Jordan Islamic Bank had their independent Sharia boards, some of whose fatwa are available in print.
Why did they choose to include Islamic scholars? Why not just go down the conventional finance route?
The involvement of Sharia experts in the project was crucial in giving legitimacy to the newly established Islamic financial institutions. For the Muslim masses under colonial rule, Western financial institutions were an extension of colonialism, an instrument of exploitation like other colonial institutions. Introducing banks and insurance companies in Muslim societies was, therefore, always suspect, as the history of the 19th century shows. Government officials and businessmen with vested interests would have never succeeded in selling these institutions to the people.
How did scholars become involved with multinational banks?
At about this time, in the middle of the 1980s, big multinational financial corporations started operating in the Islamic financial market. Whereas the two biggest Islamic conglomerates, Dar al-Mal al-Islami and al-Barakah, were managing funds of around US$5bn each at the peak of their success, Citibank, HSBC and ABN AMRO, managing hundreds of billions each, started aggressively, first to prevent their rich Arab clients from deserting them in favour of Islamic banks and then to mop up the surplus liquidity in the oil-rich Muslim countries.
Does this mean that Islamic finance has to mimic conventional finance, but with a different veneer, to be able to compete?
The small but rich Muslim countries of the Gulf also entered the fray at the official level. Even after the introduction of murabaha, ijara, and so on, during the 1980s, the Islamic financial market needed more sophisticated financial products to handle the estimated US$300bn of funds under management at the dawn of the 21st century.
The impulse to try duplicating conventional financial products seemed natural. The trend of focusing on duplicating conventional financial products through a kind of Islamic financial engineering started in the 1990s and came to dominate the scene in the new century. The most important areas seem to be sukuk duplicating bonds and tawarruq duplicating bank loans.
How will Islamic finance cope with the modern, debt-laden, global economy? Does it provide an alternative?
One of the banes of the modern financial system is the proliferation of debt. Debt instruments dominate the scene. From money creation and supply of credit to investment and capital formation, in the domestic market and at the international level, everywhere it is accelerated proliferation of debt.
Islamic economists since the earliest days, but increasingly during the last three decades, have pointed out that almost all major ills of the contemporary economic and financial system are rooted in this phenomenon. Domination of debts leads to instability. It creates opportunities for gambling-like speculation. It increases disparities in the distribution of income and wealth based as it is on interest. Islamic economists advocated an asset-based system of creating money and extending credit in which money loans will occupy a marginal role.
Have Islamic scholars perhaps played a role in this, by giving their consent to instruments that seem to copy conventional finance?
It is not possible for me to go into further details in discussing the wider causes of malfunction in Sharia advisement. I only note that it occurred. I think it can occur again. I suggest the issue be discussed with the seriousness it deserves and at the level of scholarship it requires. It will be most unfortunate for the discussion to degenerate into a blame game. The matter is far too complex to be dealt with in terms of pronouncements of right and wrong, sincere or motivated, etc. To appreciate part of the complexity, let us remember that economists were always called upon to assist the Sharia experts by the sponsors of Sharia boards/advisories.
Do Islamic finance scholars need special training in economics?
In these days of specialised expertise it may be too much to expect anyone to be an expert in the whole of Sharia or in all branches of economics. So how realistic it is to expect one to be an expert in Sharia and economics simultaneously? All that can be said with certainty is that the current practice of Sharia advisement and auditing, buttressed by occasional hearings given to economists, is vulnerable to malfunction. As to how to fix it, we are yet to grapple with that problem. I do not claim to offer you any quick fix. I will consider my job done if I succeed in convincing people that a problem exists and deserves our attention.
What else have scholars help in the broader world of Islamic finance?
Banking, insurance and investment were not the only financial institutions taking off from the Islamic economic project launched many decades ago. In several countries with a Muslim majority the project covered other areas of the economy such as trade, commerce and international economic relations. The establishment of the Islamic Development Bank and its numerous subsidiaries is an eloquent testimony to that. Sharia scholars had a strong role in the conception as well as direction of these institutions.
I would like to re-affirm the important role Sharia experts played in the progress of Islamic economics and finance. However, there has been some malfunctioning that needs looking into and correction. Further more, the issues we face are far too complex to be handled properly without some conceptual as well as structural changes in Sharia advisement. The future of Islamic economics and finance may well depend on rising to this challenge.