A Critique of Creative Shari’ah Compliance in the Islamic Finance Industry

301 Pages·2017·2.157 MB·English

by  Ahmad A Alkhamees

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.
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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
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
2 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
3 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 T he 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
4 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
5 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
6 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
7 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, encourage-
ment, 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 sacri-
fice, encouragement, and prayers for my success. I must extend special grati-
tude 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 upright character
ʿadl justice
aḥād single
Ahl al-Ḥadīth an Islamic school of thought started mainly in
Medina; ‘the traditionalists’
Ahl al-Ra ʾy an Islamic school of thought that arose in Iraq;
literally ‘the people of good sense’
al-ḍarūrah tuqaddar what is permitted due to necessity is restricted to
 bi-qadarihā times of necessity (legal maxim)
al-ḍarūriyyāt tubīḥ necessity legalises prohibitions (legal maxim)
 al-maḥẓūrāt
al-siyāsah al-Sharīʿah Sharīʿah-based policy or politics
al-tawarruq al-mubārak the blessed tawarruq; see also tawarruq
al-umūr bi-maqāṣidihā acts are judged by intentions (legal maxim)
ʿamal ahl al-Madīnah the established practice of the people of Medina
ʿAqid̄ ah dogma
ʿaql intellect
bayʿ al-dayn the selling of debt
bayʿ al-ʿīnah 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
Bayʿ al-Taljiʾah fictitious or temporary sale used to avoid seizure
of assets by unjust rulers
darʾ al-mafsadah preventing harm
ḍarūriyyāt necessities
dīn religion
faḍl excess
fāsid void
fatwā Islamic legal opinion
fiqh al-muʿāmalāt Islamic commercial jurisprudence
fiqh Islamic jurisprudence
Jalb al-Maṣlaḥah achieving a benefit
1 Please note that the IJMES transliteration system has been generally used for Arabic terms in
this book.