SHARIAH LAW IN ISLAMIC FINANCIAL INSTITUTIONS

Shariah law is open to interpretation and religious boards frequently hold different views on key Shariah issues. Furthermore, Islamic jurisdiction is not bound by precedent and legal opinions may deviate from previous decisions made by other Shariah scholars. Thus, a Shariah board has considerable discretion in the interpretation of Islamic law and may choose any school of thought to inform its decision-making process

However, there is yet to emerge a consistent ruling of Islamic law on the religious compliance of certain assets and transaction structures in terms of Shariah law. Shariah boards from different Islamic financial institutions may have different interpretations and advise differently because, in Islam, there is no generally accepted codification of the jurisprudence. In a conventional sense, that can lead to uncertainty and confusion.

The effects of non-standardized Sharia rulings

1) Uncertainty and confusion

The absence of a universally accepted central religious authority is largely a result of the lack of uniformity in religious principles applied in different Islamic countries across the world. Shariah boards at individual banks have their own way of defining what is and is not Islamic banking. This results in different transactions being interpreted differently, hence leading to a single identical financial transaction having various interpretations across different Shariah boards. This causes uncertainty about what is the acceptable way to do business in the Islamic banking and finance system. Further, the assessment of risk for both the financial institution and the customer can become complicated. The way Shariah advisory boards of Islamic financial institutions function thus remains a source of confusion.

2) Not replicable

The difference in interpretations of Shariah laws means that one Islamic bank may not be able to “copy” another Islamic bank’s products, and this can stifle the growth and integration of Islamic finance at both national and international levels.

In order to promote a global standard for Islamic finance instruments, there are a couple of key steps that must be taken.

1) Adoption of AAOIFI standards

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has taken the lead by preparing Shariah standards. These have been adopted by a number of government authorities and Central Banks, which will form an avenue for Shariah compliance and also product innovation.

2) Cooperation and collaboration

Collective effort with international collaboration between major Islamic financial regulatory bodies such as the Islamic Financial Services Board (IFSB), AAOIFI and Central Banks in Islamic countries is important in strengthening the fabric of Islamic finance.