Sharia scholars oppose more regulation on Islamic finance

November 12, 2008

At a time when many critics are calling for tighter regulation of the worldwide financial industry, Muslim scholars are saying that Islamic finance cannot be more tightly controlled for theological reasons. The Islamic finance industry has long been marked by divergent interpretations of Sharia, or Islamic law.

(Photo: Traders at Saudi Investment Bank in Riyadh, 8 Oct 2008)

Now, amid calls for standardisation, the scholars say the Islamic concept of ijtihad — reasoning to reassess  sharia in light of modern developments– bars any tighter regulation or coordination of this $1 trillion industry.

It’s rare that religious scholars get to dictate terms to business, but this might be one because Islamic finance is expressly built upon the principle of sharia compliance.

Here’s a report from Frederik Richter, a correspondent in our Bahrain bureau:

Scholars reject strict Islamic finance standards

MANAMA, Nov 10 (Reuters) – Islamic scholars on Monday cautioned against enforcing legal standards in the Islamic finance industry, even though the lack of standardisation is widely seen as an impediment to growth.

Scholars said at the conference of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) that legally binding norms would challenge the Islamic concept of ijtihad, or reasoning, that continuously re-assesses sharia, or Islamic law, in light of modern developments
This would make the industry more vulnerable to risks, they argued.

“There should not be sharia standards except in the form of reasoning, which gives different windows to solving problems,” said Mohamed Saeed al-Booti, professor at the University of Damascus and member of AAOIFI’s board of trustees.

(Photo: AmIslamic Bank in Kuala Lumpur, 11 Aug 2008)

Scholars said introducing binding legal standards for the industry would limit the diversity in Islamic banking products that they say has helped the industry weather the global financial crisis.

Sharia scholars play an important role in Islamic banking as they advise banks on whether specific loans and investments  comply with sharia, which bans interest and prohibits investments in certain areas such as gambling and alcohol.

The $1 trillion Islamic banking industry has ridden the boom in Gulf Arab oil earnings, but is struggling to reconcile vastly different interpretations of Islamic law.

Regulators and industry practitioners said legally enforced industry standards are badly needed to increase investment certainty and lower transaction costs.

“Western banks and lawyers find it difficult to understand how to enforce a contract that one group of Islamic scholars opposes and the other doesn’t,” said Neil Miller, partner at international law firm Norton Rose.

He added the industry needed to discuss how to address this issue without moving away from its diversity, which he said has been valuable to the sector.

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