Shariah’s Black Box

The stated goals of the IFSB include:

110.    Although inevitably nowadays a small number of Sharī’ah scholars have been providing their services globally, the current practice is considered far from professional because of some serious inadequacies, whereby in most jurisdictions:

(i)       the criteria for recognizing a person as a qualified Sharī’ah scholar is still vague; and

(ii)      the means of checking the legality, credibility and validity of a Sharī`ah ruling are still uncertain.

Considering the juristic nature of Sharī’ah rulings and the legal implications they would have for the validity of contracts entered into by IIFS [SCF financial institution], the ultimate test for their legitimacy should be the admission of such rulings into a credible court of law. The IFSB notices that, for some IIFS, the fatāwā have legal force by virtue of the IIFS’s constitution or statutes. However, in other cases, they do not; thus, from a legal point of view, the IIFS are not bound to follow the fatāwā. Accordingly, an IIFS must not enter into a contract which is not Sharī’ah compliant.

111.    Certain countries have a central SSB [Sharī’ah Supervisory Board], recognized by the regulatory and supervisory bodies, to issue binding fatāwā. Nevertheless, so far, there is little evidence of the adoption of Sharī’ah rulings by a credible court of law in resolving Islamic finance disputes. Even if there are some instances, more records of these are needed to ensure that the system is running smoothly and with reliable credibility.

112.    We cannot set aside the idea that, in order to propel the Sharī’ah compliance framework of IIFS to a higher level, it may be preferable to have a professional organization or an industry association that will set professional standards for Sharī’ah scholars serving the Islamic financial services industry. Such a professional association might look after the interests of membership, and promote understanding and exchange through publications and regular forums. It could also establish relationships with relevant academic, commercial and professional bodies. The Islamic financial services industry appears to have matured to the point where such an association, which lay down a transparent and accountable structure for Sharī’ah advisory services, would be of great value to everyone involved, whether as industry players or as consumers.[293]

Thus, according to the IFSB and the independent writings of many of the Shariah authorities, there are designs to establish industry-wide minimal credentials a newcomer would be required to obtain to enter this apparently lucrative consulting business. The initial antitrust issue raised by such efforts is the problem of “group boycotts” or the implications of “self-regulation” for a small, discreet and insular group of authorities who have almost total market share deciding how one gains entry into the market.[294] Applying the standard “rule of reason”, courts will look to the motivations and anti-competitive effects of such “industry standards.”[295]

This is especially problematic in SCF because should a non-recognized Shariah authority attempt to market his services to the financial institutions seeking Shariah guidance, a ruling by the existing Shariah authorities that the newcomer has not satisfied their credentialing requirements would render the market closed to that newcomer as a practical matter. This is the case because financial institutions who market SCF products to the Shariah-adherent consumer are extraordinarily sensitive to the problem that public disputes among the Shariah authorities over what is permitted or prohibited could devastate both the demand for SCF products generally and certainly render any given SCF product suspect.[296]

The problem of “self-regulation” would become an issue for the financial institutions if they play some material part in this effort to control entry into the market by newcomers in a de jure or de facto collusion with the dominant group.[297] Another problem, however, which does implicate liability for the financial institutions directly, is what has been described as “rules collusion”[298]. Here, the effort by the financial institutions and their agents, the Shariah authorities, to agree upon what transaction structures and investments should be considered “Shariah-compliant”, will most assuredly work to limit the development of new competitive products by the market players. This, in turn, will make it more difficult for the consumer to distinguish between SCF products, and raise the cost of searching for newer, innovative SCF products — thereby shaping and softening competition among cartel members in order to increase the profits of the parties to the agreement.[299] The fact that such a financial market is predicated upon a consensus of the market’s private rules advisors suggests that SCF within the financial industry presents substantial antitrust liability exposure.