Shariah’s Black Box

This monopolistic institutional control over the legal doctrine of Shariah by the recognized Shariah authorities is no better evidenced than in the world of SCF. Whether one is reading from the Islamic legal treatises themselves, the academic studies of SCF produced by Muslim and non-Muslim university professors, the lawyers who publish legal journals on the subject, the media, or the myriad of Internet sites which are dedicated to the subject, no one seriously contests the exclusive role of the accepted Shariah authorities to divine what is permitted in SCF and what is not.[74]

This is more than just convention. Islamic jurisprudence codifies the important role played by Shariah authorities to reach consensus (ijma) among themselves on areas not previously established by the classical Shariah jurists as fixed law and immutable.[75] Thus, as new financial transactions are fitted to Shariah and its immutable “principles and rules”, the only way for a Muslim concerned with Shariah to know that he is not violating Shariah is to rely upon the Shariah authorities and the level of consensus they have reached on the particular matter.

The quite obvious implication of this fuller understanding of Shariah is that one cannot speak of Shariah-compliant finance, business, or economics in the U.S. without understanding Shariah as articulated by the Shariah authorities and its ramifications for the U.S. investor. This is especially true given the legal implications in the areas of the duty to disclose for financial institutions contemplating a SCF transaction. For example, a mutual fund promotes itself as Shariah-compliant. Having licensed the use of the Dow Jones Islamic Index (“DJII”)[76], which utilizes a software filtering protocol determined to be Shariah-compliant by the Shariah advisory board retained by Dow Jones & Company, the mutual fund selects a subset of the indexed listed equities for its portfolio. After a careful reading of the marketing material of the DJII and the registration statement of the mutual funds utilizing the DJII, it should be obvious to any moderately competent attorney that disclosure issues abound.[77]

Specifically, in the registration statement filed with the Securities and Exchange Commission (“SEC”) for one of the first such funds, the Dow Jones Islamic Market Index Portfolio[78] (“Dow Jones Islamic Portfolio Fund”), other than a reference to certain “Shariah screens” or “filters” limiting the universe of acceptable investments, nothing is said of Shariah. For the investing public, all it learns about Shariah in the context of this Shariah-compliant mutual fund is that equities of companies involved in interest-driven profits, companies dealing with commodities such as alcohol or pork, or companies engaged in the “vice” industries such as entertainment and gambling, are prohibited. In addition, the standard disclosures also include references to various financial ratios that work to eliminate companies that might generate too much interest income on its cash reserves or pay too much interest on its debt. In other words, the DJII and the mutual funds utilizing such an index appear in many ways like other “socially responsible investing” or customized “values-based” and “faith-based” indexes.

But this is hardly the case. In a “secular” or even “ideologically” driven values-based index, a screen that filters out all tobacco and weapons businesses is just that. Even if the background social or political activism animating the screen is a “smoke-free environment” and “pacifism,” the screen is marketed only as a screen that filters out tobacco and weapons industries. It does not purport to be based upon some universal theological-moral-legal system existing independently of the filters.[79]