As indicated above, Shariah-compliant financing is nomenclature describing the contemporary Islamic legal, normative, and communal response to the demands of modern day finance and commerce. Shariah-adherent Muslims desire to maintain their commitment to the normative demands of Shariah. At the same time, they wish to participate in the benefits and opportunities afforded by investment in international and Western financial and commercial structures that are neither Shariah-centric nor Shariah-compliant, at least according to the overwhelming majority of Shariah authorities called upon in their institutional or personal roles to pass judgment.
In many instances, both related and unrelated to SCF, transactional lawyers are required by the parties to a transaction to opine on the transaction’s compliance with existing law and the enforceability of the underlying agreements in a court of law or, in some cases, before an arbitrator. These legal opinions serve the purpose of assuring the parties to the transaction that there are no hidden issues that might create obstacles to enforcement. In addition, although not necessarily part of a formal legal opinion, lawyers are required by the ethics of professional responsibility to investigate compliance, disclosure, and due diligence issues in order to understand their client’s legal exposure when a new and innovative approach to existing financial or commercial transactions is contemplated. Lawyers and accountants themselves have direct exposure for documents submitted by a client to the Securities and Exchange Commission (“SEC”) under several laws, the most recent and well-known example of which is the Sarbanes-Oxley Act of 2002.
A fundamental predicate of a lawyer’s opinion and indeed the confidence of the parties to engage in large complex financial deals is the knowledge that the basic transactional building blocks of the deal are well-known, predictable, and do not pose any significant risk that a court will refuse to enforce them as intended by the parties. In simple terms, this means that the deal is structured in a way that has certainty, consistency, predictability, and transparency (what shall be referred to hereinafter simply as “Transparency”).
The problems legal counsel face when attempting to analyze a specific SCF transaction and to opine on compliance and enforceability issues are often directly related to the Shariah “black box” phenomenon. Attorneys, accountants, and financial advisors who wish to structure a transaction to be Shariah-compliant do so by treating Shariah precisely as Shariah demands by its own terms. For the Shariah faithful, Shariah is first and foremost the divine and perfect will of the ultimate lawgiver and necessarily there are strictures and obligations imposed on its adherents which are not subject to reasoned critique or discourse. As to the part of Shariah open to human analysis, it is reserved for Shariah authorities who cannot be challenged except by other equally authoritative Shariah authorities. Further, because Shariah is understood as divine and the Shariah authorities are considered the trustees of its authority, integrity, and interpretation, the application of Shariah’s well-established and ancient doctrines to the quite modern practice of SCF necessarily lacks Transparency.
The inability of Shariah as a jurisprudence and positive law to provide Transparency is systemic. Any legal or normative system which is not articulated and enforced within a political structure of codified laws, procedures, courts, binding legal opinions providing precedence, and effective enforcement mechanisms will, by definition, lack Transparency. Shariah is at its essential core by its own terms a divinely ordained law which can never be subordinated to a secular political, legal, or regulatory system. SCF is an attempt by the participants – financiers, businessmen, facilitators, and Shariah authorities – to fit the divine law within a modern secular political, legal, and financial system. But should a secular court or legislature attempt to codify Shariah’s precepts as they apply to SCF in an effort to establish Transparency, aside from the constitutional issues this would raise in the U.S., it would fail its fundamental purpose because Shariah cannot be rendered subservient to secular law.
In stark contrast, domestic finance and commerce in the U.S., and indeed international financial transactions, are based upon Western legal financial structures which provide Transparency. It is Transparency which renders a complex transaction quite manageable and viable. When the parties to a transaction and the professionals facilitating it know that a given transaction format has been used before successfully after being stress tested and enforced in many forums under various circumstances, the risks of the deal are then limited to the specific business terms and market conditions rather than the formalities of the documents and their enforcement. In these transactions, the lawyer can opine safely and with confidence because he knows the rules of the game and knows they are not subject to fiat or challenge.
This is not the case when a lawyer confronts a high-stakes, complex SCF transaction. In order to render a legal opinion that will satisfy the parties and necessary third-parties such as a rating agency for a bond securitization, a whole host of issues arise that cannot be rationally addressed for at least two reasons: One, certain transaction restrictions applicable to SCF are considered divine and unalterable. Two, those aspects of a transaction subject to human reason are not subject to any human reason, but to the reason of a Shariah authority. For example, interest income is understood by most Shariah authorities today to be forbidden. The result has been that SCF utilizes all sorts of Shariah-compliant transactional structures to convert the exact same income stream (including its variability by pegging it to an index such as the LIBOR) from interest to something else, such as lease payments. In legal parlance, this is the application of “form over substance”.