Islamic Finance and Shariah Compliance - More Than This

Islamic Finance and Shariah Compliance - More Than This

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It is a pleasure to introduce our third ‘thought piece’ explaining why and how Islamic Finance is more than Shariah compliance. We have titled the piece “More than This” as that describes our feelings about the subject in just three simple words. The following comments should give you a good understanding of why Islamic finance is indeed about a great deal more than just Shariah compliance.

Following the Maqasid al Shariah is much more than a compliance issue. It is a way of life. We often hear about ‘form over substance’ or conversely ‘substance over form.’ Both of us lean towards the substance over form approach, and in many ways, it has been discussions in this idiom that have developed our friendship and our line of thought on many topics. Sadly, many take the approach that Shariah is a list of instructions that you have to tick off in order to maintain compliance. This line of thought is, in part, endorsed by factors such as the process of negative screening for Shariah-compliant stocks and investments, which gives the impression that if the box is ticked then everything is okay. This form of screening should be for guidance only, and, does not do a particularly good job at ensuring Shariah compliance overall. For example, the permissible percentage of debt or leverage in a company that uses conventional finance is a good example of the limitations of considering Shariah compliance as sufficient. If you come under the number prescribed, you are Shariah compliant; if you are over the ratio then you are not. Does that mean that stealing less than a prescribed amount from someone is somehow OK?

The essence of our message is that Shariah compliance is not quite as simple as a box-ticking exercise to determine in ‘form’ terms whether you are compliant or not. In ‘substance’ terms, you would need to look at the objectives of the Shariah, known as the Maqasid, and understand the role of Stewardship that all Muslims are entreated to perform as guardians and protectors of the planet and of all humanity.

The two of us have the great opportunity to interact with incredible people around the world. It is amazing to see the breadth of experience and the many religions across this group of people. Perhaps surprising to some, religious guidance on the ‘substance’ approach is very similar. Whilst this post is focused on Islam, the same discussion is relevant to all major religions.

In future articles we will address this topic in more detail and start to describe the clear alignment of the objectives of the Maqasid al Shariah with such things as the 17 Sustainable Development Goals (SDGs) of the United Nations. It suffices, for the time being, to encourage you to start thinking in very simple terms about ‘substance.’ What is the intention? What is the desired outcome? What are the behaviours required to demonstrate good intentions? All of which must be supported by a governance process as well as guidance and encouragement to ensure that outcome. The Shariah is exactly that from a ‘substance’ point of view, and from a ‘form’ point of view, the Shariah allows you to tick the boxes, but it does nothing to encourage the focus of your attention on the desired outcome. Simply put, this is what is known as "A Duty of Care." A concept that we would encourage everyone to follow.

Wassalam


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Comments (6)
2 years ago
N/A

Could not agree more with Duty of Care. In many cases we have seen a disconnect between the industry and consumer perceptions - and personally, I believe this is due to the fact we don't think more about substance and duty of care. This will open more opportunities for Islamic finance to differentiate itself from conventional firms. (edited)

2 years ago
DVA Consulting Sdn Bhd

Many thanks for your helpful comments

2 years ago
senturiyon global

The Maqasid issue is raised lots of times and mostly in the vehement public IF Islamic Finance debates.One needs to be aware that there is a big difference in the way that one is allowed and/or supposed to behave. There are differentiators ranking low - middle - high standards (read for instance al ghazali 'ihiya - halal and haram' for a very quick intro).So it ranks from the absolute minimum (from the doorstep of haram) or neutral low to the absolute human perceived maximum, explained in black-and-white lay terms (apology for losing nuance here).The usual conflict in the debates arises from IF Islamic Finance often behaving on minimum still allowed levels, where the critics expect higher standards. On the lower still allowed levels the lines of what is (or is not) allowed of course become very thin and the discussion about form and substance comes very much alive. Lots of times this point of view gets rationalized as being realistic in an imperfect world.One further has to realize that whilst what is not haram probably is not necessary ideal, that concepts of ideal change from time to time and place to place and that at the end one always gives account in person, where intention will be important.In a Common Law environment where binding precedents are prevalent and intentions are that much less, that of course creates perceived uncertainty.And this leads back to the impact of the 'intention'. Those knowledgeable with the Sources realize that there is no absolute certainty and that therefor every situation is different. It poses the contemporary conflict of the need for 'objective rules / certainty that apply to everyone in every situation' where there is no such thing in Shari'ah. What may proof to be acceptable to one at one point in time and situation, may proof to be inacceptable to the other. The 'duty of care' with personal responsibility and accountability will play an important role in this.Looking forward to the series !! (edited)

2 years ago
DVA Consulting Sdn Bhd

Thanks Paul for your usual insightful input (edited)

2 years ago
Shaheen Freight Services

Dear Mr. Daud Vicary i am thankful to you for these efforts. basically Maqasids are the parts of the Shariah, which is guided by Shariah step by step. Shariah aims not only the life of this world but It cares about us here after. in this regard compliance means to do any thing in way that really follows here and after here requirements. i have soft corner with you that Islamic finance have more opportunities in 17 SDG, but this can be done by compliance before, because the compliance is the only differentiation between conventional and Islamic institutes as Mr. Omar Rashid also intimated to this way of differentiation. Wassalam. (edited)

2 years ago
DVA Consulting Sdn Bhd

Thanks for your very helpful comments. In many ways current IFI’s do not follow the Maqasid as they should and there are significant opportunities to clearly differentiate the values of following responsible ISLAMIC social Finance