Standardization of regulations and Fatwa shopping

Transcription

1. IFN SECTOR CORRESPONDENT Standardization of regulations and Fatwa shopping LAW By Dr Nicolas Bremer While we have seen some e ffort in the standardization of regulations governing Islamic finance and banking, the regulation of the industry is still much less uniform than the regulation of conventional finance and banking. Consequently, universally accepted standards and guidelines regulating the Islamic finance and banking industry are still lacking. The result is a plurality of the interpretation of Shariah laws and standards. With uniform standards and principles, the room for elective Shariah board polling would be limited and thus excessive Fatwa shopping restricted Simply put, what might be considered Shariah compliant in one jurisdiction or by one Shariah board may be considered Haram by others. This heterogeneous regulatory landscape may invite financial institutions to shop for favorable Fatwas to have their products certified as Shariah compliant. This practice — taken from the term ‘forum shopping’ and which describes the practice of litigants seeking to get their case heard by a court that may be inclined to judge in their favor, hence ‘Fatwa shopping’ — has thus far been little discussed in legal doctrine. Yet, with the growing market share of Shariah compliant assets, the practice of Fatwa shopping may have to be considered by regulators as well as the industry itself to maintain professional standards, particularly since Islamic finance and banking is deeply rooted in moral standards which are in danger of being circumvented by aggressive Fatwa shopping. © Some bodies seeking to set standards for the Islamic finance and banking industry have evolved. Most notably, AAOIFI and the IFSB have undertaken efforts to introduce common standards and guidelines for the industry. Despite these efforts however, to date no generally acceptable guidelines or standards for accounting, auditing and regulation of Shariah compliant financial instruments and Shariah governance have been established. We recently witnessed an emerging practice to adopt international standards for Islamic finance and banking in some jurisdictions in the Gulf and Asia. Still, many countries continue to ignore such international standards in favor of domestic regulation. This may be acceptable in an entirely domestic market. The reality, however, is a different one. In line with general trends, the Islamic finance industry sees a growing number of cross-border transactions. Together with increasing economic integration on regional and global levels, this internationalization of the Islamic finance and banking industry demands the introduction of common regulatory standards and established best practices. 21 Aside from issues of regulatory complexity, the current fractured regulatory landscape for Islamic finance and banking opens the door for abuse. Recently, the industry has seen an increase in Fatwa shopping, including the practice of specifically electing Shariah boards that would decide favorably on financial products submitted for certification. Less regulated jurisdictions particularly allow room for such practice. This makes it difficult to quantify the impact of Fatwa shopping. Nonetheless, there is growing concern among Islamic scholars that Fatwa shopping may erode the foundations of Islamic finance and banking standards thereby jeopardizing trust in the industry. Standardization of regulatory standards could be a suitable means to counter practices such as Fatwa shopping. With uniform standards and principles, the room for elective Shariah board polling would be limited and thus excessive Fatwa shopping restricted. Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@ alexander-partner.com. 13th March 2019