Fatwa and transaction costs in Islamic finance

LONDON: 

Shariah advice on structures of Islamic financial products and on compliance of such products with the Islamic law are a necessary pre-requisite and a regulatory requirement for financial institutions in many countries, including Pakistan. Consequently, Shariah costs are included in the transaction costs associated with Islamic financial products.

Financial fatwas play an integral part in the development of Islamic financial products, as without an explicit endorsement from a Shariah viewpoint such products cannot be successfully marketed.

A fatwa in the context of Islamic banking and finance is a religious opinion by a qualified Shariah scholar on structure of an Islamic financial product, like a mortgage, the conduct of management, like a fund manager, and operations of an Islamic financial institution, like an Islamic bank, determining their compliance or otherwise with the Islamic law.

Fatwa, if issued by an individual scholar or jurist, is non-binding and therefore, its utility is rather limited in this sense. However, if a collective body of scholars issues a fatwa under an enforcement regime, like a government or another such authority, it could be made binding on the market participants.

Legislation in Malaysia makes it compulsory, not only for all market players (Islamic banks and Takaful companies) but also for the judges hearing the cases related with Islamic banks and finance in Malaysian courts, to abide by the fatwas and Shariah rulings publically issued by the Shariah Advisory Council of Bank Negara Malaysia, the central bank.

In Pakistan, the Shariah Advisory Board of the State Bank of Pakistan issues fatwas to govern Islamic banking operations in the country. The legal standing of such fatwas has yet to be tested in a court of law.

Many observers of Islamic finance frequently refer to what is now rather cynically known as “Fatwa shopping.” Those who use the term, refer it to the process of an institution approaching a number of Shariah scholars (simultaneously or one after one) to solicit their Shariah advice on an individual basis and then choosing the one, which is the least restrictive or most liberal. This notion of Fatwa shopping is considered as bad and in fact most Shariah scholars discourage this practice.

If this is what people mean by Fatwa shopping then it should not be entirely wrong, as long as the quality of Shariah advice thus obtained fulfils strict Shariah requirements. This indeed has cost implications for the party seeking Shariah advice but if one is willing to pay relatively high costs of procuring Shariah advice, it should be left to the individual to do so.

In the absence of the Islamic law in most countries (including the ones with majority Muslim population), it is important that there is an independent Shariah verification of the products, practices and operations of Islamic financial institutions and other institutions offering Islamic financial services.

Ideally, this verification should come from a government authority like a central bank or any other financial regulator.

The best option remains a government authority, as it has enforcement power. Other organisations are ineffective unless the governments accept their Shariah Standards and make them binding on the institutions offering Islamic financial services.

In a less ideal scenario, the Shariah verification function must be offered by professional Shariah advisory firms registered with a regulator (like the Securities and Exchange Commission of Pakistan or the State Bank).

It is important to note that a new fatwa is required only when there are no clear guidelines available on a product. Thus, now that setting up an Islamic equity or mutual fund has received mainstream relevance in a number of countries, there is no need for obtaining a new fatwa from a Shariah board or a Shariah scholar. However, it remains important that the fund/transaction is supervised and monitored by a competent body to ensure its strict adherence with Shariah.

There is sometimes an over-emphasis on the importance of fatwa. For instance, there are some training providers in Islamic finance, who advocate the issuance of a fatwa on the Shariah authenticity of the training materials and their delivery. While importance of Shariah authenticity of the content and delivery of Islamic finance training cannot be underestimated, this is nevertheless needlessly stretching the concept of fatwa and its modern applications.

The writer is an economist and a PhD from Cambridge University

Published in The Express Tribune, September 9^th,  2013.

(The Express Tribune / 08 Sept 2013)

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ASEAN Muslim scholars unite on issuing fatwas

In anticipation of modern developments in various fields, international Muslim clerics and muftis have decided to establish a committee on fatwas for Muslims in Southeast Asia.

The regional Fiqh council aims to produce fatwas as well as share knowledge on existing fatwas and deliberation methodology in various countries, said Muhyiddin Junaidi, head of the international relations division of the Indonesian Council of Ulema (MUI).

Closer co-operation between fatwa-issuing authorities in different countries would be suitable not only for Southeast Asian Muslims but also for Muslims worldwide, he suggested.

"For a start, we are going to streamline the deliberation process of issuing a fatwa at the regional level," Muhyiddin told Khabar Southeast Asia.

Fatwas declare various subjects as haram (sinful), such as violent jihad, terrorism, suicide bombings, a meningitis vaccine imported from Europe for hajj pilgrims, blocking public streets to conduct mass sermons, and vasectomies.

An ASEAN initiative

Establishment of an ASEAN Fiqh council to respond to contemporary problems faced by Muslims was one of 11 recommendations issued at the end of an international conference on fatwa held in Jakarta in late December 2012.

The committee is expected to provide solutions in co-operation with the Islamic Fiqh Council -- a body within the Muslim World League, based in Saudi Arabia -- and fatwa-issuing bodies in other countries.

"They can share their experiences in deliberating a fatwa including the methodology and exchange knowledge regarding the fatwas issued in their respective countries," said Secretary General of Islamic Fiqh Council Soleh Zabin Al-Marzouqi.

The majority of ASEAN's 230 million Muslims live in the three predominantly Muslim countries – Indonesia, Malaysia, and Brunei – while sizeable Muslim minorities live in Cambodia, Laos, Burma, Thailand, Singapore, the Philippines and Vietnam.

Contemporary Islam

Indonesian Minister for Religious Affairs Suryadharma Ali told reporters that a line of Islamic experts on fatwa has agreed to convene biannually to discuss how they can best respond to, among others, advances in medicine, astronomy, social dynamics, science and technology.

"We would monitor the developments over the past two years and see which ones need [Islamic] laws because not all existing fiqh can cater to the needs of today's world. We would need to issue new fiqh as a reference for Islamic conduct suitable to the current context," Suryadharma said.

He said the committee does not intend to centralise the issuance of fatwa to increase their legitimacy, but he did not rule out the possibility that a fatwa could affect government policies.

The MUI has issued approximately 8,000 fatwas since it was founded in 1975. Suryadharma cited an example from 2009 when the Indonesian government halted using a meningitis vaccine produced by a European pharmaceutical after the MUI declared it haram because it had traces of porcine enzymes. The government had to buy a new stock of vaccine.

"A fatwa should be adopted collectively. The more congregations that endorse a fatwa, the more legitimate it would be for the Muslim people," said the politician from the Islam-based United Development Party (Partai Persatuan Pembangunan/PPP).

Ratna Shofi Inayati, an ASEAN expert at the Indonesian Institute of Sciences (LIPI), told Khabar that the establishment of a regional forum that allows ASEAN Muslim clerics to exchange information on fatwa-issuing matters is a good effort. It is a form of people-to-people relations that is encouraged in ASEAN community blueprints.

"However, it is better to also co-ordinate their activities with the governments of ASEAN member states – especially those that have Muslim minority populations," she said.

(Khabar Southeast Asia / 14 Feb 2013)

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Fiqh Academy issues edicts on five subjects

MAKKAH – International Islamic Fiqh Academy issued here Sunday fatwas or religious edicts on issues concerning Zakat, waiting period for a person who has gone missing, marriage of underage girls, maximum duration of pregnancy, and the right of a guardian.

The academy issued clarification on an earlier decision about prayer timings in countries situated between latitudes 48 degrees and 68 degrees north and south.

The edicts were issued during the academy’s 21st session, said Secretary General of the Muslim World League (MWL) Dr. Abdullah Abdulmuhsin Al-Turki.

The first edict said that Zakat was not compulsory on a creditor for debt which has not been repaid for any reason, but a creditor should pay Zakat on investment debt. If the investment debt has not been repaid for several years, its Zakat can be delayed until it is collected. In this case, the creditor should pay Zakat for the past years. The Zakat should be paid every lunar year. The Zakat is calculated on the investment for the past lunar year without the profits for the coming years.

The edict on the waiting period for a person who has gone missing states that the Qadhi should take a decision to declare the person dead. But the waiting period should not be less than one year and should not exceed four years from the day the person went missing. The circumstances of each case should be taken into consideration. After the elapse of the period decided by the Qadhi, the person’s wealth should be divided and his wife has to observe Iddah.

As to the marriage of underage girls, the Fiqh Academy decided after reviewing many researches and hearing many discussions that the matter needs further research. It also needs more study of statistics as well as social, psychological, medical and legal findings on the subject.

As regards the maximum duration of pregnancy, the academy said that Shariah does not contradict scientific proof, and so the Fiqh Academy has decided that the longest pregnancy duration is one year after the separation of the couple.

The academy said that guardianship will be transferred to the next person if a guardian does not care for his dependent who is sick. The guardian of the sick person should permit conducting a medical procedure if it is in the interest of the sick person.

(Saudi Gazette / 17 Dec 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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