Fatwa shopping as modernising Islamic finance law

Abstract

The thesis examines the evolving role of Islamic financial instruments in the modernisation of Islamic financial practices. Crucial to this process of modernisation is the proper appreciation of the impact and importance of selective Sharia opinions termed fatwa shopping in this thesis. Fatwa shopping involves selecting, reviewing, and combining Islamic juristic rulings in the form of fatwas (the plural of fatwa in English and it is also referred to as fatawa in Arabic). Using this approach, medieval Islamic rules and contracts are utilised on a functional basis and as a means of developing modern functional equivalents. The thesis argues that fatwa shopping continues the classical tradition of doctrinal selections (talfiq) made by Muslim jurists to find an interpretation that best fits the circumstances. The application of this approach finds expression in the views of Muslim scholars and Islamic Financial Institutions (IFIs) and their Sharia Supervisory Boards (SSBs) reviewing and selecting various Islamic juristic rulings from different schools of Islamic jurisprudence to certify modern Islamic financial products and services. This approach recognises that medieval Islamic commercial contracts have significant problems in terms of feasibility and practicality in modern banking transactions. The thesis takes a middle path between legitimacy and practicality by allowing the development of Islamic financial instruments that obey Islamic juristic rulings but also take into account economic and financial considerations. Since financial institutions including IFIs are crucial to economic development and invariably involve risks to the economy, institutions, and consumers, regulation plays an important role in ensuring financial stability and risk management. Thus, it is important to contextualise the position of Islamic finance within the global financial system. Islamic financial institutions cannot be separated from the general regulatory framework and the management of risk. A key justification for the regulation of banking and financial institutions is to mitigate and prevent risks that may jeopardise the industry and the whole economy. This is reflected in both the public interest and economic theories of regulation. The government has a central role in risk regulation to protect the public from adverse consequences of banking and financial transactions through regulations that are primarily concerned with specifics risk in the financial industry. In the case of IFIs, it is not only government that has a central role in the development of financial products and the regulation of risks in Islamic finance. SSBs, as non-governmental bodies, provides substantive determinations as to whether a particular financial activity or instrument is Sharia compliant. Unlike conventional products, the character of Islamic financial products relies on Sharia compliance. One of the main challenges for Sharia compliance is whether fatwas can accommodate modern risk management instruments. Risk management instruments are pivotal to managing and hedging risks. These include various forms of derivatives as well as insurance and limited liability corporations. As modern derivatives and insurance are considered essential to deliver benefits to the financial industry and the economy as a whole, modern Islamic finance should be able to adapt to this economic and risk management environment. Despite disagreements Muslims scholars on whether modern instruments comply with Islamic law, the method of selective Sharia rules or fatwa shopping provides a mechanism for deriving modern fatwas on which to base Sharia compliant equivalents on derivatives, insurance, and limited liability corporations. In order to assess how IFIs actually operate in a financial system, the thesis examines Islamic finance in two jurisdictions: Indonesia and Australia. These two jurisdictions are selected as providing a comparison of a system that makes little or no accommodation for a very small Islamic finance industry (Australia) and Indonesia where fatwas are recognised in the local banking system; the validity of Islamic financial instruments depends not only on satisfying conventional regulatory requirements but also on SSBs certification of Sharia compliance. The legitimacy of local Islamic financial products and services operates through a non-state agency, Sharia Advisory Boards "" Indonesian Ulama Council. They set their own juristic rules. The fatwas produced by that body play an important role in harmonizing Sharia opinions in the Indonesian financial system. Local banking acts direct Indonesian regulators to adopt fatwas as a national benchmark. In addition, fatwas of that governing body allow the adoption of various juristic rules from different Islamic schools in defining local fatwas on Islamic finance. In contrast, in Australia there is decentralised Sharia regulation so that local IFIs develop their own Sharia justifications for products and services offered to the markets. Local regulators have no concerns on Sharia compliance aspects of those local IFIs. The thesis concludes that that selective Sharia rules or fatwa shopping has contributed to the modern development of Islamic finance. The method has been successful in harmonizing legitimacy and practicality of Islamic financial transactions with the needs of a modern financial system.

Date of Award	2019
Original language	English