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How will Islamic finance Shariah standards develop over time?

I previously expected convergence towards the stricter standards of the Gulf states. I no longer do.

Posted 21 November 2021

Some people claim to never change their minds, or are at least reluctant to disclose that they do.

My personality has always been different. While my views are always strongly held, and strongly expressed, I am never reticent about changing them.

For my October column in the magazine "Islamic Finance News" I reflected on where I expected Shariah standards in Islamic finance to go in the long-term. As you can see from the text below, I no longer believe that they will converge on the Shariah standards of the Gulf states.

The long-term future for Global Shariah Standards

When lecturing I often point out that Islamic finance is, in mathematical terms, a strict subset of conventional finance.

Everything Islamic financiers can do; conventional financiers can also do if they wish. Conversely, many conventional finance transactions cannot be done by Islamic financiers, because they are prohibited for Shariah reasons.

Muslims’ views on what complies with Shariah vary. One Muslim may regard Transaction X as permissible, while another regards it as prohibited.

In the same way that governments set standards for other consumer products, such as bottled milk, governments in Muslim majority countries typically specify rules for determining what financial products can be labelled as Shariah compliant in that country. For example, Malaysia requires all Islamic financial institutions to follow the views of the Central Bank’s Shariah Board.

Muslim minority governments such as the UK leave it to market practice, since the UK government has no wish to regulate religion.

There is no reason to expect the governments of Muslim majority countries to converge on a common set of Shariah standards. Views about Shariah vary not just between individual Muslims but also between geographies. The reason is that the different schools of Islamic law are not evenly spread; instead, different schools predominate in different geographies.

Against this background, AAOIFI (The Accounting and Auditing Organisation for Islamic Financial Institutions) has done a commendable job in promulgating a growing set of Shariah standards that have been approved by Shariah scholars from all geographies. Islamic financial products that comply with the AAOIFI Shariah Standards should logically be acceptable to Muslim consumers in all jurisdictions.

I used to believe that this process would continue until full harmonisation was achieved with two factors driving it:

  1. Even if they cannot agree on all Shariah issues, scholars from all schools of Islamic law should be able to agree upon a core set of narrow and relatively restrictive Shariah standards acceptable to all of them.
  2. The geographies with the most restrictive views on Shariah compliance are the oil-rich Gulf states, which are the major capital exporters amongst Muslims. Accordingly, capital importing countries would have to offer financial products complying with these narrow standards as in (A) above in order to sell those products to the capital exporters.

Now I am not so sure.

As economies develop, the relative economic weight of the Gulf oil states must diminish significantly. Eventually, as their economies grow, the GDP of Muslim majority countries in aggregate will increasingly be represented by large population countries such as Indonesia, Pakistan, Bangladesh and Turkey, to name but a few.

As long as individuals in those countries regard certain transactions as permissible which religious scholars elsewhere regard as prohibited, convergence along the lines of (A) above cannot proceed to an endpoint, because factor (B) above will become less and less significant over time.

Instead, we should expect continuing differences in Shariah standards, with some geographies continuing to permit transactions that other geographies prohibit.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.


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