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Why Islamic finance does not use traditional Islamic law

Traditional Islamic law ("fiqh") suffered many centuries of non-development and is therefore not adequate for modern commercial life.

Summary

Posted 6 May 2021

In my April 2021 column for the magazine "Islamic Finance News" I chose a subject that oddly enough I have not covered in my previous 60+ columns.

The reason that is odd is that the question often gets asked by the audience when I lecture on Islamic finance. People ask why Islamic finance uses legal systems such as English law, rather than its own Islamic legal system.

I have written about this question once before on my website, on the page "The choice of applicable law for Islamic finance" which summarised an interview I gave to a different magazine in 2011.

You can read my new column below.

Why Islamic finance contracts do not use traditional Islamic law (fiqh)

The foundation of Islamic finance is complying with Shariah requirements as interpreted by Shariah scholars. Accordingly, newcomers to Islamic finance are often surprised to discover that Islamic finance contracts are almost never governed by fiqh.

Obviously, nobody should be surprised that UK Islamic banks use English law contracts subject to the jurisdiction of the courts of England & Wales.

Much more remarkable is that most Muslim majority countries rely upon commercial laws created by their legislators and subject to the jurisdiction of courts established by the state. From time to time, courts in Muslim majority countries do apply religious interpretations on top of state law; the instances vary from country to country and such religious deviations from state law often create commercial uncertainty.

The reasons why fiqh is not used for commercial transactions as an exclusive free-standing law are a combination of individual countries’ history and legal practicality.

The practical obstacles to relying exclusively on fiqh are very real. In my view the obstacles arise from a gap of many centuries when fiqh failed to keep up with changes in the world:

As a simple example of the problems created by the inability to legislate for fiqh, how would one derive an Islamic law of patents and specify what the standard life of a patented should be?

The choice of any particular number of years is an entirely arbitrary political and economic decision. There is simply no way of deriving a binding number of years for the life of a patent from the original Islamic sources and having that universally agreed.

Since fiqh is not, and realistically cannot, be used for commercial law in the 21st century, the needs of Islamic finance practitioners are the same as the needs of other participants in commercial life.

That is to have a legislature which enacts high quality commercial law in their country which caters for modern commercial requirements, and is well drafted and unambiguous. Similarly, when it comes to legal disputes, the key requirement is to have state courts which function well, avoid backlogs of cases, with judges who understand commercial law statutes and previous case law, and who are incorruptible.

None of this requires the judge to have any particular religious views. The role of the judge is to interpret the contract, written under state law, and to ensure that the contract is properly applied.

It is for each contracting party to determine for themselves, at the time they sign the contract, whether it is Shariah compliant and at that time to obtain the approval of their Shariah Supervisory Board if so required.

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

 

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