Thursday, March 11, 2010

The role of the top scholars in Islamic finance

A Reuters article raises a number of important points about Shari'ah review of contracts. The defaults in the industry have exposed what would otherwise be esoteric points in contract law. How much time are Shari'ah scholars able to devote to the review of each contract for which they provide a fatwa? King & Spalding's Jawad Ali is quoted: "Mistakes do happen when a sharia board focuses on the instrument being presented ... and there is little scrutiny on how the structures are being implemented," The article goes into further discussion that the reasons for the oversight are not in general due to Shari'ah scholars (at least the top scholars) not being able to consider the overall implementation of Islamic finance and how the form versus substance plays out. The Reuters article notes that among the top scholars there is too much required of them. They cannot read every page with the workload caused by the current situation.

I have long argued that Shari'ah scholars are simply overworked and the requirement that every relatively standardized murabaha contract be reviewed by a top scholar has led to too little attention being paid to controversial or innovative (depending on the perspective) product. With the ISDA-IIFM standardized derivatives contract joining the standardized commodity murabaha contract that IIFM developed (the Master Agreement for Treasury Placements), it has been demonstrated that standardization of basic contracts can occur. Not every contract or application can be standardized in such a way. However, the standardization of plain vanilla contracts can release the top Shari'ah scholars and allow them to focus on more innovative or controversial products and in the context of the Reuters article, read every page of the contracts.

The important point is that the top scholars' time is too valuable to be used reviewing the basics. Their seal of approval is important for marketing products, but there should be a recognition that a standardized contract with the implementation by junior scholars is as good or better than relying on the top scholars for every contract. Their insight is much more valuable developing new products and deciding what products are most favored and what direction the innovation should take in the industry.

1 comment:

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