Islamic Financial Law: Law without a Legal System

Nicholas HD Foster 1 and Simon Archer 2

Abstract

Islamic finance (IF) is based on certain parts of classical Islamic law concerning commercial
transactions. These parts, which can be called ‘classical Islamic commercial law’, had to be
adapted for the needs of IF, creating a new type of law: Islamic Financial Law. To be
effective, Islamic Financial Law needs a legal system (ways of making, amending,
developing, interpreting, applying, enforcing, teaching and studying the law). Some of these
exist. However, it does not have mechanisms such as the doctrine of precedent which would
result in legal certainty, and its application and enforcement depend on municipal legal
systems. To that extent it floats in a systemic vacuum.

As IF has matured, demands have been growing for greater certainty in order to reduce the
risk of non-compliance with Islamic law. Also, some high profile cases have highlighted the
lack of a dispute resolution system. Although various attempts have been made to deal with
the certainty issue, numerous issues remain unresolved.

In order to address these issues, there needs to be a more general realisation that the
fundamental problem is one of deficiencies in the legal infrastructure of Islamic Financial
Law, and that the problem cannot be resolved without the involvement of specialist legal
expertise, operating in a new field of study encompassing all relevant legal issues, the Law of
Islamic Finance.

1
SOAS, University of London, United Kingdom.
2
ICMA Centre, Henley Business School, University of Reading, United Kingdom.
Introduction

Islamic finance (IF) is based on law – Islamic law. 3 However, in modern times, Islamic law is
law without an underlying legal system. The implications of this fact remain largely
unrecognised, and that lack of recognition constitutes a major impediment for the further
development of the industry. In this paper, we outline the causes and some of the
consequences of this problem, and suggest some possible solutions.

Law and Legal System

There is a dearth of discussion, and a considerable lack of clarity in most people’s minds,
concerning the distinction between ‘law’ and ‘legal system’. Indeed, the terms are often used
interchangeably. The first book published by the well-known scholar Joseph Raz was entitled
The Concept of a Legal System: An Introduction to the Theory of Legal System (Raz, 1980).
But in fact it is about law.

So what is the distinction? Basically, ‘law’ refers to a body of rules – ‘English law’, for
example. ‘Legal system’ refers to that body of rules plus its infrastructure - the institutions
which do such things as making, amending, developing, interpreting, applying, enforcing,
teaching and studying the law.

There is nothing intrinsically wrong with using the term ‘legal system’ to refer to a body of
law. Indeed, a body of law is certainly a system, i.e. ‘the creative interaction of the elements
within a totality that can be identified as having frontiers, and thus being independent’
(Durand, 2004: 5-13, cited in Samuel, 2007: 106). Indeed, such a usage has the virtue of
avoiding the ambiguities intrinsic in the word ‘law’, which can also mean ‘a legislative
enactment’ and, in common law jurisdictions, ‘that part of the body of rules and doctrine
which is not equity’. However, such a usage may, and all too often does, lead to the serious
error of conflating the two concepts, or of ignoring the concept of ‘body of law plus
infrastructure’ entirely.

3
See p.9 below (The Development of Islamic Finance and the ‘Absence Problem’) for a further discussion on
the words ‘Islamic law’, ‘sharia’ and ‘fiqh’.

2
One definition of the term ‘legal system’ in its broader sense is that of Merryman: ‘an
operating set of legal institutions, procedures, and rules’ (Merryman, 1985: 1). According to
Tetley, the term ‘refers to the nature and content of the law generally, and the structures and
methods whereby it is legislated upon, adjudicated upon and administered, within a given
jurisdiction [or which governs] a specific group of persons’ (Tetley, 1999: text after fn 15).
Friedman suggested that a legal system should be seen ‘as a process—what legal institutions
do, and how they do it […] an actual operation unit in the social system, which takes in raw
materials, processes them, and produces an output.’ (Friedman, 1969: 33).

So ‘the English legal system’ consists of English law, plus the United Kingdom parliament,
the Ministry of Justice, the English court system, the English judiciary, barristers, solicitors
and other legal professionals, the professional regulatory bodies, law schools, legal
academics, legal publishers who publish law reports and various types of other legal written
output, and so on, all working interactively.

Terminology

Before proceeding further, we need to clarify some points of terminology.

So far we have used the term Islamic law. It is worth reminding ourselves of the difficulties
associated with this terminology.

Strictly speaking, we are dealing with the sharia and fiqh. The sharia is what God has
decreed as Legislator, ‘a perfect and immutable Divine Law separate and apart from any
human effort to understand that law’ (Hamoudi, 2011: 1123) or, in another way of looking at
it, the injunctions contained in the Holy Koran and the Sunna of the Prophet Mohammed (his
recorded practice, what he said or did, or did not say or do). The learned study, development
and application of the sharia is fiqh, sometimes translated as ‘Islamic jurisprudence’. ‘Sharia’
is often used in a looser way to refer to the combination of sharia in its strict sense and fiqh
(see Hamoudi, 2011: 1107). ‘Islamic law’ is a Western terminological invention which refers
to this combination.

In this paper, unless specifically stated otherwise or the context clearly requires a different
sense, we use the term ‘Islamic law’.

3
Is it justifiable to use the word ‘law’ when referring to Islamic law? It can be argued that the
Western concepts of ‘law’ and ‘legal system’ are crucially different from religious ‘law’ 4
such as Islamic law, and that to use the word ‘law’ to refer to Islamic law is potentially
misleading and should be avoided (on the arguments see, eg, Hamoudi, 2007, pp 10-11). One
difference is that (Western) law covers a limited (although presently ever expanding) area of
human activity, whereas Islamic law governs all aspects of life, including everyday
behaviour, morals, and religious observance. However, we take the view that, despite the
differences, those parts of Islamic law with which we are concerned in this paper resemble
Western law sufficiently for this usage to be not only justified, but necessary. For example,
that part of Islamic law commonly referred to as fiqh al-mu‘amalat, or the ‘fiqh of
transactions’ is clearly legal.

We use the word ‘classical’ to describe the period from the time when Islamic law emerged
as a developed body of law to its replacement or sidelining from the 19th century onwards.

The Classical Sharia Legal System and Its Commercial Aspects

Returning to the substance, the general lack of clarity about the law/legal system distinction
is no doubt one factor in the concomitant blind spot about the classical Islamic law legal
system. Whatever the reasons, it is apparent that the subject of most academic literature on
the subject is, and discussion tends to revolve principally around, the law, not the legal
system. Admittedly, a considerable part of the literature concerns legal institutions, but hardly
anyone deals with the legal system of the classical period, or indeed even mentions it. (A
notable exception is the work of Noah Feldman (eg Feldman, 2008: 22; 24; 27; 42; 43).)

Such a system, however, certainly existed. One work in which this is very apparent is
Hallaq’s An Introduction to Islamic Law (Hallaq, 2009a).

Unlike the present-day, Western legal systems with which we are familiar, Islamic law’s
authority did not derive from the state. (The modern nation state did not exist, and its
predecessor institutions did not, with a few exceptions, make law.) It was ‘a jurists’ law

4
Other religions have given rise to religious law, Judaism being one example. However, Islamic law is unique
in being the basis of a set of financial institutions and practices.

4
beyond the control of the sovereign’, it was not ‘the ruler but the class of highly trained
religious scholars, ‘ulama, who have enjoyed the prerogative of undertaking interpretation of
the sources and the task of applying them to new circumstances. Religious scholars when
working in their capacity as jurists […] and their juristic treatises, works of fiqh, were
considered the authoritative statements of Islamic law’ (Mayer, 1991: 1022-1023). There
were no legislature, case reports, or various other things which we now think of as integral
parts of a legal system.

But this is not a reason for saying that no legal system existed. Pre-modern Western law was
not state-based either, nor did legislatures, or many other legal institutions, exist in Western
Europe until fairly recently. One would not say, however, that there was no English legal
system in, say, the 14th century. There certainly was. The same applies to the Islamic law
system, which fell squarely within Merryman’s and Friedman’s definitions quoted above.
And that system seemed to serve the needs of society well. Notably it had ways of providing
reasonable degrees of flexibility and certainty, such as the taqlid/ijtihad system, in which less
knowledgeable (muqallid) jurists had to follow the settled rules of their madhhab, while their
more knowledgeable (mujtahid) colleagues could exercise independent judgment. It also had
mechanisms which provided flexibility and certainty in commercial law, such as the great
importance accorded to custom, approved standard contract types, the use of written
documents and the existence of standard form documents (Mallat, 2000: 81; 95-97; Foster,
2007a: 3-4; Tyan, 1945).

An important part of classical Islamic law was that part of the fiqh al-mu’amalat relating to
commercial transactions and associations (Foster, 2006, Foster, 2007a and Foster, 2010a: 8-
13). We can call this ‘classical Islamic commercial law’.

(The term ‘fiqh al-mu’amalat’ must be used with caution. It is commonly used as an
equivalent to the English term ‘commercial law’. However, fiqh is not law, it is the ‘term for
jurisprudence, the science of religious law in Islam’ (Goldziher, 2012), and mu’amalat,
although it does encompass rules and mechanisms relating to commercial transactions, is a
general word referring to all human interactions, including marriage, divorce and succession
(see generally Bernand, 2012).

5
Classical Islamic commercial law was a sophisticated system in itself with everything
necessary for the conduct of commerce in the classical period, with institutions of sale,
partnerships, agency and so forth, established official procedures (eg for registration of
partnerships), standard practices for the facilitation of business such as the hiyal, or
stratagems, which enabled the avoidance of certain rules regarded as hindrances, and so forth.

Was this living law, law in action, or a theoretical construct which was not used in practice?

The idea that Islamic law generally relied on ‘kadi justice’, ‘informal judgments rendered in
terms of concrete ethical or other practical valuations’ is debatable and controversial (Weber,
1978: 976-978, cited and rejected in Ghani, 1983: 365; but see also Crone, 1999: 269
(‘Weber did not say […] that Islamic justice was always qadi justice, and cases from
nineteenth-century Afghanistan do not prove that it never was.’ See also Agmon, 2006: 169-
170)). Whatever the situation in Islamic law generally, the idea does not seem to be
applicable to commercial law.

The criticism that Islamic law was merely an ivory tower product, devised by jurists ‘in self-
imposed isolation from practical needs’ deserves rather more attention (Coulson, 1957: 57,
cited in Hallaq, 1994: 29: this paragraph follows Foster, 2010a: 24-27). Although Schacht
famously wrote that Islamic law was ‘an extreme case of a “jurists’ law”’, he meant that ‘it
was created and further developed by private specialists’ (Schacht, 1965: 209), not that it was
necessarily impractical. Scholars have differed regarding the practicality of classical Islamic
commercial law. Hurgronje claimed that it ‘remained for the most part a dead letter’
(Hurgronje et al., 1957, cited in Udovitch, 1970a: 5), while Bergstrasser, Schacht and
Udovitch took a more positive view, Udovitch’s opinion being that ‘Hanafi commercial law,
especially that portion of it dealing with institutions of commercial association, had a very
close relationship to actual practice’ (Udovitch, 1970b: 290; Udovitch, 1970a: 7, citing
Schacht, 1935: 3, 119-122 (Bergstrasser); Schacht, 1965: 78-84). Reaching a definitive
conclusion is difficult, because we have very little evidence of how the system really worked,
and what evidence does exist is sometimes conflicting (against: Tyan, 1946; De Groot, 2004:
576; for: Gerber, 1981; Hanna, 1998). We must also remember that when we talk of ‘classical
Islamic law’ we are referring to a system which existed for over a thousand years and was
used over a huge geographical area. Our tentative conclusion is that, by and large, there is
good evidence that classical Islamic commercial law was a practical system.

6
However, it was a commercial system, not a financial one. There was little financial law in
the modern Western sense, and nothing equivalent in range or depth to modern Western
financial law. This statement may come as a surprise to many people, for the IF literature
contains many statements that IF is a return to the golden age of the classical past, in which
an Islamic financial system comparable to that of modern times flourished in classical times
and was governed by Islamic law. However, no such system existed in the Muslim world of
classical times. Indeed, for nearly all of that period, no such system existed anywhere. So no
law existed to serve it. Indeed, in the latter part of the classical period, the beginnings of the
modern financial system were developed in Western Europe, and that system was a major
factor in the Western domination of the Muslim world and the demise of classical Islamic
commercial law.

What did exist was a financial system adequate for the economic situation of the time, a
system which seems to have served, and served well, the financial requirements of merchants
and of the ruler. Merchants needed money to trade, currency exchange and a long-distance
payment system. Rulers needed somewhere to deposit their funds and money to finance
governmental needs. Financiers in the classical Muslim world provided these services. They
‘performed all banking operations: the exchange of money, loans, and the sale of assignments
of credit’ (Ashtor, 1972: 561; see generally Chachi, 2005: 9-12). In the reign of the Caliph
Al-Muqtadir the Djahbadh, usually a Christian or a Jew, ‘in addition to his functions as an
administrator of deposits and as a remitter of funds from place to place […] was called upon
to advance huge sums to the Caliph, the viziers, and other court officials on credit terms with
interest rates and securities’ (Fischel, 1992; see also Fischel, 1933). Scholars differ as to
whether banks existed or not (Chachi, 2005: 10), but this may be an anachronistic debate
which is actually about the definition of the word ‘bank’ – banking firms certainly existed
(see, eg, Fischel, 1933: 591). The law provided the necessary mechanisms for these
operations, such as: the sakk, which was an order of payment, similar to the modern cheque:
the suftaja, which was similar to a banker’s draft, but is also translated as ‘letter of credit’ or
‘bill of exchange’, used for remittance of funds (the word also denoted a payment order
issued by the government); the ruq‘a, a sort of purchase order (the word could also denote a
promissory note); and the hawala, a ‘credit guarantee or credit transfer’ (Udovitch, 1979:
263, cited in Chachi, 2005: 12; see generally Fischel, 1933: 569-583). So one can say that
some sort of Islamic financial law, albeit of limited extent, did exist in the classical period.

7
The Disappearance of Islamic Commercial Law

With the onset of modernity in the Muslim world, the classical Islamic law legal system
disappeared. Some parts of the law, such as those relating to family relationships, remained in
force, but were subject to a Western-style, state-based system. The municipal legal systems 5
of Muslim-majority countries are completely different from that of classical Islamic law, and
are all based on the Western-style nation state. This applies even to Saudi Arabia, for
although Islamic law is applicable law there, it is the state which accords it this authority, and
it is supplemented by state law, albeit of an unusual type and enforceability status.

The transformation of the legal systems of the Muslim world was part of the replacement of
the political structures of the classical period by those of the Western-style nation-state (see
generally (Hallaq, 2009b: Part III).

In the Middle East, a few decades after some significant, but still relatively minor changes
introduced during the French occupation of Egypt, the Ottomans led the way in the
commercial field, importing two parts of the French Commercial Code 1807 as the Ottoman
Commercial Code 1850 (on the Ottoman transformation, see Foster, Forthcoming). The
domination of Western ideas was far from total, for the Ottomans also produced the Majalla,
a codification of some commercial aspects of the Hanafi madhhab (legal school) (on the
commercial nature of the Majalla see Foster, Forthcoming: §4.2) In 1875-6 the Mixed Courts
were introduced in Egypt, along with French-based civil and commercial codes, in order to
serve as a forum for disputes between Egyptians and foreigners. The Mixed Courts
established Western-style law firmly in Egypt, and it was this law which formed the basis for
the Egyptian Civil Code of 1948 (Foster, Forthcoming: §3.2.1, §4.2.3).

In India and South-East Asia, Islamic law was only one normative order in plural contexts.
English law was gradually introduced into India and British Malaya and Dutch law into the
Nederlandsch-Indië (now Indonesia) (Hallaq, 2009b: chs 14, 15: Hallaq’s treatment of India

5
‘Municipal’ is the correct English law term for the law of a jurisdiction, or ‘law district’ such as England and
Wales, France or New York; the terms ‘local’ and ‘national’ are inexact and, in certain contexts, incorrect –
English law is not a national law, for example.

8
relates to the creation of Anglo-Muhammadan law; on the introduction of English law see,
eg, Setalvad, 1966; Banerjee, 1984.)

The commercial parts of Islamic law were among the first to go. Apart from the Majalla
(which, it must be remembered, was state-enacted legislation, so in form at any rate foreign to
classical Islamic law) and Saudi Arabia, Islamic commercial law, including financial law,
disappeared from the Islamic world.

Somewhat curiously when viewed from an IF perspective, in which the Islamic revival has
led to a desire to ensure the compliance with Islamic law of all areas of commercial and
financial life (and with the exception of the Ottoman debate which led to the Majalla), there
were hardly any objections to the disappearance of classical Islamic commercial law (Brown,
1997: 359; Hallaq, 2009b: 425-429; Foster, 2010b: 279-282; Foster, Forthcoming: §4.1, para
headed ‘Why was the import not challenged?’), nor to the replacement of the classical
financing system and its associated legal underpinnings with a Western-style, interest-based
regime. Indeed, the perceived inadequacies of classical Islamic law constituted a major factor
in the desire to transform the legal system (Foster, Forthcoming: §4.1, para headed ‘Why
import?’).

The Development of Islamic Finance and the ‘Absence Problem’

As the classical Islamic commercial law system emerged in the broader context of Islamic
law itself, commercial law was inevitably subject to the overall ethos and principles of
Islamic law. However, it also developed out of practice in order to serve the pragmatic needs
of its users, the merchants and, as part of a working legal system, must have been fashioned
by lawyers.

The original impetus behind IF, on the other hand, came from Islamic Economics, a body of
normative political economy which was the brainchild of such thinkers as Ahmad al-Najjar,
Khurshid Ahmad and Muhammad Umar Chapra (Hegazy, 2007: 582), which was itself an
offshoot of a revival process initiated by ideologues such as Abu al-A'la al-Mawdudi, Hassan
al-Banna and Sayyid Qutb, who ‘focused on the overall reform of Muslim societies, covering
the political, social, and economic aspects of life’ (Hegazy, 2007: 582).

9
Notwithstanding this origin, according to Hegazy and others, IF as presently practiced has, as
a result of the influence of Muhammad Baqir as-Sadr and Sami Homoud, a ‘legalistic basis’
(Hegazy, 2007: 589-601). ‘Legalistic’ is defined in terms of the objective shifting ‘from
attempting to solve the social and economic problems of Muslims to offering a lawful or
permissible (halal) platform for financial products capable of attracting the savings of the
more affluent Muslims.’ (Hegazy, 2007: 590.)

However, the legalistic approach immediately ran into two problems.

The first might be called ‘the absence problem’. In order to produce lawful, ‘sharia-
compliant’, financial products, one needs law (call this ‘Islamic Financial Law’) and the tasks
associated with the production of such products were immense. It was classical Islamic
commercial law, not financial law, which had to be adapted, for, as can be seen from the brief
description of it above, classical Islamic financial law was too limited to be suitable for
modern requirements. So, once the decision had been taken to use a legalistic approach, the
architects of IF had no choice. They were obliged to use what already existed, and the only
thing which came close to what they needed was classical Islamic commercial law, namely
the commercial parts of the fiqh al mu’amalat. Commercial law fitted their purposes well
because commerce is allowed in Islam, as is made crystal clear in a verse of the Holy Koran
itself (Koran: II:275), tellingly famous and much quoted in IF and contrasting permitted
trade with forbidden riba:

‫ﷲُ ْﺍﻟﺒَ ْﻴ َﻊ َﻭ َﺣ ﱠﺮ َﻡ ﺍﻟﺮﱢ ﺑَﺎ‬

ّ ‫ﻮﺍ ﺇِﻧﱠ َﻤﺎ ْﺍﻟﺒَﻴْﻊ ِﻣ ْﺜ ُﻞ ﺍﻟﺮﱢ ﺑَﺎ َﻭﺃَ َﺣ ﱠﻞ‬
ْ ُ‫ﻗَﺎﻟ‬
That is because they say: ‘Trade is just like usury; whereas Allah permitteth trading
and forbiddeth usury’ (translation from Pickthall, 1976).

And classical Islamic commercial law is a rich source, a sophisticated system which
benefitted from the authority of centuries of use and study.

So, legally speaking, IF is based on an attempted adaptation of certain ‘nominate contracts’ (a

closed list of approved contract types) to finance. Examples of nominate contracts so adapted
include the murabaha (sale with an agreed mark-up), the ijara (lease), the trading partnership
(sharika/shirka, renamed musharaka) and the investment partnership (mudaraba/qirad).

10
However, the fundamental law reform tools which one would normally employ in this sort of
undertaking in a Western system, such as law reform institutions (the English Law
Commission is one example), a legislature, with its associated civil service institutions and
procedures, and institutionally organised legal professions, did not exist. For, as noted above,
the classical Islamic law legal system had disappeared. Hamoudi refers to essentially the
same issue when he writes of the absence of a ‘legitimate agent’ to satisfy Islamic law’s need
for the ‘reinvigoration of fresh ideas’ (Hamoudi, 2011: 1122).

The second problem was, apparently, that either nobody was aware of the existence of the
‘absence problem’ or, if they were aware of it, they did not address it. So, for whatever
reason, the major policy decision to go down the legalistic route seems to have been made
without taking into account the jurisprudential foundations of that decision.

The decision may have been made without even an awareness of the need to undertake this
reflective exercise. If this was what did actually happen, it was an instance of a common legal
phenomenon, which can be called the ‘technical ignorance problem’. This occurs when
policy makers take a decision which needs legal input from the outset, but do not have
sufficient legal knowledge, especially knowledge of the more general, theoretical aspect of
the law, to realise that they need this input. Such policy-makers regard lawyers as mere
technicians, who therefore have no contribution to make on policy and system design, and
they are only brought in at a later stage to deal with the technical legal aspects necessary to
make the new system work.

That task was formidable. Classical Islamic commercial law had to be adapted to the needs of
modern life, and this had to be done within the constraints of (i) the conventional interest-
and speculation-based financial system (which IF is obliged to track) and (ii) the present
global legal order, made up of nation states and their municipal legal systems, in which IF
transactions have to operate (‘vehicular systems’).

So cooperation was required between two types of lawyers, sharia scholars, who adapted
classical Islamic commercial law, and Western commercial lawyers, who advised on the
practicality and enforceability of those products in the relevant vehicular system. The
adaptation was effected by adapting suitable nominate contracts to serve purposes for which

11
they had not been originally designed, for example the adaptation of the mudaraba to create
an alternative to a conventional bank deposit account, or the adaptation of the murabaha,
initially for trade financing and now used extensively for other financing purposes.

The result of this history was that there was no attempt even to formulate the major systemic
difficulties. As far as we are aware, nobody discussed the problems in terms of the absence of
a legal system which would normally provide the basic tools for the formulation, adaptation
and application of law. Consequently, those problems have been approached piecemeal, often
by non-lawyers, and in ways and using terminology which have obscured, rather than
illuminated, the possible paths to solutions. 6

As regards the piecemeal approach, we have seen certain elements emerging which resemble,
and fulfil similar functions to those of, the corresponding elements of a legal system (Foster,
2007b). The first, and still one of the most important, is the body of figures of authority, the
sharia scholars, able to issue legal opinions which have a significant, but limited, degree of
authority – rather like the written opinion of a well-known barrister in the English legal
system 7. Standardised transaction types have been devised, with associated standard
documentation. Multilateral rule-making and policy institutions such as AAOIFI, the OIC
Fiqh Academy and the IFSB have been formed. We have the so-called ‘sharia standards’ - in
point of fact a sort of legislation or codification (on which see more below). Collections of
fatawa are available, such as that of the International Shari'ah Research Academy for Islamic
Finance. Legal professionals have become specialised in the field. A small amount of
specialist legal literature exists and more is appearing. Academic and practitioner discussion
takes place in various fora. Some specialist legal courses are being offered, such as the ‘Law
of Islamic Finance’ Masters course at SOAS, University of London.

However, the piecemeal approach and its source, the failure to act upon, or even appreciate
the nature of, the ‘absence problem’, mean that some important practical issues remain
unsolved. Any body of rules used to facilitate and regulate real life activities has to derive
from a legal system which itself has roots in a particular society. Islamic Financial Law,

6
Sharia scholars are not required to be schooled in Western commercial law, including the latter’s methodology,
and this tends to aggravate the difficulties.
7
Sharia scholars are not required to, and generally do not, make known the detailed legal reasoning on which
they base their opinions or rulings (fatawa). This impedes the use of analogical reasoning by other scholars
confronted by a similar issue and the emergence of consensus among scholars.

12
however, is not so derived. It is a body of rules designed for a field of activity, the IF
industry, so is unattached to any society. Moreover, although one can argue that something
approaching a legal system is emerging (Foster, 2007b), that system does not yet, and may
never have, the sort of authority and legitimacy which are enjoyed by well-established
municipal systems such as English law.

Some Consequences

Two examples of the problems which derive from this history, those of ‘standardisation’ and
dispute resolution, are briefly discussed in this section.

‘Standardisation’ Conventional financial markets rely on a high degree of legal certainty,

which can be viewed as a manifestation of Weber’s ‘formal rationality’. 8 If a transaction
complies with the law, it will, barring exceptional circumstances and due account being taken
of practical considerations, be enforced. This is because the relevant parts of Western legal
systems have been specifically designed with this aim in mind. Legal certainty can never be
absolute, of course, but those legal systems in which commerce and finance have been
important, such as that of England and Wales, have developed a specialist body of law and
specialist institutions which ensure a very high degree of legal certainty.

Islamic Financial Law, however, does not enjoy this degree of certainty, which can only be
created within a fully functioning legal system. Islamic Financial Law is artificial. The sharia
scholars and, a fortiori, the commercial lawyers who created it do not enjoy the authority
granted by an accredited place in a functioning legal system. Unlike the situation in an
established legal system, not only can different sharia scholars reach different answers, but
there is no higher authority which can resolve such differences. There is no equivalent to the
Western legal institutions of a hierarchical court system, with a court of appeal and a supreme
court, which establishes, with reasonable certainty, what the law is. Nor, equally to the point,
is there anything like the methods which, it seems, were successfully used in the classical
sharia legal system to create sufficient certainty for the needs of commerce. In addition, the

8
But note that Weber himself classified English law as ‘empirical justice’ – ‘formal judgments rendered, not by
subsumption under rational concepts, but by drawing on “analogies” and by depending upon and interpreting
concrete “precedents”’ (Weber, 1978: 976). Fiqh al-mu’amalat is more similar to common law than to the
codified law of the Continental European tradition, but the practices of sharia scholars do not make a similar use
of analogies and precedents (see footnote 7).

13
scholars use methods of adaptation such as takhayyur (choosing solutions from different
madhahib), talfiq (patching different legal opinions together) (Hallaq, 2009b: 448 (takhayyur
and talfiq); Krawietz, 2002 (talfiq)) and ijtihad, or original interpretation, all operating under
the overriding principle of maslaha (roughly speaking, public interest). However, although
these techniques have been essential in creating an Islamic Financial Law able to function
within its allotted parameters, these techniques are very different from those used in the
classical period. This makes them open to challenge in terms of authority. For example
(writing not about IF, but more generally) Hallaq calls Rashid Rida’s ideas on maslaha ‘a
total negation of traditional legal theory’ (Hallaq, 2009b: 508). The consequence, according
to some scholars such as El Gamal, is that there is ‘no legitimacy in the institutions that
comprised Islamic finance, and correspondingly, no authenticity to their means of deriving
medieval rules’ (Hamoudi, 2011: 1120).’ For Hamoudi, Islamic Financial Law ‘is a rather
artificial synthesis of disparate rules of four medieval Islamic schools patched together by
some sort of internal logic’ (Hamoudi, 2011: 1117).

So ‘sharia [non-compliance] risk’, the risk that potential customers or counterparties will not
believe that a product or financial instrument complies with Islamic law and will therefore
refrain from using it, remains problematic. Lack of certainty can also act as an impediment to
innovation, it increases costs, reduces financial and market stability and makes the task of the
regulator more difficult (Alkhamees, 2013: ??).

Attempts have been made to address this issue through so-called ‘standardisation’, including
notably AAOIFI’s ‘sharia standards’, as well as the efforts of other bodies such as the OIC
Fiqh Academy. Ahmad Alkhamees deals extensively with standardisation in his contribution
to this volume, and the reader is referred to that chapter for more detail on the phenomenon
itself (Alkhamees, 2013). Our treatment of it here concerns only those aspects relevant to
present purposes.

It is worth pausing for a moment to consider the word itself. ‘Standardisation’ is not a term
used by lawyers. One might think that it refers to something similar to phenomena which one
does encounter in law, namely ‘harmonisation’, or in some contexts ‘uniformity’ (on the
difference between harmonisation and uniformity see Mistelis, 2001: 4). The aim of people
engaging in legal harmonisation or unification projects is to reduce the effects of divergence
among municipal legal systems (see generally Andenas and Baasch Andersen, 2012). The

14
Vienna Convention on the International Sale of Goods (CISG) is a highly successful example
of a harmonised/uniform regime, which avoids the need for parties buying and selling goods
across borders to incur the expense and suffer the risk of using numerous, and probably
unfamiliar, legal systems as the governing law of their contracts.

‘Standardisation’ in IF is different. The problem is not one of the existence of numerous legal
systems, but of inconsistency in one legal system, that of IF. To put it another way, is a
matter of creating certainty in Islamic Financial Law. As observed above, IF ‘standardisation’
is in fact a kind of legislation or codification. One only has to examine the AAOIFI sharia
standards to see their resemblance to the text of a statute.

(But note the point made by Kilian Bälz: ‘The AAOIFI Sharia standards […[ differ, however,
in an important point from a restatement of Islamic contract law: they do not provide
“secondary rules” for unforeseen circumstances or non-performance of either party to the
transaction, but only set out criteria that must be met by Islamic financing transactions so that
they meet Sharia requirements. They only provide very limited guidance in case an
agreement is incomplete and virtually none when things go wrong.’ (Bälz, 2008: 14).) 9

However, the authority of bodies such as AAOIFI is of necessity self-assumed and doubtful,
and the measures taken by them can be challenged. For example, the very idea of
standardisation is problematic in itself from the point of view of the methods used in, and the
outlook of, the classical sharia. Some countries, for example Malaysia and the Sudan, have
national sharia councils which issue sharia opinions (fatawa) which are authoritative only
within the country in question, but in fact complicate the problem in an international context.

Dispute Resolution Another issue which derives from the ‘absence problem’ is dispute
resolution (see, eg, Adawiah bt Engku Ali, 2008). This is a key part of any legal system, yet
IF does not have it. Disputes have to be resolved in the municipal courts of vehicular systems
such as those of England or Malaysia 10. Not many disputes have gone before the courts, but

9
According to Bälz, this ‘has the effect of reducing Islamic law to business ethics’ (Bälz, 2008: 14). We find
this paradoxical because in practice the narrow juristic preoccupation with compliance with sharia rules takes
the focus away from broader ethical principles.
10
In Malaysia, the Sharia courts deal with matters of sharia family law, but not with matters of commercial law,
which are handled by the civil courts.

15
in recent years a few high profile cases have resulted in considerable controversy and (often
ill-informed) debate.

By way of illustration, consider IF dispute resolution in the English courts. England has a
legal system which presently plays a major role in IF but, although it willingly and easily
accommodates IF, its courts have effectively refused to adjudicate on Islamic Financial Law.

The first time the English High Court dealt with an IF dispute, in the Symphony Gems case, 11
Tomlinson J had no hesitation in applying English law. He was right to do so. Indeed, he had
no choice, for the governing law clause clearly and unequivocally stated that the law to be
applied was that of England and Wales. A few years later, in the Shamil Bank case, the Court
of Appeal refused to become involved in the adjudication of contentious sharia questions. 12
At first instance, Morrison J said: ‘Whilst in one sense this Court will answer any question
posed to it, however difficult, it is improbable in the extreme, that the parties were truly
asking this Court to get into matters of Islamic religion and orthodoxy. This is especially so
when the bank has its own religious Board to monitor the compliance of the bank with the
Board's own perception of Islamic principles of law in an international banking context’
(Shamil Bank QBD: 54, cited in Shamil Bank CA: 41). The Court of Appeal, approving the
approach taken by Morrison J, said: ‘the words [referring to the principles of Islamic law in
the governing law clause] are intended simply to reflect the Islamic religious principles
according to which the Bank holds itself out as doing business rather than a system of law
intended to “trump” the application of English law as the law to be applied in ascertaining the
liability of the parties under the terms of the agreement’ (Shamil Bank CA: 54).

The court also approved the view of the judge ‘that, having chosen English law as the
governing law, it would be both unusual and improbable for the parties to intend that the
English Court should proceed to determine and apply the Sharia in relation to the legality or
enforceability of the obligations clearly set out in the contract’ (Shamil Bank CA: 54).

11
Islamic Investment Co of the Gulf (Bahamas) Ltd v Symphony Gems NV [2002] WL 346969, (QBD (Comm
Ct)).
12
Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd [2003] EWHC 2118 (Comm); 2003 WL
22187542 (‘Shamil Bank QBD’); Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd [2004] EWCA
Civ 19, [2004] 1 WLR 1784, [2004] 2 All ER (Comm) 312, [2004] 2 Lloyd's Rep 1 (‘Shamil Bank CA’).

16
In his conclusion on this matter, Potter LJ said: ‘there are indeed areas of considerable
controversy and difficulty arising not only from the need to translate into propositions of
modern law texts which centuries ago were set out as religious and moral codes, but because
of the existence of a variety of schools of thought with which the Court may have to concern
itself in any given case before reaching a conclusion upon the principle or rule in dispute’
(Shamil Bank: 55).

Critics of this conclusion are quite numerous. Some of them say that the Court of Appeal
should have taken responsibility for opining on the Islamic law compliance of IF transactions,
the benefit, presumably, being the potential for increased certainty in sharia compliance in IF
generally. However, City of London practitioners, it is said, welcomed the judgment, as it
simplified their task, making it clear that conformity with Islamic law was just a matter of
compliance not, in the view of the English courts at least, law, while at the same time
ensuring that transactions benefited from the considerable legal certainty afforded by English
law. In such transactions, there is very little doubt that the contract will be enforced in a
predictable way, according to its terms. Some lawyers have gone further, inserting ‘what Dr.
[Kilian] Bälz referred to as “Waiver of Shari'a Defense” clauses, which prevent the parties
from being able to assert in court that the transaction in question is not compliant with shari'a
as a defense to enforceability’ (Hamoudi, 2011: 1117).

Different issues arise elsewhere. In Malaysia, for example, although IF is officially

encouraged and a statutory framework has been put into place for it, the Constitution grants
jurisdiction over IF to the civil courts, and some high profile cases have led to intense debate.
(see, eg, Bin Hasan and Asutay, 2011; the authors deal also with England, India and the
United States). However, whatever the variations, the basic theme is the same. IF does not
have a dispute resolution it can call its own.

Conclusion: A Suggested Way Forward

These problems cannot be satisfactorily resolved or even addressed without the involvement
of legal experts who can navigate the complexities of reviving and adapting a pre-modern
law, classical Islamic commercial law, to a completely different financial and legal
environment. In other words, the involvement is needed of people who possess adequate
expertise in the salient parts of the overall legal situation of IF: the relevant aspects of the

17
classical sharia and the construction therefrom of Islamic Financial Law; the relationship
between Islamic Financial Law and relevant municipal and transnational normative systems;
and so on; that is to say, people who understand the theoretical aspects of the totality of the
legal issues, which we can call the ‘Law of Islamic Finance’.

However, none of this can happen unless the existence, and character, of the issues associated
with the Law of Islamic Finance are properly appreciated. Unfortunately this, too, is
problematic. There is a vicious circle, determined by the history and structure of IF. Since the
history of IF was such that lawyers were not involved in the fundamentals of its creation,
legal expertise is still in its assigned place. The result is a sort of blindness in the industry
even to the existence of the overarching legal issues, despite the existence of scholarly
material on the general theme of the revival of Islamic law (see, eg, Hallaq, 2009b: ch 18).
This is most clearly seen in the difference between, on the one hand, the reactions of IF
practitioners (including lawyers) and, on the other, lawyers outside IF with a comparative
knowledge of legal systems.

Many people in the first group, although made up of highly intelligent and experienced
people, find it difficult to see the structure from the outside, let alone understand that a
problem exists, for they work deep within the existing conceptual structure. With these
colleagues, a considerable amount of time is needed to communicate the message, especially
as it may be unwelcome. The second group’s reaction could not be more different. They
understand it immediately and do not understand why such pains are taken to explain the
problem, for they consider it obvious.

What is initially needed, therefore, is a concerted effort to communicate the nature of the
fundamental issues, to gain recognition of the Law of Islamic Finance as an area of activity
and study in its own right, and to ensure that people with the relevant expertise work on the
problem.

18
Cases

Islamic Investment Co of the Gulf (Bahamas) Ltd v Symphony Gems NV [2002] WL 346969,
(QBD (Comm Ct)).
Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd [2003] EWHC 2118 (Comm);
2003 WL 22187542
Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd [2004] EWCA Civ 19, [2004] 1
WLR 1784, [2004] 2 All ER (Comm) 312, [2004] 2 Lloyd's Rep 1

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