(Ret’d) Justice Muhammad Taqi Uthmani, International Shari’ah Scholar, says

“Modern banking developed in an era that witnessed the political decline of the Muslim community throughout the world. The originators of modern banking based their system on ‘interest-oriented investments and earnings which are clearly prohibited in the Shari’ah of Islam. Therefore, modern banking institutions, which gradually became essential to the commercial activity of the entire world, were totally antithetical to the guidance revealed to humankind through the Qur’an and the Sunnah of the Prophet, upon him be peace and blessings.

Many Muslims, believing in the prohibition of interest, remained aloof from this modern system of banking, and those who did enter the field restricted themselves to the routine work necessary for their employment. This was done because they had reservations about interest-based transactions and also because, owing to their political decline, they were unable to control the wheel of international commercial transactions.

Since the acquisition of political freedom by many Muslim countries during the past thirty years, it has been the cherished dream of the Muslim Ummah to develop a new banking system based on Islamic principles. Unfortunately, the political authorities of the Muslim countries paid precious little if any attention to bringing their socio-economic activities into harmony with the principles of the Shari’ah. Hence, certain groups of Muslims individuals were forced to establish Islamic banking institutions on their own, and without any meaningful support from their governments. Several Islamic banks were established in the decade of the Seventies and through them the cherished dream of Islamic banking was translated into reality, at least at the private level.

From the very beginning, Islamic banking institutions have been constantly guided by Religious scholars on their respective Shari’ah Supervisory Boards who are responsible for designing their transactions in accordance with the principles of the Shari’ah and subsequently keeping a watchful eye over their operations. These boards have devised new modes of financing to replace interest-based transactions. The management of an Islamic banking institution brings its day to day problems before its Board which, after examining the relevant details, will decide whether or not the proposed transactions are in line with Shari’ah principles. Such decisions by the Boards are called fatwas.

The function of a Shari’ah Supervisory Board is of a very delicate nature. On the one hand, they are meant to abide strictly by Islamic principles, and on the other they have to fulfill the requirements of the constantly emerging needs of the contemporary marketplace. The task entrusted to the Shari’ah boards is indeed a difficult one; because when we claim that Islam provides solutions to the problems of every time and place, it does not mean that Islam has given a specific rule for each and every minute detail of every transaction.

In fact, the sacred sources of the Shari’ ah, the Qur’an and the Sunnah, have provided Muslims with a set of eternal principles, but their application to the practical situations of each age requires the exercise of ijtihad. This means consultations in which the individual deliberations of many scholars play a vital role in reaching many firm conclusions. This exercise sometimes brings different answers from different Shari’ah Supervisory Boards with regard to the same question. The Shari’ ah Supervisory Boards, being comprised of a number of Islamic scholars, decide the matter placed before them after mutual deliberations, which is tantamount to collective ijtihad”.

(Introduction to Compendium of Legal Opinions Volume I, published by the Institute of Islamic Banking and Insurance, London, UK)

Legal Opinions on the Operations of Islamic Banks

Edited and Translated by Yusuf Talal DeLorenzo, Independent Shari’ah Scholar Director, Master’s Program for Imams The Graduate School of Islamic and Social Sciences, Leesburg, Virginia USA, Published by the Institute of Islamic Banking and Insurance, London, UK – available on IIBI website

Volume I: Murabah, Mudarabah and Musharakah
Extract from Translator’s Introduction

If the numbers indicate anything about Islamic banking, it is that an exciting chapter in the religious, cultural, and intellectual life of Muslims is opening. The relatively new field of Islamic economics and banking is particularly challenging for the reason that it brings together scholarship from jurists and economists. Realistically speaking, however, there is much about this novel interdisciplinary field that is not well understood, even at the conceptual level; and a great deal of groundwork still needs to be done. The problem at the present time, if we seek to reduce the matter to its lowest common denominator, is that scholars from both fields bring their own intellectual and disciplinary predilections to their understanding of the new phenomenon, and these are often at ideological and even paradigmatic loggerheads with one another. For example, many Muslim jurists are reluctant to exercise any sort of independent thinking on economic issues, preferring instead to rely on the scholarship of past ages. Thus, their response to new questions is to locate in the classical legal literature questions of a similar nature, through the liberal use of what may at best be termed “rough” analogy, and then to ‘graft the old solutions prescribed there to the questions at hand.2 In contrast to the literalist and traditionalist orientations of many Muslim jurists, our economists have suffered from a lack of Islamic contributions to their field. A former official of the State Bank of Pakistan asserts that Muslims writing on economics often apply western standards in proposing their “Islamic” models. “Let us admit that we Muslims are oriented in western theories of economics and are apt to believe them to be a fair standard of judging policies and decisions.”3 Moreover, in their inability to appreciate Shari’ah principles and purposes, many Muslim economists appear in their thinking to assume that the only purpose of fiqh is to regulate and facilitate economic activity. At a very fundamental level, they would endow homo Islamicus with the same traits as the neoclassical homo economicus whose primary motivation is utility and precious little else.

In modern times the appearance of serious thought, from an Islamic perspective, on the subject of economics coincided closely with the emergence of Muslim nation states following the colonial experience, at a time when Muslims sought not only to repair their ailing economies, but to reestablish their cultural and religious identities. Gradually, the ideas generated by this preliminary thinking led some Muslims to speak in terms of “Islamic Economics,” and a respectable body of literature on the subject (however tentative) was developed in several different languages, especially in Arabic, English, Persian, and Urdu, with significant contributions by both Muslim economists and jurists. Clearly, these works contributed to the establishment of Islamic banks as the most immediately implementable manifestation of the desire on the part of Muslims for working models of an “Islamic” economic system. The success of the first handful of Islamic banks, particularly in the decade of the seventies, led to the growth in the next decade of Islamic banks and banking all over the Muslim world. Today western economists are busy studying the potential impact of Islamic banking on economic relationships, as well as some of those aspects of Islamic banking which have met with success and show promise as profitable alternatives to established norms.

In the coming stages the work of economic historians will become increasingly important as their studies begin to inform the thinking of both Muslim economists and jurists, further increasing the complexity of the interdisciplinary mix, and further emphasizing the inadequacy of present classifications to encompass this fascinating new field. No doubt, the economic history of Muslims is fraught with lacunae; and there is much in our past that may be of relevance to the economic activity of our future. In particular, the ways in which Muslim scholars, especially the jurists among them, wrestled with problems of credit, trade, and production in the centuries prior to the depredations of the colonial powers may have much to tell us about how these issues may be dealt with today. Until recently, this has been a subject that failed to gain the attention of modern Muslim jurists, owing perhaps to their preoccupation with the classical period and its texts, so that many legal scholars remain in the dark with regard to the practices and strategies developed in the recent legal past.

Indeed, the point has been made, and it seems a valid one, that we are dealing with an interrupted process. Between the “medieval” and “modern” forms of Islamic banking transactions, as described by Nicholas Ray in his work on Islamic Banking, there lies a historical hiatus of as yet undetermined proportions and significance.

The areas of chief concern in the operations of Islamic Banks at present have been identified as trade financing and participatory or investment financing; the fatawa relevant to the three particularly Islamic modes of finance which represent the basis for, and majority of, operations within Islamic Banks are murabaha, mudarabah, and musharakah, each of which is used for investing. Murabaha, a form of trade financing, represents the most widely used of the three, yet the most suspect from an Islamic legal perspective. The other two operations are in no wise controversial, and musharakah may be understood to correspond to private investment funds, and mudarabah to public joint investment funds.