Is Islamic finance law?
Is Islamic finance even law?
The answer to this question I think might help us understand a great deal about the nature of Islamic finance practice, and lead to a broader understanding of a form of religious practice and religious rules that actually dovetails with secular state law, by which I mean law that does not derive its authority from the divine.
The typical Islamic finance transaction goes like this: two parties agree in advance to a deal wherein interest will not be paid. This is usually achieved through the purchase and resale of an asset for a higher price (the murabaha), though there are any number of techniques to basically mimic interest on a loan. (The more controversial Islamic bond, for example, is technically a share in equity in the venture, except any return above the fixed return is returned to the issuer in the form of a reward, any less than the fixed return is moved back up to the fixed rate through a nonrecourse interest free loan (recourse only to amounts in the future that exceed the fixed return) and the equity is paid back at original value in the end. That's a total sham, hence the controversy.)
In any event, the mechanics, or acrobatics, aside, the contract often, in my experience almost always, invokes New York law to govern it. That's because New York has a predictable commercial system, everyone knows what the courts will do, and no problem really emerges through its use generally. But what does it mean, when New York law is used, and there is no election for shari'a instead.
Well, to me, that shari'a in this context at least, isn't really law. Nobody knows what it means, or who is supposed to apply it, too much uncertainty reigns, no regime can be invoked, no state can be used (unless you are insane enough to want to rely on Saudi law when you don't have to) and hence the preference for New York law.
Yes of course the shari'a helped structure the transaction in the first place, but it's hard to see how that makes it law, unless the idea is that because two people chose an unusual way to organize their contract for any reason at all (comply with the Will of God, avoid tax consequences, transfer risk of loss early, take advantage of lax securities rules in a jurisdiction) then all of a sudden that structure becomes a form of a "law" when many people start to do it. I am open to any conception anyone wants to assign to law, but surely it must, in the context of contract law, mean more than "things people agree to stick into their contract". I await the definition that makes Islamic finance contracts governed by the laws of the state of New York into Islamic law, but does not make a marriage contract conducted underwater, and governed by New York law, a matter of scuba law because of all the avid divers who do this.
I think once one accepts that Islamic finance can at least be thought of as non-law in light of how we normally understand law, that it's just a form of commercial practice, with its own unique industry practices as with any other industry, then some practicalities follow.
First, the shari'a in this context does not depend on law for its implementation. That is, it is perfectly, entirely functional without the law doing anything other than allowing the parties to draft their contracts as they please, and enforcing the model so drafted, ie New York law. You can argue about whether the law should or should not implement shari'a, you can't argue about whether or not the two are conceptually separate. It isn't true that to the Muslim law and religion are one in this context. That point was lost the minute it became customary to draft an Islamic finance transaction and choose New York law.
Second, it makes some of the Islamophobic ranting against Islamic finance rather ridiculous. I actually am perfectly happy to explain why I think shari'a finance is patently ridiculous, because really it is. It can even be quite fraudulent at times, suggesting realization of the cause of social justice that is at best highly exaggerated and at worst largely fantasy.
However, the notion that you can just get rid of it, given this law/religion distinction it necessarily employs is inane as well. How? Are you really going to empower judges, New York judges, to look at a contract, and actually tell them what Islamic finance looks like and if they see it in an otherwise valid contract to render it unenforceable? Can you imagine the result? Nobody, well beyond the Islamic finance world, would pick NY courts again for one thing, they'd be terrified these guys are going to run off and stop enforcing the will of the parties whenever they think it's not a good idea. Unimaginable, both for the middle left and it's theories of liberal inclusion, and the middle right and its desire to reduce the power of the courts to modify the words of a contract.
I think the practice is booming, but we're seeing a settling of consensus on it. It operates within the parameters of secular state law, it is not evidence of the growing power of political Islam but rather the growing means by which Islam seeks to express itself in a manner that does not threaten, or even seriously engage, the secular state. Islamic law as LAW, in the context of Islamic finance, or really in the context of Islamic commerce more broadly, is swiftly becoming a thing of the past.
HAH
The answer to this question I think might help us understand a great deal about the nature of Islamic finance practice, and lead to a broader understanding of a form of religious practice and religious rules that actually dovetails with secular state law, by which I mean law that does not derive its authority from the divine.
The typical Islamic finance transaction goes like this: two parties agree in advance to a deal wherein interest will not be paid. This is usually achieved through the purchase and resale of an asset for a higher price (the murabaha), though there are any number of techniques to basically mimic interest on a loan. (The more controversial Islamic bond, for example, is technically a share in equity in the venture, except any return above the fixed return is returned to the issuer in the form of a reward, any less than the fixed return is moved back up to the fixed rate through a nonrecourse interest free loan (recourse only to amounts in the future that exceed the fixed return) and the equity is paid back at original value in the end. That's a total sham, hence the controversy.)
In any event, the mechanics, or acrobatics, aside, the contract often, in my experience almost always, invokes New York law to govern it. That's because New York has a predictable commercial system, everyone knows what the courts will do, and no problem really emerges through its use generally. But what does it mean, when New York law is used, and there is no election for shari'a instead.
Well, to me, that shari'a in this context at least, isn't really law. Nobody knows what it means, or who is supposed to apply it, too much uncertainty reigns, no regime can be invoked, no state can be used (unless you are insane enough to want to rely on Saudi law when you don't have to) and hence the preference for New York law.
Yes of course the shari'a helped structure the transaction in the first place, but it's hard to see how that makes it law, unless the idea is that because two people chose an unusual way to organize their contract for any reason at all (comply with the Will of God, avoid tax consequences, transfer risk of loss early, take advantage of lax securities rules in a jurisdiction) then all of a sudden that structure becomes a form of a "law" when many people start to do it. I am open to any conception anyone wants to assign to law, but surely it must, in the context of contract law, mean more than "things people agree to stick into their contract". I await the definition that makes Islamic finance contracts governed by the laws of the state of New York into Islamic law, but does not make a marriage contract conducted underwater, and governed by New York law, a matter of scuba law because of all the avid divers who do this.
I think once one accepts that Islamic finance can at least be thought of as non-law in light of how we normally understand law, that it's just a form of commercial practice, with its own unique industry practices as with any other industry, then some practicalities follow.
First, the shari'a in this context does not depend on law for its implementation. That is, it is perfectly, entirely functional without the law doing anything other than allowing the parties to draft their contracts as they please, and enforcing the model so drafted, ie New York law. You can argue about whether the law should or should not implement shari'a, you can't argue about whether or not the two are conceptually separate. It isn't true that to the Muslim law and religion are one in this context. That point was lost the minute it became customary to draft an Islamic finance transaction and choose New York law.
Second, it makes some of the Islamophobic ranting against Islamic finance rather ridiculous. I actually am perfectly happy to explain why I think shari'a finance is patently ridiculous, because really it is. It can even be quite fraudulent at times, suggesting realization of the cause of social justice that is at best highly exaggerated and at worst largely fantasy.
However, the notion that you can just get rid of it, given this law/religion distinction it necessarily employs is inane as well. How? Are you really going to empower judges, New York judges, to look at a contract, and actually tell them what Islamic finance looks like and if they see it in an otherwise valid contract to render it unenforceable? Can you imagine the result? Nobody, well beyond the Islamic finance world, would pick NY courts again for one thing, they'd be terrified these guys are going to run off and stop enforcing the will of the parties whenever they think it's not a good idea. Unimaginable, both for the middle left and it's theories of liberal inclusion, and the middle right and its desire to reduce the power of the courts to modify the words of a contract.
I think the practice is booming, but we're seeing a settling of consensus on it. It operates within the parameters of secular state law, it is not evidence of the growing power of political Islam but rather the growing means by which Islam seeks to express itself in a manner that does not threaten, or even seriously engage, the secular state. Islamic law as LAW, in the context of Islamic finance, or really in the context of Islamic commerce more broadly, is swiftly becoming a thing of the past.
HAH
In your article, Is Islamic finance law, posted in October of this year you tackled the subject of uncertainty and unpredictability of the Islamic Commercial law, you said: “Well, to me, that shari'a in this context at least, isn't really law. Nobody knows what it means, or who is supposed to apply it, too much uncertainty reigns, no regime can be invoked, no state can be used (unless you are insane enough to want to rely on Saudi law when you don't have to)”
In your article you tried to answer the question of, whether the Islamic finance is even a law. Correctly, in my opinion, you answered to the negative. I believe Islam merely impose certain limitations on peoples power to contract. It does not in it self provide a prescriptive structured venues, or ideas for investment. Commerce is as old as the existence of mankind; Islam merely provided certain restrictions on an existing way of human dealing. As long as these limitations are not provoked, it does not really matter if you apply the laws of Saudi Arabia or the laws of New York, you could adopt and implement any ideas from any legal system as long as the covenants are preserved. To that end I believe the problem is with these convents and not with the procedural system though which it could be carried. You could adopt the best procedural law in the world, and that would not offend the Islamic compliance.
Second, the source of these restrictions, whether religious or secular does not matter, what matters is the existence of group of people who chooses to adopt these restrictions and make them binding in there dealings. It is true that Islamic commercial law is uncertain and unpredictable at times, but that is only because, first, it is not codified, and second there are too many schools of thoughts that hardly agree unanimously on any rule. The solution for this incapacitating problem is to codify the Islamic commercial law, and unify its rules in an IUCC (Islamic Uniform Commercial Code!). Hamdan Alqudah
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