Bitcoin Majlis

I don’t think Shariah and scholars should have a seat at the table in Islamic finance. They shouldn’t be a part of the process or the conversation. They should be the WHOLE table. They should be the WHOLE conversation. They should be the axis around which everything is permitted to rotate. NOT - please provide approval to what we already intend to do But - deliver constraints which cannot be manipulated, cannot be loophole’d, cannot be silenced by money and power.

Jazakallahu khairan Sheikh for your detailed response. I acknowledge the legitimate distinction between classical contracts and their modern application in Islamic finance (which is very often not a faithful application). It appears we have a difference in our assessment of the cause of the current Islamic finance industry being dominated by debt, credit and lending products and being delivered by contracts deemed to be Shariah compliant. The focus in your response, which is consistent with the focus of the established Shariah apparatus in modern Islamic finance, remains on individual contracts. And considering whether the implementation is faithful or correct. My unit of analysis is more at a systemic level, an institutional level, how their capital structures and regulatory incentives control how they interact with capital. I prefer to focus on a philosophy of capital as outlined by our Deen, and contrast to that philosophy required, and demonstrated, by key participants in the Islamic banking and finance industry. This then provides a clear foundation to understand the dominant aggregate outcome of transactions in this industry. Contractual scrutiny is important, but it is clearly insufficient – it has been insufficient to prevent this outcome, and will be insufficient to change this trend. Islamic banks do not begin with a neutral approach towards contracts and then, accidentally, arrive at industrialised debt. A credit-creating bank requires scalable financing, principal preservation and predictable time-priced returns. It therefore will select and adapt whichever contracts can reproduce these outcomes. Products and contracts are delivery mechanisms for the architecture; they are not its source. The causal direction runs from the institutional balance-sheet requirement to the selection and adaptation of contracts—not from neutral contractual choices to an accidental aggregate outcome. It does not matter if the contract is Murabaha, Mudarabah, Wakala, Ijara – the Islamic banks will utilise them to deliver the outcomes they require. To refer to issues in the market as relating to implementation issues of faithful Shariah approved contracts, is entirely insufficient and fails to recognise the reality of the capital requirements in the industry. The observed implementation is the rational, observable and predictable activity of a lending institution. When the same outcome (deliberate replication of Riba outcomes via lending, debt and credit) is reproduced across institutions, jurisdictions, and multiple contractual forms, it cannot plausibly be treated as a series of isolated implementation failures. Reforming one structure simply causes the market to migrate to another structure that will deliver the same required debt outcome. It is my position that this wider systemic lens I take is consistent with classical juristic reasoning. The well-known hadith on dates (exchanging lower quality dates for higher quality dates) can be treated narrowly as a rule against unequal exchange. When analysed beyond the immediate transactional prohibition, this lawful pathway carries necessary institutional implications – sell independently, access to markets, price discovery, establishing monetary value, protection of participants, warning against off market transactions, and establishing all these as required elements to be present before a transaction is made. This requires a functioning exchange/market, possession, settlement and governance. Imam Malik (ra) looked through two separate sales transactions to their combined result – the asset returning to the original owner and resulting in an exchange of money for more money later. Bai al Inah similarly demonstrates that formally valid individual contracts may be properly judged by their coordination and combined economic outcome. If Shariah can look through two coordinated transactions, then it must also be capable of examining millions of transactions generated under the same institutional logic producing a deliberately engineered balance sheet outcome. Scale cannot be used as a tool for immunity from interrogation and scrutiny that would apply to the smallest instance. I have stated earlier the scale of the debt and Riba replication in the industry, and it is vast, and barely credible. These outcomes continue to exist even while the nominal Islamic contracts may change their names or types. This is therefore evidence of the governing institutional purpose, not a coincidence arising from isolated contractual defects or issues in implementation. With regards to the standing of scholars, I share your concerns for the standing of genuine scholars. But the standing of scholarship cannot be protected by limiting scrutiny to individual contracts while avoiding the aggregate system scholars are asked to certify. Public confidence with regards to our scholars is ultimately protected by truthful diagnosis and institutional independence. My criticism is primarily of the institutional Shariah apparatus within islamic banking and finance and the limited authority assigned to scholars within it – not of scholarship or scholarly authority itself. With regards to reform, I do not take the position that classical contracts are problematic – I separate these contracts from their modern institutional (and intentional) misuse, which scholars are unable to prevent. Reforming products inside the existing Islamic banking architecture cannot and will not change the existing dominant outcome. This architecture rationally subordinates permissible forms to its prior requirement for credit creation. Faithful reform cannot be achieved merely by further analysing or refining existing contracts. It requires a different philosophy and architecture of capital that is consistent with our Deen, and within which contracts and scholars are not constrained by a predetermined lending model. I have written many papers that cover these issues in more detail, and I do not wish to link them here, but they are available on my website for those who wish further clarity on my position. The remaining fundamental disagreement I see between our positions is whether Shariah scrutiny ends with individual contractual validity or must also govern the financial system those contracts are deliberately used to construct. Permit me to provide two examples of why contract-level Shariah scrutiny, without institutional authority over the architecture in which those contracts operate, has proved insufficient. In my discussions with people at AAOIFI, I raised specific market products that do not adhere to stated AAOIFI Shariah Standards. I was told that AAOIFI was aware of such practices but lacked the institutional power to prevent them. This illustrates the dominance of the philosophy of capital as demonstrated by Islamic banks overriding any isolated contractual requirements that are faithfully required. Secondly, It would not be difficult for faithful practitioners and scholars to translate existing requirements into operational tests capable of determining whether ownership is genuine in substance. If genuine ownership, risk and disposal rights were operationally required and tested, the prevailing Islamic-bank balance-sheet model would become unworkable. There is no mechanism or avenue for such improvements in Shariah aspects to be delivered to the market. I point to the current reluctance of the industry to accept proposals around asset ownership with regards to Sukuk as evidence of this. The absence of such an avenue is not incidental. Effective enforcement of genuine ownership would prevent the industry from continuing to produce the balance-sheet outcomes for which its present architecture exists.

Thank you brother for your considered comments. In matters of Shariah - I don’t disagree with any of what you say. My position is based on market practice - which is allegedly directly from modern Shariah standards. In fact your position tends to confirm my points. Before I explain, I should clarify something important. I have always been a massive supporter of our Deen with regards to financial matters. Some years ago I delivered a series of webinars (four were originally planned) discussing Hadith (on dates and related matters) and how we can faithfully derive complex requirements for the successful operation of financial markets from them. This series extended to 26 weeks. I have always maintained that scholars in Islamic finance are sincere. This has never been in question. I have written several papers which discuss the diversion of modern Islamic finance from the principles laid out by our Deen. I mention them only to provide context for my position I also believe AAOIFI is generally making sincere attempts to align modern shariah standards to faithful requirements of our Deen. The point is that modern islamic finance operates - In spite of Shariah standards - in a cohesive and observable and repeatable manner. The market delivers interest rate products consistent with the wider debt based economic system in which the Islamic banks operate. The outcomes are observable. 95% of global Islamic finance assets (of around $6 Trillion) are interest based – my own analysis. The balance sheets of Islamic banks are around 95% dominated, both assets and liabilities, by interest rate products whose pricing and behaviour reproduce the conventional banking system. Again my own analysis and this is publicly available. These are products that deliver debt and credit while generating time-priced returns economically equivalent to interest. This is deliberate. I have also written how Islamic banks are 40x more profitable when they deliver debt and lending compared to actually investing in assets. Their actions are entirely rational. Common institutional implementations of commodity Murabaha do not comply with key AAOIFI requirements, including those concerning agency, onward sale and possession. The then Chairman of Dubai Islamic bank’s Sharia Supervisory Board and an AAOIFI Sharia Board member has publicly written about this. His stated position concerned institutional Tawarruq as a prohibited practice. One major attempt by Islamic banks to move away from commodity Murabaha has been Interbank Wakala. The white paper for this product explicitly covers practitioners stating that the return should be known and effectively guaranteed. The scholars say this is impermissible and that this cannot be communicated to the other party as this would contravene Shariah principles. Yet such institutions have Shariah approval from their Shariah board. Often involving Scholars whose institutional memberships often overlap with membership of AAOIFI’s Shariah Board In addition - the Sukuk market operates - again - not in accordance with AAOIFI Shariah standards. The additional resolutions in 2008 relating to Sukuk were not new - they were a clarification and reaffirmation of the existing Sukuk standards - again which the market was ignoring. One of the four books in my series is wholly on Sukuk and covers this in detail. I would be happy to share this book with you if you wish. All Sukuk are presented and certified as Shariah-compliant, despite their economic and contractual defects. Scholars whose membership of AAOIFI often overlap are the ones who then provide Shariah approvals for Sukuk deals that don’t align with these standards. A study at INCEIF examined nearly 900 Malaysian corporate Sukuk issued over 15 years. Only 86 used mudarabah or musharakah risk-sharing structures. None of those 86 was genuinely risk-sharing in substance, and 97% required repurchase at face value. I have personally reviewed dozens of Sukuk prospectuses and found none to be compliant with AAOIFI standards and in fact are clearly in contravention of them. I have found no legal Sukuk documentation containing unqualified issuer representation that the entire Sukuk structure and all transaction documents comply fully with all applicable AAOIFI Shariah Standards. This is market practice. All are signed off by scholars. I have a long youtube video showing precisely how market practice structures these Sukuk. The market prepares its desired and necessary outcome - which is overwhelmingly debt and credit and lending - and then introduces scholars to provide the ratification. This structurally marginalises scholars and leaves them with insufficient institutional power to alter the market’s dominant economic outcomes. Individual interventions may occur, but they have not altered those aggregate outcomes. A more precise way of restating my more sweeping statement that modern islamic finance has made Shariah and scholars irrelevant would be this: the institutional Shariah apparatus has proved incapable of stopping the market’s systematic movement towards riba replication. At the same time, that apparatus continues to approve the structures through which this systemic movement towards Riba replication occurs I personally know scholars who are troubled by this. Who refuse to operate with Islamic banks. Who are trying their best to support change. Who see the ideological capture taking place and wish to reverse it. This is why my base position has been that reform of such a captured modern Islamic banking system is not possible. Because it is operating exactly as planned. What is needed is not better products built inside the same system. What is needed is a direct abandonment of Islamic banking and the opportunity for Shariah and scholars to operate without constraint in the search for faithful financial markets and products. It is my unyielding respect for Shariah and scholars that is the driver of my criticism.