A wolf in a halal sheep’s clothing? Checking Shariah-compliance.

I was one of the very lucky kids growing up in Lahore, Pakistan who had a wonderful, knowledgeable, sincere, and caring Quran and Islamic teacher. From the age of 9 till 15, Maulana Askari taught me everything including recitation of the Qur’an, understanding the five pillars, the methods of Islamic practice (prayers, fasting, etc.) as well as Akhlaq (etiquette and behavior). Maulana Askari holds respect in my heart next only to my parents and select university professors.

However, today, if I need to dig into a technical issue with regards to Shariah-Compliance in finance, I would not burden Maulana Askari to speak to it. Why? Because his knowledge of the Quran and Islamic Practice – extensive as it is – does not qualify him as an authority in the field of finance, accounting, and halal vs conventional interest-based transactions.

Asking Maulana Askari to explain the application of Murabaha to a home financing product, or the preference of a Mudarabah arrangement vs a Wakala arrangement for investor-financing would be the same as asking my chemistry professor to explain quantum physics. As another example, take the case of Covid vaccines. Even the top scientific experts in most western countries refer to advice by the CDC in approving or rejecting vaccines and in making recommendations to the public. Why? Because these top scientific experts are smart to realize that, to save lives, its important to refer to the highest qualified and established authority, rather than make the decisions
And yet, when it comes to Islamic Finance, I come across many individuals who prefer taking advice from their Quran teacher, a very pious relative, or an imam at a nearby mosque, whose knowledge within Islam, although vast, is within a non-finance field within Islam as a subject. If Science and Mathematics are wide-ranging fields, imagine the width, depth, and breadth of Allah’s (swt) perfect religion for humanity.

Shariah-Compliance Checklist

• The company has a strong Shariah supervisory board with reputable scholars (see Note 1)
• The Shariah board has issued a fatwa or certificate ruling that the offering is halal
• The Shariah certificate confirms compliance with a reputable standard-setting body (see Note 2)
• The Shariah certificate and/or the latest sharia audit carried out are still valid
• If the Shariah certificate indicates the frequency of audits, confirm the audit has been completed

Note 1: A strong Shariah supervisory Board

A reputable and honest halal financing company will have a minimum of three, but ideally five scholars on its board. A reputable scholar is one with extensive knowledge of BOTH Islamic Finance AND conventional finance. It is not enough to have halal finance knowledge without understanding interest-based finance. This is because the vast majority of Islamic Financial Institutions (“IFI”s) must deal or transact with conventional (interest-based) financial institutions. The Islamic scholar must, therefore, have knowledge in both areas to ensure there is no “leakage” of riba or other non-Islamic aspects in these relationships.

You can check the reputation of the Islamic scholar through their LinkedIn profile or a simple google search. If the scholar is not easily found online or their profile does not demonstrate experience and knowledge in Islamic finance, then that is a major red flag.

Note 2: Shariah-standard-setting bodies

Today, the ONLY globally-recognized Shariah-standard-setting bodies are:

• AAOIFI (www.aaoifi.com)
• IFSB (https://www.ifsb.org/)
• IIFM https://www.iifm.net/

Today, the global Islamic finance industry is over USD 3 trillion in size and growing fast. This vast and dynamic industry requires well-established and uniform standards and rules that all Islamic Financial Institutions can adhere to. Over the past 30 years, the top Islamic scholars across the world, representing all the main schools (Hanafi, Shafi’i, Hanabila, and Maliki) have worked together to develop a robust set of standards that are founded in deep knowledge and understanding of Shariah law as understood through the Qur’an, sunnah, and hadeeth. Just as conventional financial institutions across the globe use IFRS accounting standards without question, IFIs base their products, policies and procedures on the standards set by one of the above bodies, which are accepted universally.

Following the above standards not only allows us, as individuals and organizations, to operate smoothly within a vast network of organizations, but it also protects us from committing mistakes and, Allah forbid, sins by inadvertently engaging in riba (interest), gharar (speculation) or maisir (gambling) – the three main aspects considered strictly haram in Islamic law.

• Don’t listen to non-experts, including Islamic experts without credentials in Islamic finance
• Don’t rely on hearsay or small talk. We often tend to make sweeping statements that “such and such restaurant is not halal”. In doing this, they are not only misleading others but also committing the huge sin of “bohtan” (false accusation). This should be avoided.
• Don’t go by just “gut feel” because that’s exactly what it is. Islamic finance is a very complex and developing field. Many things that seem right to a lay person can be haram, and many things that seem wrong are actually halal. The reason for this is that we, as individuals, are influenced not just by religion, but by our ethnic cultures, social trends and so on. For example, the concept of marriage between individuals of certain ages is aggressively frowned upon, whereas in Islam it is absolutely halal, and to portray is as haram would be bid’ah (innovation) Allah forbid.
• Don’t assume that if it’s too complicated to understand, then it must be haram, questionable, or “fishy”. Just as we rely on our doctors, often blindly, to save our lives, we should trust our Islamic finance scholars when it comes to matters beyond our expertise.

In summary, each one of us is one of 1.8 billion Muslims. We have a well-established global Islamic-Finance standard-setting and code-of-conduct system developed for the ummah by hundreds of the most qualified, wise, and sincere Islamic scholars across the world. The vast majority of Islamic Banks and other financial institutions abide by this system. For our own individual sakes, and for the sake of unity among the Islamic ummah, we are best advised to follow this system rather than something else.

Ultimately, Allah (swt) knows best.