he emergence of Islamic finance has
introduced a new discipline known as “Shari’a
advisory services” (SAC). SAC adds a unique value
proposition of religious law in the area of commercial
life, where secularism rules almost unquestioned
throughout the rest of the world. This phenomenon
has emerged as a regulatory requirement to ensure
Islamicity of Islamic financial institutions (IFIs) by establishing an independent Shari’a Board (SB).
According to AAOIFI, “Shari’a board is entrusted
with the duty of directing, reviewing and supervising
the activities of the IFIs to ensure that they comply
with Shari’a principles”.1 The following diagram
depicts the cycle of SB involvement in the business of an IFI.

One of the major responsibilities of SB is to issue
a Shari’a certification (fatwa) endorsing Shari’a
compliance of the products offered by the institution.
Shari’a scholars (SB members) pronounce the
resolution through a collective ijtihad — a systematic
logical approach adopted to apply legal ruling to
a financial matter based on their interpretation of
Shari’a sources. From a juristical perspective, this
is called “tanqihul manat”. According to Sheikh
Taqi Usmani, a leading Islamic finance scholar, the
process of tanqihul manat requires a Shari’a scholar
to get the “right description” (tassawur al-mas’alah)
by understanding financial nature and business
model of the product and, then to apply the relevant
Shari’a ruling (al-ttakyif al-shari).

The exercise of tanqihul manat is in fact an important
component of Shari’a advisory services provided to
IFIs by Shari’a scholars, which simply can be termed
as “Shari’a decision making”. Scientific research
proved that there are various psychological traps,
which significantly influence decision making.3 This
article highlights only those traps that potentially
lead to debacles in Shari’a decision making, namely
(1) the framing trap, (2) the status-quo trap, (3) the
anchoring trap and (4) the confirming-evidence
trap, along with antidotes tips.

The first logical move in tanqihul manat is known
in business management science as “framing the
problem”. It is like a frame around a picture that
separates it from the other objects in the room.
In Shari’a decision making, framing creates a
mental border that encloses a particular aspect of
a situation to outline the key elements of it for in
depth understanding. A mental frame enables the
Shari’a scholars to navigate the complex nature of
a financial product, so they can avoid solving the
wrong problem or solving the right problem in the
wrong way.

Since majority of SB members (Shari’a advisors)
come from Shari’a background, they typically
rely on the information presented to them by the
management of an IFI (i.e. business and product
development unit) as they normally do not possess
practical exposure to analyse directly a complicated
product. Therefore, the way a product is defined
to them by the management actually shapes the
potential Shari’a solution that SB members select
(of course with some exceptional Shari’a minds who
have developed throughout the years a phenomenal
comprehension of financial markets).

A substantial amount of studies found that “framing”
significantly impacts outcome of a decision. The
framing effect is an example of cognitive bias, in
which people react to a particular choice in different
ways depending on how it is presented e.g. as a loss
or a gain, positive or negative.4 Similarly, there are
evidences suggesting that framing influences Shari’a
decision in Islamic finance industry depending on
the manner in which a financial matter is presented
before the SB.

A famous example of the framing trap could be a
fatwa endorsing conventional insurance as attributed
to a famous Egyptian Scholar Muhamad Abduh. A
French man explained to him that insurance is like
a mudarabah contract where one party provides
capital and the other manages the fund. Later, he
asked Muhamad Abduh about its Shari’a status.
Muhammad Abduh considered it a Shari’a-compliant
product based on the information presented to him.
This was in reality “mis-framing” of the product.

Another latest example in Islamic finance would be
the case of Islamic total return swap proposed by
a multinational bank in 2007 and was approved by some Shari’a scholars. The proposed product was
claimed to be a Shari’a-compliant version of the
conventional total return swap (TRS), which had
been christened as the “wa’d” (unilateral promise) –
based total return swap. The objective was to use
non-compliant assets and their performance to
swap its returns into a so-called Shari’a-compliant
investment portfolio.

The product was presented to Shari’a scholars in a
way reflecting that the performance of non-halal
fund is just used as a benchmark index for the
Islamic investment fund, resembling the interestbased pricing mechanism (LIBOR) in Islamic banking
products. However, its legality was heavily criticised
by other scholars on the ground that wa’d is
used as a mere stratagem to halalize a prohibited
income. The analogy (qiyas) between the use of
LIBOR for pricing and the use of the performance
of non Shari’a-compliant assets for pricing is both
inaccurate and misleading. The only similarity is that
both are used for pricing. LIBOR is used to indicate
the return, while the other is used to deliver the return.

Sheikh Yusuf DeLorenzo categorically considered
this Shari’a decision as an unfortunate one (due to

“It is an unfortunate shortcoming on the part of the
Shariah Board in this transaction that it has failed
to consider the context of the offering. It is an even
greater shortcoming when it fails to consider the
consequences the product will have for the entire
industry. When it is clear that a product cannot be
offered in its own form or, in other words, when it
cannot be offered directly, but must be offered by
means of a stratagem that is basically a derivative
like a swap, red warning flags should go up. In such
situations, the Shariah Board must pay careful
attention to the circumstances of the offering. If
the circumstances can be found to justify such a
product, then it may be possible to grant approval.
If not, however, approval must be withheld. In the
case of promised returns from a referenced basket
of assets, the assets must be Shari’a compliant in
order for the returns to be Shari’a compliant. It really
cannot be otherwise.”

To avoid such incidences, Shari’a scholar shouldn’t
automatically accept the initial frame formulated by
one of SB members or the management. Rather he
should always try to reframe the problem in various
natural ways. Sheikh Taqi Usmani accentuated that a
Shari’a scholar shall get a deep understanding of the
concerned case before issuing a fatwa:

Sometimes the fatwa seeker–due to his limited
knowledge (of Shari’a)– cannot explain features
that determine Shari’a ruling (of the case enquired).
In such scenarios, the scholar (mufti) shall try to
obtain the relevant information by other means.
This happens –mostly– in commercial affairs related
questions in which the fatwa seeker presents a
case according to his understanding and ignores
the important aspects (that impacts Shari’a
ruling). While in some instances, the fatwa seeker
deliberately misrepresents (mis-frames) the matter
(to manipulate its Shari’a ruling). Therefore, Imam
Muhammad– a famous Muslim jurist– used to visit
markets to understand the business nature and the
prevailing commercial trends.

Status quo trap is an emotional bias and a preference
for the current state of affairs. Psychologically,
human brain considers a prevailing practice as a
reference point and perceives other alternatives
that vary from that baseline as inferior, hence
undesirable.8 This trap affects decision making
eloquently as it underpins that the current practice
is based objectively on a rationale. Therefore,
whenever a new product is introduced there is a
great tendency of rejection in the market.

In the case of Islamic finance, the status-quo
influences Shari’a decision making from two aspects:
management and scholarly reputation. It has been
argued that the sin of innovation (thinking out of
the box) tends to be punished much more severely
than sins of replicating conventional products. The
management often displays a strong bias toward a
“novel” proposal since it perpetuates the ‘statusquo’ of existing conventional financial system
that still—unfortunately—serves as a baseline for
Islamic banking industry. For example, in 2014,
Bank Negara Malaysia introduced mudarabah,
musharakah and wakalah based investment
account policy to portray the true spirit of Islamic
investment. Nevertheless, instead of adopting this
new model, IFIs resorted back to tawarruq based

On the other hand, it is also observed that if a
product is approved by famous Shari’a scholars,
it becomes often a challenge for junior Shari’a
scholars to question it or even to suggest another
alternative due to the well-endowed reputation of
those who endorsed it. To some extent, the status
quo may be considered—depending on the case— a
viable option. However, adhering to it out of fear
will limit Shari’a advisory options, and ultimately will
compromise effective decision making.

To overcome this challenge, all other options should
be carefully analysed. Exaggerating the effort or
cost involved in switching from the status quo
should be avoided. As far as questioning the opinion
of senior Shari’a scholars is concerned, the rule of
thumb in Islamic discourse is to examine validity,
authenticity and suitability of the underlying Shari’a
justification in the light of Islamic jurisprudence. This principle is exemplified by the evolution of Islamic
jurisprudence into different school of thoughts,
proving how constructive criticism has been playing
a productive role throughout Islamic civilisation. An
academic criticism shall not constitute by any means a discredit.

Anchoring in psychology refers to the common
human tendency of giving disproportionate weight
to the first information he or she receives.11 During
decision making, an initial impression, estimate or
idea thwarts subsequent thoughts and judgments,
like an anchor that prevents the boats from moving
away. For example, the initial price offered for
a used car, sets an arbitrary focal point (anchor)
for all following discussions. Prices discussed in
negotiations that are lower than the anchor may
seem reasonable, perhaps even cheap to the buyer,
even if said prices are still relatively higher than the
actual market value of the car.

In Shari’a decision making, a common anchor
could be the first proposal presented either by the
management or a member of the SB. For instance,
when an IFI intends to replicate a conventional
product, its first Shari’a-compliant structure (alttakyif al-fiqhi) proposed during brain storming
session may serve as an axis around which the
subsequent discussion will revolve. One good
example is the excessive use of tawarruq,13 which
was initially suggested for personal financing in dire
need cases. Nonetheless, since last two decades
tawarruq has become the ideal baseline for both
assets and liabilities sides products offered by IFIs.

Due to its anchoring effect, it paved the way for
reverse financial engineering that led to stagnancy
and lack of innovation in Islamic finance. A prominent
Islamic economist Najatullah Siddiqi demonstrated
through macroeconomic analysis that the harmful
consequences of tawarruq are much greater than
the benefits generally cited by its advocates.14 He
further articulates:

The market has enthusiastically welcomed this
development (tawarruq) mainly because it takes
us back to familiar grounds long trodden under conventional finance. As a result, several scholars
who approved tawarruq in the first instance
are raising their voices against its indiscriminate
widespread use. But profit-maximisers have rarely
been amenable to moral exhortations.
It is recommended to try using alternative starting
points and approaches rather than sticking with the
first line of thought that occurs. A scholar should
be open minded with the capability to think about
the problem independently before consulting
others in order to avoid becoming anchored by
their ideas. He should be vigilant to avoid anchoring
by advisers, consultants and others from whom he
solicits information and counsel. He should share
with them as little as possible about his own ideas,
estimates, and tentative decisions as revealing
too much may result in his preconceptions simply
coming back to him.

Confirmation bias is the tendency to “search for
or favour evidence and information that confirms
one’s preexisting beliefs or hypotheses”. Research shows that decision makers sometimes seek out
information that supports their prevailing instinct
or point of view, while avoiding information that
contradicts it. This trap affects the individual to
halt gathering information when the evidence
gathered confirms the views (prejudices) one would
like to be true. The source of confirmation bias lies
deep within human psyches that disconfirmation
is unquestionably superior to confirmatory reasoning.

In Shari’a decision making, a common confirming
bias occurs when a scholar seeks juristical evidences
in classical literature (al-juzyat al-fiqhiyyah) to
validate his position regarding a contemporary case.
Bai’ al-inah (sale of an asset with its subsequent
repurchase on a deferred payment basis) – a
common Islamic financing product in South Asia
but divisive in other jurisdictions – would be a good
example to illustrate confirming-evidence trap.
Although its permissibility is narrated from Imam
Al-Shafi’i (founder of Shafi’i school of thought), but
he referred to it as an unorganised sale that takes
place occasionally without prior arrangement. Yet,
this reference was taken by some IFIs to legalise
a buy-back sale in an organised manner to offer
a commercial financial product. This practice has
created a growing frustration among scholars and
proponents of Islamic economics due to the failure
of Islamic finance in addressing the real economic
and ethical issues beyond the legal realm of Shari’a compliance.

Such a cheery-picking legalism not only undermines
the true spirit of Islamic law (maqasid al-Shari’a),
but also deviates from the multi-dimensional
aspects of Islamic finance at both macro and
micro level. A famous Hanafi jurist Ibn Abidin
rightly pointed out that a Shari’a ruling in classical
fiqhi texts is usually based on the cultural norms
of that particular period, which no longer can be
prevalent. Consequently, some opinions of past
jurists cannot be applicable to contemporary cases.
After mentioning various examples of cultural trends
that have changed with the passage of time, he
concluded: “these are clear evidences affirming that
a mufti (scholar) shall not confine himself (in making a
Shari’a decision) to what is written in classical books
without taking into consideration the contemporary
practices. Otherwise, the harm of such a Shari’a
decision will be more than its benefits.

To circumvent confirming bias, a scholar should
examine evidences with equal rigour avoiding the
tendency to accept confirming evidence without
question. One of SB members may play devil’s
advocate to argue against the contemplating
decision. All possible juristic solutions should be
explored before drawing at a Shari’a resolution.
In seeking the advice of other experts, leading
questions that invite confirming evidence should
not be asked. It is advisable for SB member to not
surround himself with a yes-man who always seems
to support his point of view.

Psychologists have identified a series of manipulative
flaws hardwired into human thinking process, which
we often fail to recognise during decision making.
Shari’a decision is apparently not an exception. By
analysing the above facts, it can be concluded that
these traps together point towards two key findings.
First, an unfortunate Shari’a decision might be the
result of the partial information received by SB
members and their subsequent limited perspectives.
Such a decision will not only undermine legality of the
product enquired but might also trigger reputational
risk for the industry. To provide profound Shari’a
advisory services that reflect the multi-dimensional
aspects of Islamic finance, the SB should deal with
accurate information exploring issues from multiple perspectives.
Second, most of these decision-making traps are
correlated. Falling into one trap often leads to
become prey of other traps as well. Avoiding these
traps largely depends on how the SB members
interact with each other during a decision-making
process. Furthermore, we are always susceptible to
these traps in the future despite having a successful
track record in the past due to the different nature
of decisions and circumstances. Therefore, Shari’a
scholars who are the source of confidence in Islamic
financial industry should critically evaluate the
situations confronting them to bypass the traps.

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