It is absolutely imperative to disallow any
kind of Islamic financial business outside the regulatory net
to protect the industry from reputation loss. There have
been many scandals around Islamic finance. Starting from
the scandal of the so-called Islamic money changers in Egypt,
Shari’a gold scandal in Indonesia and the most recently
hundreds of million dollars of fraud in India in the name of
Islamic finance, un-regulated or loosely regulated Islamic
financial businesses have only inflicted harm. India, being a
very large country, is prone to Ponzi schemes. It is, therefore,
tempting even for a Muslim to defraud Muslims in the name
of religion. The secular government in India does not want
to regulate Shari’a and it is consequently losing credibility
to run an Islamic financial business in the country. Although
the UK has so far opted not to intervene in Shari’a matters
related with Islamic banking and finance, the recognition of
Islamic banking and finance as a regulated form of business by
the financial regulators have provided the required certainty
about it. Consequently, Islamic banking and finance continues
to attract attention in the country.
In many Muslim-majority countries, the governments have
also shied away from playing a role in Shari’a governance. It is
only recent that some governments have decided to introduce
Shari’a Governance Frameworks (SGFs) to introduce discipline
to Shari’a assurance relevant to Islamic financial operations
In the absence of Islamic financial regulations in a country, no
‘aalim or someone who attempts to leverage their association
with a scholar or seminary should ever be trusted to start
any financial business without getting regulatory permissions.
Needless to say, no one else should also be allowed to do any
regulated activity without proper permissions. The need for
a tight control of financial businesses run by ‘ulama or their
close associates is even more paramount as general public is
easily influenced by a religious sentiment.
The case of un-regulated Mudaraba business in Pakistan by a
Mufti and defrauding thousands of investors is an example of
the regulators turning a blind eye to malpractices in the name
of Islamic finance. The end result was loss of billions of rupees
of the innocent general public who trusted the ‘aalim. It also
raised questions on the credibility of otherwise very tightlyregulated and well-run Mudaraba sector in the country.
It is also true that any wrong-doing by an ‘aalim or Shari’a
scholar is scrutinised too brutally by the market players,
which in a way is unfair. This, however, allows stakeholders
in Islamic banking and finance to preserve sanctity of Shari’a
and its torch-bearers.
There are some Shari’a advisory firms owned by scholars. This
has in the past given rise to some issues concerning conflict
of interest. With an increasing focus on Shari’a governance
and adoption of Shari’a Governance Frameworks by
regulators, the threat of malpractices in the Shari’a advisory
businesses owned by scholars will be minimised.
Having said that, there are some success stories of ‘ulama
or Shari’a scholars pursuing their commercial interests.
One such example is described in my forthcoming book,
How to Succeed in Islamic Banking and Finance. Dr. Mohd
Daud Bakar, founder of Amanie Group of Companies and
recently appointed as president of International Islamic
University Malaysia, pioneered what he termed as Shari’a
entrepreneurship. Many other businesses owned by Shari’a
scholars, although successful in their own right, may not
necessarily be fully transparent. It is also true that most of
the widely respected Shari’a scholars refrain from setting up
their own businesses. It is only the tier-2 Shari’a scholars
who have struggled in their businesses and hence are prone
to failure. Their failure poses a risk to Islamic banking and
finance industry and its credibility.
In a number of Muslim-majority countries, Shari’a is regulated
for a variety of reasons. The most paramount of such
reasons is political in nature. Privatisation of fatwa in Islamic
banking and finance (through independent Shari’a advisory
boards set up by Islamic banks) has worked to an extent but
the market and regulators have fast realised that keeping
it further in private domain is not going to help. Therefore,
following the tradition set by Malaysia by way of developing
a comprehensive Shari’a Governance Framework, an
increasing number of regulators are now adopting rules and
regulations to regulate Shari’a matters related with Islamic
financial institutions and transactions.
It will certainly help to curb the tendency of some of the
players to unilaterally proclaim them Shari’a-compliant or
Shari’a repugnant when it suits them. The recent Dana Gas
is an excellent example of the latter.