Islamic International Financial Market Conference: uniformity and standardisation: threat or opportunity?

The efforts for uniformity and standardisation of Sharia'a can be traced to the times of Imam Malik. In modern times, the 19th century compendium of 1851Articles - Majalla-tul-Ahkam of the Ottoman Empire, the 20th century corpus at Al-Azhar and the relatively recent 1316 Articles code covering financial transactions by the Arab League Secretariat are noteworthy.
These are pioneering and profound constructs. But we live in different, if exciting, times. Our endeavours may not be as profound, but our solutions must pass the litmus test of results in competitive global markets.
In the last decade, Islamic finance has not only grown, but also transformed. In a globalised world, its horizons have changed. It involves not just Sharia'a, or more properly Fiqhi opinions, but must consider various secular laws and governance principles.
Before a proposal can mature into final closing, the documentation must cross the hurdles of consensual decision on relevant rules of different Fiqhi schools. Further, its terms should not derogate from applicable substantive and procedural laws, taxation and regulatory regimes.
The main argument condemning uniformity as a threat is that it will inflict a dent in the 'sovereignty' of the individual Fiqhi Schools, a dilution of heritage and of identity itself. This is reminiscent of the passionate but unrealistic criticism against the WTO.
Unrealistic because today Islamic Finance aspires to play increasing role in the international financial system. European regulators, risk analysts and Rating Agencies regularly review preparedness of Islamic institutions in implementing Basle II and other International Standards.
Uniformity and Standardisation, in my humble view, should not be feared as a threat. If some of its elements could at all be perceived as a threat, then we must focus on how to convert this threat into an opportunity. I flag a few points, which may assist in the development of standardisation and may facilitate its application:
1. The draft code & and standardised documentation must give due regard to consultation amongst all the stakeholders and enquire into the rationale of diversity. Sharia'a encourages consultation and consensus reached after informed and free choice. More so, in adoption of newer techniques. It will improve the quality of the finished product and, because it is not from a narrow individual perspective but for the vision of the common good, it will have greater moral weight.
Therefore, when policy makers define the limits of uniformity & and standardisation, no leader should negotiate to gain advantage for his own 'constituency' over others. They must genuinely demonstrate that individual advantage depends not at the cost, but on the success, of the common advantage. In unity is strength.
2. From my experience, I submit that the strategy should be in two steps, instead of one: The first step is evolving a Model, not a Uniform, Sharia'a Code. The effect of a Model Code will be advisory and not enforceable as a statute, hence consensus will be easier and quicker.
The second step is conversion of the Model Code, into a uniform, judicially recognisable Code, like the US Uniform Commercial Code, or the ICC Uniform Customs and Practice Documents. This will facilitate development and acceptance of the Uniform Sharia'a Code. The time taken by the two steps will not be twice, and could be about the same as one step strategy.
3. Drafting a Model Code is a gigantic task. Alas, it is not sufficient. The real challenge is (i) its comfortable 'fit' in the legal architecture, and (ii) its due application in competitive markets with the entrenched vested interests and herd motivations of greed and fear.
4. Policy framers must ensure that rights and obligations under standardised documentation and uniform practice are enforceable under the relevant legal system. For instance, creating beneficial ownership rights and fixing fiduciary duties is futile if there is no trust law. In some GCC countries, the commercial codes have origin in Code Napoleon where legal and beneficial ownership distinction is not maintained.
Similarly, provisions in the model code regarding charges and encumbrances would be almost fictional, if the Law does not provide for efficient recording and effective protection of interests in land. In the absence of adequate laws, the same would apply to provisions in the model code about economical with the truth representations in IPOs, insider dealings and market abuse.
5. I have previously advised on similar issues and should say that the matter does not end with ordinary Laws but goes right up to the constitution. The respect accorded to Sharia'a in the constitutions of Islamic countries shows a wide range of flexibility, from one end of Sharia'a being " a source of law", (in many countries) to " a principal source of law" (Kuwait) to " the principal source of Law" (Egypt).
Compare, Oman (Islam is the religion of the state and Sharia'a is the basis of all laws) with Jordan (Islam is the religion of the state and the nation is the source of all legislative powers).
Thus, if a material term of a standardised document is held to be in breach of Sharia'a (eg 'profit' in a certain structured product is held to be 'riba', or if the uncertainties or gaps in understanding are held to suffer from ' gharrar') then it could be declared unconstitutional and hence null and void.
The detriment caused to the Claimant would need to be addressed by interim injunctive relief from a higher Authority, until dispute resolution through mediation or other avenues. The situation in Pakistan is illustrated by the Supreme Court judgement on prohibition of riba.
6. The manifest virtue of uniformity and standardised documentation is efficiency of execution and guidance in interpretation from reported precedents. This enhances protection against legal risk.
However, I may apprise decision makers that before according their approval, they may subject the uniform and standardised product to simulated stress test under a jurisdiction where a party may be tempted to challenge legal validity, due to vague laws or wider court discretion. Merely stipulating English Law or New York Law as the governing law may not be enough.
7. We live in the age of knowledge economy. In future, the most valued resource in an economy will not be oil or natural resources but knowledge. Already, competition is becoming regional, if not global. Alert financial groups in the Islamic financial market, are positioning by Mergers, Acquisitions, and Alliances.
The quickest to respond to the changing landscape will survive. Model code and standardisation of documentation is a timely response to the winds of change.
8. IIFM, ISDA, ICMA, IRTI CBB, DIFC, SBP, MIFC, AAOIFI, IFSB and other organisations are to be applauded for their contribution towards Islamic Market Uniformity and Standardisation. It may be helpful to identify, some Core Principles to support the dynamics of their commendable efforts.
Whilst advising on similar issues, I developed and used some Sharia'a compliant principles which were quite helpful. In the interest of time, I refer to only two principles:
A. THE PRINCIPLE OF COEXISTENT PERMANENCE AND CHANGE: I respectfully submit that we should protect the eternal permanence of the Holy Quran and the Sunnah whilst at the same time recognising the need, if any, for change and evolution in Fiqhi findings. The founding fathers of the four jurisprudential Schools, and lead classical scholars are towering venerable personalities.
In their quest, they differed with one another and did not claim that their opinion is the last word for all times. Instead of following their tradition of intellectual enquiry and Ijtehad, we have idolised their writings, due to our own intellectual incompetence, laziness and nostalgia. Without this measured coexistence of permanence and change, our ignorance will keep us immobilised in stagnation and entropy.
B. THE PRINCIPLE OF PLURALISM: Standardisation would not necessarily entail a single inviolable script. Perhaps harmonisation is more appropriate than standardisation. It should not be a fortress wall, but be more akin to a rainbow of madhahebs across the horizon where no constituent is lost, yet every colour is within the bounds of the rainbow - Diversity in unity and Unity in diversity.
I have worked with some Islamic and Western organisations in structuring Master Agreements, boilerplate clauses, Model Codes and Standards. I hope the above two and other Core Principles will be helpful in the dialogue of stakeholders.
Leading Islamic Regulators are already contributing to the process as enablers of change for smooth enforcement through predictable laws of contract, insolvency, trusts, securities, and dispute resolution in a vibrant Global Islamic Financial Market. If we do not move now, events of the markets and protests of customers for their unfulfilled expectations will overtake us.
(The writer is Vice Chairman of IIBI, London)