An investment banker working in Dubai was quoted as saying:

“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa … If he doesn’t give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”[1]

Let’s talk about a problem plaguing Islamic finance, Fatwa shopping.

A Fatwa is an Islamic legal opinion issued by an expert in Islamic law regarding a specific matter.[2]

Fatwa shopping is when the party seeking the legal opinion isn’t so much looking for an accurate answer as much as they are looking for validation for something they want to do or have an interest in doing. So they keep asking different sources until they get the answer they want as the investment banker from Dubai described.[3]

In my estimation, fatwa shopping is one of the main obstacles hindering innovation in Islamic finance today. This is because innovation is birthed out of need. There must be a need for something in order for innovation to happen. Today, customers primarily rely on the word “Islamic” being in the name of a product to identify if it’s Islamic or not. If the only barrier to using the word “Islamic” is finding a person who is considered a scholar and is willing to call it that, then in order to sell “Islamic” finance you don’t need to innovate new products you just need to gain the approval of a scholar. As the Dubai investment banker pointed out earlier, if the first scholar doesn’t give you approval, perhaps the next one will, especially if there is money to be made.

So how can we solve this problem?

As with all my analysis, I like to start with the generous Quran which says: “Follow those who are not asking you for compensation and are rightly guided.”[4]

اتَّبِعُوا مَنْ لَا يَسْأَلُكُمْ أَجْرًا وَهُمْ مُهْتَدُونَ

In matters related to determining if something is Islamic or not, it should be prohibited for the opinion giver, the scholar, to receive compensation from the party asking the question.

Now one may ask, how is a religious scholar providing their expert opinion on a matter different from a doctor or lawyer or financial advisor providing theirs? If they are not different, then why would it be prohibited to compensate the religious scholar for their opinion but not prohibited to compensate other professionals for theirs?

It all has to do with the alignment of incentives. In the case of a doctor or lawyer or financial advisor, the customer always wants to receive the most accurate opinion. The customer always wants the doctor to give them the most accurate medical advice, the lawyer to give them the most accurate legal advice, and the financial advisor to give them the most accurate financial advice. So in order for these professionals to maximize their compensation they are incentivized to provide the customer with what they want i.e. the most accurate opinion they can provide.

But when we are talking about religious opinions, as is the case with Islamic finance, it is logical to expect that the party asking the scholar for their opinion is not always seeking the most accurate answer rather they often prefer the most convenient answer over the most accurate one. It is not a stretch therefore to assume that scholars who are being asked these questions are aware of their customers’ preferences. Accordingly, in order to maximize their compensation, these scholars are incentivized to provide customers with the opinion the customer prefers rather than the most accurate one.

In this way religious scholars giving their opinions are more akin to judges than they are to doctors or lawyers. You would find it quite bizarre and troubling for a judge to be compensated by a party affected by the judge’s ruling and I find it equally troublesome for Shariah scholars to be compensated by the businesses asking for their opinion.

Such a system of compensation is destined to fail in providing meaningful regulation.

It is important to note that I am not suggesting that Islamic scholars should not be compensated for their efforts. They should be compensated and generously even. Otherwise there won’t be enough talented people willing to commit their time towards answering the pressing religious questions of our time. However, the compensation should come from a source that has nothing to gain or lose from the opinions the scholars express. Moreover, the source of the scholar’s compensation should be afforded no influence whatsoever over the scholars not just in words but in the structure of the system that determines how they are compensated and appointed. So for example, if the source of compensation has the right to hire or fire the scholar or reduce their income then it cannot be said that the scholar is truly independent. Additionally, if a certain scholar has a vested interest in an Islamic bank for instance, then this scholar should not be allowed to rule on matters that affect the Islamic banking industry because there is a danger that their opinions may be skewed towards favoring the interests of the bank which they are vested in.

Most independent judiciaries in democratic countries are set up in this way. The judges are typically guaranteed their salaries and cannot be removed from their position unless of course they are convicted of a crime.

I won’t comment on how certain regulatory bodies are set up. Whether they meet the standards I’ve espoused in this episode or not. I am not familiar enough with how they are internally managed so I’m not comfortable with commenting on them by name. This article is not intended to be an attack on any particular person or organization.

However, the next time a company claims that their product is Islamic because they have a Sharia board that approved it, ask them: have any of the scholars on this board received compensation in return for evaluating your product? If the answer is yes, then I would take the opinion with a generous portion of salt.

To advance Islamic finance and gain credibility we must adhere to the Quranic principle that in matters of religion “we should follow those who are not asking us for compensation and are rightly guided”. If we do this I think we can start to take huge steps towards reforming Islamic finance and causing it to reach its true potential.

Sources:

[1] https://muslimmatters.org/2010/07/15/the-failure-of-islamic-finance/

[2,3] https://en.wikipedia.org/wiki/Fatwa

[4] Quran 36:21. https://quran.com/36/21