The Legal Implications of Fatwā Shopping' in The Islamic Finance Industry: Problems, Perceptions and Prospects

arab law quarterly 30 (2016) 107-137 Arab Law
Quarterly
brill.com/alq
The Legal Implications of Fatw Shopping

in the Islamic Finance Industry: Problems,
Perceptions and Prospects
Umar A. Oseni,a Abu Umar Faruq Ahmadb and M. Kabir Hassanc
a Department of Civil Law, International Islamic University Malaysia (IIUM),
Malaysia
b Associate Professor, School of Business and Economics, Universiti Brunei
Darussalam, Brunei
c Professor, Department of Economics and Finance, College of Business
Administration, University of New Orleans, New Orleans, LA, USA
umaroseni@iium.edu.my; aufahmad@gmail.com; mhassan@uno.edu
Abstract
This article examines the occurrence and legal implications of fatw shopping in the
Islamic finance industry and the need to put the proper legal mechanisms in place to
regulate the phenomenon. It provides a case study of the existing legal restrictions in
some jurisdictions with a centralised Sharah Supervisory Board at the national level
such as in Malaysia. As a preliminary review of the implications of fatw shopping in
the industry, this study examines the consequential problems, current perceptions
and prospects of such practice. The study finds that instances of fatw shopping are
common in cross-border Islamic finance transactions such as cross-border ukk
transactions where there is less regulation.
Keywords
fatw fatw shopping Islamic finance Sharah Supervisory Boards Sharah

compliance
koninklijke brill nv, leiden, 6|doi 10.1163/15730255-12341319

108 Oseni, Ahmad and Hassan
1 Introduction
With global Sharah-compliant assets hitting a record high of $1.3 trillion as

at the end of 2011, $1.8 trillion in 2014, and are projected to grow to $3.2 trillion
by 2020, there exists a number of legal and regulatory issues that might still
affect the competitiveness of Islamic finance products.1 While it is believed
that the original philosophy of Islamic economics is elusive in some Sharah-
compliant transactions,2 there is an increasing call for the stakeholders in the
Islamic finance industry to take stock of the evolution of Islamic finance prod-
ucts in the last 50 years and critically appraise the process of product develop-
ment in Islamic finance.
In spite of numerous international standard-setting bodies, such as the
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) and the Islamic Financial Services Board (IFSB) and their laudable
standards and guidelines to reposition the Islamic finance industry on a sound
footing, it appears that the directional flow of events in the industry might
not be so encouraging. Despite the efforts of AAOIFI and IFSB, there are no
generally acceptable guidelines or standards on accounting, auditing, legal,
governance, and Sharah issues as yet. With the exception of a few jurisdic-
tions that prefer to adopt international Sharah-compliant standards, some
jurisdictions prefer to opt for self-regulation while they paradoxically pursue
the objective of economic integration into the global financial industry.3
From the perspective of Sharah governance, there have been series of crit-
icisms and counter-criticisms about the models of Sharah governance in dif-
ferent jurisdictions. One does not need to prefer one model to another, as every
jurisdiction knows what works better. However, since there is an increase in
cross-border transactions and the inevitability of economic integration among
jurisdictions having Sharah-complaint financial institutions, best practices
would be the best choice for the Islamic finance industry.4 The existing stand-
1 U.A. Oseni, Introduction, in S.N. Ali, (ed.), Building Bridges across Financial Communities:
Faith-Based Finance, Social Responsibility, and the Global Financial Crisis (Cambridge, MA:
Islamic Finance Project, Harvard Law School, 2012), p. 4 et seq. Also, see Thomson Reuters,
Islamic finance assets to hit US$trillion by 2020, at http://www.themalaysianinsider.com/
business/article/islamic-finance-assets-to-hit-us3.2-trillion-by-2020-says-thomson-reuters,
accessed 12 Feb 2016.
2 M. Asutay, A Political Economy Approach to Islamic Economics: Systemic Understanding for
an Alternative Economic System, Kyoto Bulletin of Islamic Area Studies 1(2) (2007): 14-17.
3 U.A. Oseni, Towards Restructuring the Legal Framework for Payment System in International
Islamic Trade Finance, Journal of International Trade Law and Policy 12(2) (2013): 108-129.
4 Ibid.
arab law quarterly 30 (2016) 107-137

the Legal Implications of Fatw Shopping 109
ard-setting bodies such as AAOIFI and IFSB have been coming up with such
standards and guidelines to, for once, have some best practices that could be
adapted to suit the specific needs of individual jurisdictions, particularly in
areas of Sharah governance.5
To a large extent, nowadays the Sharah Supervisory Boards (SSB)6 have
obviously been subjected to unfair criticisms. There are reports on how some
scholars sit in multiple boards across the world and the consequential effec-
tiveness of such Sharah supervision.7 While we do not intend to delve into the
arena of controversy that has trailed the component of Sharah governance in
Islamic Financial Institutions (IFI), this article takes a critical look at another
practice in IFIs relating to the Sharah governance framework. Of recent, the
term fatw shopping has emerged in the industry, as it appears some stake-
holders are suspecting the practice of this phenomenon in the process of prod-
uct developments in some desperate financial institutions. To this end, this
article examines the legal implications of this new trend of fatw shopping in
the Islamic finance industry as well as the current perceptions and problems
associated with it.
Unlike forum shopping in private international law, fatw shopping is a
new but important aspect of the Islamic finance literature, which requires the
attention of researchers. Apart from general works such as that of Hosen8 and
a more specific one by Foster,9 not much attention has been paid to the legal
implications of fatw shopping. While some Sharah scholars have denied
5 I. Warde, Corporate Governance and the Islamic Moral Hazard, in Ali (ed.), supra note 1 at
15-25.
6 Different jurisdictions use diverse terms to refer to the role of Sharah boards and Sharah
scholars in Islamic financial institutions. While many jurisdictions in the Gulf Cooperation
Council (GCC) countries use the term Sharah Supervisory Board, Malaysia uses Sharah
Advisory Council and Sharah Committee. Others simply refers to this body as Sharah
Board or Sharah Council. In this article, Sharah Supervisory Boards is used generally but
when specific reference is made to Malaysia, the appropriate terms are used. For a compara-
tive analysis between the Sharah governance system in the GCC countries and Southeast
Asia, see R. Grassa, Shariah Supervisory System in Islamic Financial Institutions: New Issues
and Challenges: A Comparative Analysis between Southeast Asia Models and GCC Models,
Humanomics 29(4) (2013): 333-348.
7 A. Khorshid, Adding Social Responsibility and Accountability to the Mandate of Sharia
Advisory Boards, in Ali (ed.), supra note 1 at 83-101.
8 N. Hosen, Online Fatw in G. Fealy and S. White (eds.), Indonesia: From Fatw Shopping to
Googling a Kiai, in G. Fealy and S. White (eds.), Expressing Islam: Religious Life and Politics in
Indonesia (Singapore: Institute of Southeast Asian Studies, 2008), pp. 159-172.
9 J. Foster, How Sharia-Compliant is Islamic Banking?, BBC News, 11 December 2011, at: http://
news.bbc.co.uk/2/hi/business/8401421.stm, accessed: 8 November 2012.

the likelihood of such instances of fatw shopping, it is widely believed that

it happens in less regulated jurisdictions. This makes it extremely difficult to
survey the IFIs and indeed the Sharah scholars on the dynamics involved in
their appointment or personal engagement to endorse Islamic finance con-
tracts brought before them as individuals.
This study utilises a research method that involves personal observation
with analytical techniques of relevant theoretical issues, analysis of statutory
provisions and instances where some scholars have practically refuted their
so-called fatw being used by some IFIs in less regulated jurisdictions for the
purpose of marketing. Thus, apart from the analytical approach, the study
embarks on content analysis of relevant material to ascertain certain instances
of fatw shopping. One such material is the authoritative document of the
IFSB: Guiding Principles for Corporate Governance for Institutions Offering Only
Islamic Financial Services (Excluding Islamic Insurance (Takful) Institutions
and Islamic Mutual Funds) 2005.
This article is organised into seven sections. After the introductory Section 1,
Section 2 looks at the meaning of fatw and its legal significance in Muslim
communities. Section 3 examines the nature and performance of SSBs in fatw
making. Section 4 defines fatw shopping and enumerates what falls outside
the general category of fatw shopping. Section 5 examines the alleged inci-
dences of fatw shopping and introduces six related dimensions to the dis-
course. The penultimate Section 6 highlights the role of law in restricting fatw
shopping through a centralised Sharah governance framework with the case
study of Malaysia. Section 7 concludes the study with the summary, conclud-
ing remarks and suggestions.
2 Fatw: Its Meaning and Legal Implications
The Arabic word fatw stems from the root word , which means youth
fulness, uniqueness, opinion, description, enlightenment, etc.10 Literally, fatw
refers to a non-binding ruling on an issue relating to Islamic law given by a
Muslim scholar or a recognised religious authority. The plurals of the word
fatw are fatwin and fatw. From this linguistic meaning of fatw, the word
istift is meant to ask for a verdict or opinion. Similarly, in the present day
Arab world, particularly with the changing socio-political landscape, istift is
mainly known to be an opinion poll.11
10 J.M. Cowan (ed.), Arab-English Dictonary. The Hans Wehr Dictionary of Modern Written
Arabic (London: Macdonald & Evans Ltd., 1993), p. 696.
11 M.K. Ibn Manzur, Lisn al-Arab (Cairo: Dr al-Maarif, 1981), vol. 5, 3348.

In Islamic legal terminology, the word fatw has a more technical meaning
that is indicative of its contextual functionality in Islamic jurisprudence. The
Prophet Muhammad (SAW) was the first person who issued fatw as emphati-
cally recognised in the Qurn and conspicuously shown in tens of thousands
of prophetic narrations. From the early days of Islam, people approached
learned companions of the Prophet to inquire about the true position of Islam
on certain issues. So, the proto-jurists in the Muslim communities were often
the torch-bearers of their societies as people approached them to get their
non-binding judgments or rulings on emerging issues not expressly covered by
textual authority.12 The answer of the respondent who is a learned jurist to the
questioner is simply referred to as fatw. It is important to clarify that fatw is
not only issued on legal matters but also on any religious issue that beclouds
the mind of the questioner. However, the scope of this study is exclusively
the value of fatw in jurisprudential issues relating to Islamic finance and
this relates to the functions of SSBs.13 Though in modern societies, experts on
financial issues do give opinions based on their experience and professional
calling, a fatw of a recognised Sharah scholar or an authoritative body has
more value in the final analysis. An example of a related fatw is reproduced
below with approval from the Fatw of Ibn Bz on the Sharah-compliant
manner of exchanging gold for gold in Islamic transactions.
Question: A man came to buy gold and sell [to] me [an]other gold. The
value of his gold, for example, is 200 riyals and my gold is 300 riyals. I gave
him the value of his gold in cash then I took the value of my gold from him
and we did not separate; is this permissible or should we separate
between one trade and the next?
Answer: In the name of Allah, the Most Gracious, the Most Merciful.
Praise be to Allah and peace be upon our Prophet Muhammad, his family,
his Companions and those who were guided with his guidance. It was
authentically reported from the Messenger of Allah (peace be upon him)
from the adth of Ubdah and from the adth of Abu Hurairah (May
Allah be pleased with him) that he said: Gold is to be paid for gold, like
for like, hand for hand, He who made an addition or demanded an addi-
tion, in fact, dealt in usury. When a person wants to sell gold to a jeweller
in return for other gold, it must be equal in weight and value; like for like.
The seller may sell the gold for a price and receive it first then he buys
other gold. As for selling him gold for gold and giving him some more
12 W.B. Hallaq, The Origins and Evolution of Islamic Law (Cambridge: Cambrigde University
Press, 2005), pp. 197-199.
13 Ibid.

money, this is not permissible. The Sharah (Islamically lawful) way is to

sell the old gold or the new gold, receive the price, then buy other gold
with the value he received whether in banknotes or silver; hand in hand.
They should not separate until each one takes his right; a seller gives the
gold and the purchaser gives the value whether it is silver, banknotes,
dollars, Saudi riyals or others.14
Such legal opinion does not ordinarily have the force of law unless where pro-
active measures have been taken to codify or gazette it as being experienced
in Malaysia.15 One may arguably state that fatw made by the apex Sharah
Advisory Council (SAC) in the Islamic finance industry in Malaysia are binding
as SAC is a statutory body established to give a clear direction to the industry.
Such fatw do not need to be gazetted or codified to have the force of law.
However, the underlying principle is that a fatw only morally binds the maker
and not the questioner.16 Al-Ghazl noted that the jurists unanimously agree
that whenever a mujtahid arrives at a well-reasoned opinion or ruling and he
is convinced about it, it is not permissible for him to adopt an opposing view
by abandoning his own juristic efforts.17 This impliedly means the fatw binds
the maker according to Al-Ghazl. According to Al-Qarf, a muft does not
have the legal capacity to enforce a ruling. Such a muft cannot also compel a
14 A.A. Ibn Bz, Majmu al-fatw wa maqlt mutanawwiah (Riyadh: Ar-Risat al-mah li
idrat al-buh al-ilmiyyah wa al-iftwa al-dawah wa al-ird, 1410/1989), vol. 19, 161-162.
15 Section 34 of the Administration of the Religion of Islam Enactment (Federal Territories)
Act 505, 1993 of Malaysia, provides:
(1) The Muft shall, on the direction of the Yang di-Pertuan Agong [Supreme Ruler of
Malaysia], and may, on his own initiative or on the request of any person made by
letter addressed to the Muft, make and publish in the Gazette, a fatw or ruling on
any unsettled or controversial question of or relating to Islamic Law.
(2) No statement made by the Muft shall be taken to be a fatw unless and until it is
published in the Gazette pursuant to subsection (1).
(3) Upon publication in the Gazette, a fatw shall be binding on every Muslim resident
in the Federal Territories as a dictate of his religion and it shall be his religious duty
to abide by and uphold the fatw, unless he is permitted by Islamic Law to depart
from the fatw in matters of personal observance, belief, or opinion.
(4) A fatw shall be recognised by all Courts in the Federal Territories as authoritative
of all matters laid down therein.
16 See supporting views justifying this position in N. al-Tawf, Shar Mukhtaar al-Rawdah,
A. Alturky (ed.) (Beirut: Muassasat Al-Risalah, 1987), vol. 3, 629; and S. Al-mid, al-Ikam
f Ul al-Akm (Beirut: Dr al-Fikr, 1997), vol. 4, 247.
17 A.M. Al-Ghazl, Al-Mutaf min ilm al-Ul, . afi (ed.) (Medina: Al-Jmiah
al-Islmiyyah, 1992), vol. 2, at 4.

questioner to apply the Sharah ruling he has made.18 This is one of the major
differences between a muft and a q. In the case of the latter, his ruling is
binding on the litigants.19
From a different perspective, there have been situations, particularly in
Andalusia (Spain), where the muft was consulted by the council of judges on
issues relating to muamalt (rules of human conduct) in disputes brought
before them. In such judicial reference, particularly on novel issues, the muft
gave his opinion or ruling to the judges and such ruling was considered while
pronouncing the judgment of the court. In this case, such fatw becomes bind-
ing on the parties which is pronounced and enforced through the instrumen-
tality of the court.20
Generally, a fatw is issued based on the understanding of the muft (one
who gives the fatw) of the issues brought before him using the standard meth-
odologies recognised in the Islamic hermeneutic principles (ul al-fiqh).21
This suggests the possibility of multiplicity of opinions on any given issue,
depending on a number of factors that would have influenced the conclusion
of the respective jurists. Any subject of a legal inquiry brought before a jurist
is borne out of the sheer need to resolve some conflicting positions or com-
pounded legal ambiguities. Therefore, there is no doubt that a fatw assumes
a conflict of evidence and a need to weigh and evaluate the evidence.22 After
all, Sharah scholars extrapolate the applicable ruling on any subject of legal
inquiry brought before them from different sources. While the four fundamen-
tal sources of SharahQurn, Sunnah, the ijm (consensus of the schol-
ars), qiys (analogical deduction),23 the resulting fatw might be premised
on the interpretation of such primary sources in accordance with the school of
thought to which a scholar belongs.
The International Islamic Fiqh Academy (IIFA), a subsidiary organ of
the Organisation of the Islamic Cooperationformerly Organization of the
18 S.A. Al-Qarf, Al-Ikm f al-Tamyz al-Fatw an al-Akm (Beirut: Dar Ibn Hazam,
2010), 30-31.
19 A.S. Al-Andals, Fatw Qi al-Jamah, M. Ab Al-Ajfn (ed.) (Beirut: Dr Ibn azm,
2006), 49.
20 I.M. Ibn Farn, Tabirat al-ukkm f Ul al-Aqiyah wa-Minhj al-Akm (Beirut: Dr
al-Kutub al-Ilmiyyah, 1986), vol. 1, 57.
21 M.H. Kamali, Principles of Islamic Jurisprudence (3rd edn.) (Cambridge: Islamic Texts
Society, 2005), p. 278 et seq.
22 K. El-Fadl, The Search for Beauty in Islam: A Conference of the Books (Rowman & Littlefield,
2005), p. 46.
23 A.U.F. Ahmad, Theory and Practice of Modern Islamic Finance: The Case Analysis from
Australia (Boca Raton FL: BrownWalker Press, 2010), pp. 53-55.

Islamic Conference (OIC), in its 17th session held in Amman from 24 to 28 June
2006 discussed the issuance of fatw with particular reference to certain rules
and conditions. One important aspect of the rulings of the IIFA is the condi-
tions for issuing a fatw. The most important conditions enumerated by the
Academy are:
1. Knowledge of the Book of Allah and the Sunnah of His Messenger, may
Allah bless him and grant him peace, as well as related disciplines.
2. Knowledge of the fields of consensus (ijm) and disagreement, the
schools of Islamic Jurisprudence (mahib), and legal opinion.
3. Complete knowledge of principles of jurisprudence (ul al-fiqh), its ori-
gins and its rules, the goals of Sharah, as well as disciplines which con-
tribute to this such as grammar and syntax, rhetoric, linguistics, logic,
and so forth.
4. Knowledge of peoples circumstances and their customs, the conditions
and developments of the time, with due regard to how they change inso-
far as this concerns [law] that is derived from a relevant custom (urf )
that does not contradict a source text (na).
5. The ability to derive rulings in the Sharah from the source texts.
6. Consultation with experts on various specialised topics in order to for-
mulate the answer to the question, such as medical, economic, and simi-
lar questions.24
In order to constantly meet the challenges of modern complex societies and

the plethora of issues that often emerge, which were not earlier contemplated,
collective ijtihd is encouraged through recourse to fatw bodies in a particular
jurisdiction.25 This trend is noticeable in the Islamic finance industry where
SSBs are saddled with the responsibility of collectively coming up with the
applicable Sharah rulings on issues brought before them. Despite the non-
binding nature of fatw juristically, its modern formalisation requires some
elements of force, particularly when the bodies issuing such legal verdicts
are statutory bodies established under the extant laws. Undoubtedly, IFIS are
bound by any fatw issued by their respective SSBs.
24 International Islamic Fiqh Academy, Resolution 153: The Issuance of Fatws: Rules and
Conditions, at http://ammanmessage.com/index.php?option=com_content&task=view&
id=36&Itemid=34, accessed: 12 December 2012.
25 Aznan Hasan, An Introduction to Collective Ijtihad: Concept and Application, American
Journal of Islamic Social Sciences 20(2) (2003): 26-49.

It is however important to enumerate those from whom fatw cannot be

taken within the general ambit of Islamic law. According to IIFA, fatw can-
not be taken from the following:
1. A fatw cannot be taken from one who does not meet the conditions
mentioned above [the six conditions enumerated above which a person
must fulfil to become a muft].
2. Often fatw broadcast through various media are only valid for the per-
son who requested it, except in cases when the circumstances and condi-
tions of the one who encounters such a fatw are like those of the one
who requested the fatw.
3. Anomalous fatw which contradict definitive texts and [which contra-
dict] fatw arrived at by consensus are to be ignored.26
The above considerations are of great concern to the subsequent discussion

in this article. Should everybody be free to get fatw through any means from
anybody to suit specific needs or some preconceived ideas? Before addressing
these specific issues, it is pertinent to look at the role, nature and performance
of SSBs in fatw making.
3 The Nature and Performance of Sharah Supervisory Boards

in Fatw Making
To better situate the discussion on the significance of fatw in Islamic finance

business, it is important to examine the nature and performance of SSBs in
fatw making through Sharah resolutions. One of the primary justifications
for establishing IFIs is to ensure that financial services adhere to the rules of
the Sharah. To this end, clients of IFIs require an independent verification
of Sharah compliance; so the IFIs must establish SSBs. According to AAOIFI:
A Sharah Supervisory Board (SSB) is an independent body of specialised

jurists in fiqh al-muamalt (Islamic commercial jurisprudence)...it may
include a member who should be an expert in the field of Islamic finan-
cial institutions and with knowledge of fiqh al-muamalt. The Sharah
Supervisory Board is entrusted with the duty of directing, reviewing and
26
Supra note 24.

supervising the activities of the Islamic financial institution...The fat-

ws (legal opinions) and ruling of the Board shall be binding.27
It is now a standard practice of every Islamic financial institution (IFI) to

maintain an independent SSB which is a requirement of the law in some juris-
dictions; and, in some countries, the central banks or other supervisory author-
ities have established supreme SSBs. The confidence of the stakeholders in IFIs
rests on the claim that these institutions are compliant with Sharah. In order
to ensure that confidence remains intact, AAOIFI and IIFA have issued guide-
lines and standards for Sharah compliance.28 The IFSB has also issued guiding
principles on Sharah compliance.29 However, IFIs are not obliged to follow
these guidelines and standards. Each IFI has its own SSB, making compliance
a private sector matter in some jurisdictions. Another difficult issue arises due
to different interpretations of the Sharah, leaving an unwary observer won-
dering which of the various interpretations can be considered truly compliant.
Hence, there is a need for harmonisation among various standard-setting and
regulatory bodies.30 However, the functions of SSBs in most jurisdictions are
27 A AOIFI, Accounting, Auditing and Governance Standards for Islamic Financial Institutions
(Manama, Bahrain: AAOIFI, 2005).
28 A AOIFI, Financial accounting standard 9 (Manama, Bahrain: AAOIFI, 1998). Also see
Islamic Fiqh Academy, Resolutions and Recommendations of the Council of the Islamic
Fiqh Academy 1985-2000 (Jeddah: Islamic Development Bank, 2000).
29 Islamic Financial Services Board, Guiding Principles for Corporate Governance for
Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance (Takaful)
Institutions and Islamic Mutual Funds) (Kuala Lumpur: IFSB, 2005).
30 The members of SSBs are employed by their respective Boards of Directors (BoDs) on
behalf of the shareholders. Remuneration of the SSB members is fixed by BoDs as well.
However, these aspects of SSBs potentially compromise their independence. Grais and
Pellegrini conclude that most of the IFIs have not instituted practices that ensure trans-
parency in the role and functions of the SSBs. In theory, the members of a SSB should
be well-versed in Islamic commercial law as well as contemporary financial practices.
However, in practice, the number of such competent persons is extremely limited, com-
pelling IFIs to engage scholars who sit on the SSBs of their competitors as well. For exam-
ple, Unal analyzes 1,141 positions for SSB scholars as of 31 July 2010 and concludes that
the busiest scholar holds 85 positions in IFIs and 12 positions in standard-setting bodies.
The least busy Sharah scholar among the top-20 held 14 positions in IFIs and 2 positions
in standard-setting bodies. This fact potentially compromises the independence, com-
petition and confidentiality of IFIs that have shared SSB members, and it can also create
conflicts of interest. The few scholars who are available are in great demand. This has
pushed up their remunerations and perquisites. According to the findings of Khan and

now geared toward standardisation. For example, the regulators in Bahrain,

Indonesia, Jordan, Kuwait, Lebanon, Malaysia and Pakistan have developed
their own guidelines for SSBs in their respective jurisdictions. Some countries,
like Indonesia, Kuwait, Malaysia, Pakistan, the Sudan, and UAE have central-
ised SSBs.31
Nevertheless, the SSBs have contributed significantly to the fatw making
process in the Islamic finance industry even though some still consider such
Bhatti, such scholars charge up to $88,500 per year per bank and may earn as much as
$500,000 for consultations on large capital market transactions. Similarly, Abdul-Rahman
reports that high-profile SSB members often sit on the boards of 50 to 70 banks and often
receive retainers of $50,000, as well as other perquisites such as travel expenses. The
authors highlight the significant income increases that have been gained by the Ulam
(Islamic scholars) as a result of the increased demand for their services. This often allows
them to experience a relatively more lavish lifestyle, as the demand for their services has
also been extended to the areas of fiqh (jurisprudence) research as well. Additionally,
Farooq suggests that the enhanced lifestyles of the Ulema has presented them with sig-
nificant conflicts of interest, and some accuse them of overstepping the Sharah. It is
argued that these scholars have provided easy and possibly questionable fatw (opin-
ions) that favor modern bankers. See I. Warde, Islamic Finance in the Global Economy
(Edinburgh: Edinburgh University Press, 2010); W. Grais and M. Pellegrini, Corporate
Governance and Shariah Compliance in Institutions Offering Islamic Financial Services,
World Bank Policy Research Working Paper 4054 (Washington, DC: World Bank, 2006), 9;
M. Unal, The small world of Islamic finance: Sharah scholars and governanceA net-
work analytic perspective, v.6.0. Zawya Sharah Scholars. 19 January 2011. Available online
at: www.shariahscholars.com, accessed: 15 December 2012; M.M. Khan and M.I. Bhatti,
Developments in Islamic Banking: The Case of Pakistan (Houndsmills: Palgrave Macmillan,
2008), 72; Y. Abdul-Rahman, The Art of Islamic Banking and Finance (Hoboken, NJ: John
Wiley & Sons, 2010), 241: M. Kahf, Islamic Banks: The Rise of a New Power Alliance of
Wealth and Sharah Scholarship, in C. Henry and R. Wilson (eds.), The Politics of Islamic
Finance (Edinburgh: Edinburgh University Press, 2004) 17-36; M.O. Farooq, Islam and the
Riba-Interest Equation: Reexamination of the Traditional Arguments, Global Journal of
Finance and Economics 6(2) (2009): 99-111.
31 H. Askari, Z. Iqbal, and A. Mirakhor, Globalization and Islamic Finance: Convergence,
Prospects, and Challenges (Singapore: John Wiley & Sons (Asia) Pte Ltd., 2010). Grais
and Pellegrini enumerate five functions of a SSB: 1. Certifying financial instruments for
their compliance with Sharah; 2. Verifying transactions for compliance with Sharah;
3 Calculating zakah payable by Islamic financial institutions; 4. Disposing of non-Sharah
compliant income; 5. Advising on the distribution of income among investors and share-
holders. See W. Grais and M. Pellegrini, Corporate Governance and Shariah Compliance
in Institutions Offering Islamic Financial Services, World Bank Policy Research Working
Paper 4054 (Washington, DC: World Bank, 2006).

contributions as not representing the traditional fatw making process.32 In

essence, Siddiqi recognises the contribution of SSBs in terms of the colossal
amount of literature they have produced regarding modern issues in finance.33
This is a valuable contribution and deserves due compliments. However, he
also observes that SSBs are often manned by scholars who are often not aware
of broader macroeconomic issues and do not have the capacity or ability to
analyse matters beyond the level of the institution for which they are working.
According to him, some SSBs have issued decrees which may be justified from
the perspective of an individual IFI or within narrow legal constraints, but are
in conflict with the broader objectives of the Sharah. He quotes the example
of tawarruq, which has been justified and approved by several SSBs without
recognising that the instrument defeats the broader objectives of the Sharah.
Though Siddiqis argument may be true in some respects when one considers
the prevailing trends in the Islamic finance industry about two decades ago.
But what is obtainable today is an integrated SSB model where legal experts,
Islamic economists, and Sharah scholars sit on the same board to deliberate
on Sharah issues brought before them from different prisms. Apart from IFIs,
the Sharah Boards of international standard-setting bodies such as AAOIFI
have also adopted this integrated model.
In an earlier study, Siddiqi points out that the job of the Sharah scholar
while on a SSB requires knowledge of the contemporary sciences of econom-
ics, finance, statistics, sociology, psychology and management. They must be
proficient in the English language as well.34 One may, however, argue that a
Sharah scholar should not necessarily possess all of these qualifications. In
the modern world, it will be practically difficult to find a Sharah scholar who
is an expert in all relevant fields of Islamic finance. The modern practice in
most IFIs is to have a team of experts with diverse backgrounds in terms of
qualifications, experience, and knowledge in all relevant fields.
32 There is a controversy whether the functions of SSBs and their Sharah resolutions con-
stitute what is traditionally known as fatw. From a close review of the nature of Sharah
resolution, one cannot but agree with the position that such Sharah resolutions on spe-
cific Sharah questions brought before the SSBs are fatw. See R. Wilson, The develop-
ment of Islamic finance in the GCC, Kuwait Programme on Development, Governance and
Globalisation in the Gulf States (London: Centre for the Study of Global Governance, LSE,
2009), 8.
33 M.N. Siddiqi, Maqasid e shariat (Objectives of the Sharah) (Islamabad: Institute of Islamic
Research, International Islamic University, 2009).
34 M.N. Siddiqi, Sharah, Economics and the Progress of Islamic Finance: The Role of
Sharah Experts, in Pre-Forum Workshop on Select Ethical and Methodological Issues in
Sharah-Compliant FinanceSeventh Harvard Forum on Islamic Finance (Cambridge,
MA, 2006).

Other scholars have also criticised the performance of SSBs due to their lack
of independence and transparency. For instance, Foster writes of the limited
availability of Sharah scholars and how the concentration of the same schol-
ars are spread throughout the world, from the US to Pakistan. This has often
led to much scepticism about their propriety, as some have levied the accu-
sation that these scholars issue fatws for rent, whereby enough compensa-
tion and perquisites ensure the passage of rulings favourable to the financial
institutions.35 While this happens in some situations, most jurisdictions now
have clear guidelines to ensure the independence of SSBs and promote trans-
parency and accountability in the discharge of their duties.
Nevertheless, Warde contends that interviews have shown that, in some
instances, the SSB decision is one in which the board rubber stamps the deci-
sions already made by bank management.36 This is why Farooq has warned
that the term Sharah-compliant can be sometimes misleading. Here, it is
argued that the term refers to practices that have been deemed acceptable by
SSBs, rather than whether the practice is actually compliant with the rules of
Islam.37 Nevertheless, whether members of SSBs rubber stamp the decision of
the bank management or notwhich is definitely not true in all casesthis
unique class of experts remains the centrepiece of the Islamic finance indus-
try. The concerns being raised in this study relate to instances where proper
regulation of fatw making are needed to enhance consumer confidence in the
products and services being offered by the industry. Conflict of interests can be
easily avoided in situations where the law has provided for the establishment
of a statutory Sharah body, such as in the case of Malaysia, where the SAC is
considered the final authority in the ascertainment of the Islamic law applica-
ble to Islamic finance transactions. This is where modern positive law plays its
role in regulating and facilitating Islamic finance business.
4 What Is Fatw Shopping?
Fatw shopping is a methodical process of finding the right fatw or formal

legal opinion that fits ones individual or collective needs.. The advice often
given to the layman and a new learner is to stick to adopt a trustworthy source
of knowledge when seeking advice or legal opinions. Fatw shopping has also
been defined thus:
35 Foster, supra note 9.

36 I. Warde, Islamic Finance in the Global Economy (Edinburgh: Edinburgh University Press,
2010), p. 235.
37 Farooq, supra note 26 at 108.

Fatw shopping refers to seeking opinion and rulings by Islamic scholars

on matters where there is ambiguity that a certain product or banking
activity is in line with Sharah or not. Fatw resolves controversies and
addresses key challenges faced by the Islamic financial industry.38
The aim of the person is not to find the opinion that is the most reliable or the
most in line with what the Prophet might have responded39 but rather the
opinion which suits the preconceived belief or proposal. In most cases, such
situations involve getting a scholar to rubber-stamp ones prior position on
issues. It is pertinent to observe that the term fatw shopping can be used in
both the positive and negative sense, depending on the intention of the seeker
as well as the method adopted to seek the formal legal opinion.
In the positive sense, there are some legitimate situations in which a muft
can find ways out (makhrij) for someone who seeks clarification on a Sharah
issue. In such a situation, the muft might even take a further step to confirm his
ruling with other learned scholars if the issue is so confusing and subjective.
Though this may be termed fatw shopping, the practice is acceptable under
the Sharah. Similarly, it is not wrong to ask a muft a specific question until the
seeker finds one that he/she is satisfied with based on a good understanding
of the situation.40 The person requesting a legal opinion may choose an easier
opinion in a confused state, and this is not also considered fatw shopping.41
The general usage of the phrase fatw shopping is implied more in the nega-
tive sense rather than mere seeking for the most appropriate opinion. While
the above definitions of fatw shopping may be simply referred to as taayyur
(preference or selection), there is another side of the coin, which is the focus
of this article. To this end, a different definition is proffered. Fatw shopping
is the act of seeking a favourable Sharah ruling on a particular issue. In con-
38 M.S. Malik, A. Malik, and W. Mustafa, Controversies that Make Islamic Banking Contro-
versial: An Analysis of Issues And Challenges, American Journal of Social and Manage-
ment Sciences, 2(1) (2011): 41-46.
39 A.S. Ahmed, Muft, Fatw, and IstiftaThe Asking and Answering of Religious
Questions,onlineat:http://www.suhaibwebb.com/islam-studies/muft-fatw-and-
istifta-%E2%80%93-the-asking-and-answering-of-religious-questions-part-ii/, accessed:
11 November 2012.
40 This is what is known as taqld al-mafl which simply means following the less excellent
juristic view in the presence of a better ruling. This principle permits the questioner to
choose any of the rulings once scholars have given their fatw. See A.M. Ibn Qudamah,
Rawdah al-Nir wa Janat al-Munir f Ul al-Fiqh al madh-hab al-Imm Amad bin
anbal, 2nd edn. (Beirut: Muassasat al-Rayyn, 2002), vol. 2, 388.
41 M. Al Rm, Kitb al-Furu, A.A. Al-Turki (ed.) (Beirut: Muassasat al-Rislah, 2003), vol. 9,
20-21.

textualising the concept within the general framework of the modern prac-
tice of Islamic finance and the imperativeness of Sharah compliance, fatw
shopping can be defined as the act of looking around for a friendly ruling on
the compliance of a particular finance product. This naturally involves seeking
Sharah scholars who will endorse such a product. While most of the Sharah
scholars exercise due diligence in approving most Islamic finance products
brought before them, there are some marginal instances of abuse, which are
caused by a number of factors discussed in the next section of this article.
5 Incidences of Fatw Shopping
While fatw shopping is a common phenomenon in the modern Muslim soci-

eties where people even go online to ask different scholars about an issue and
get some form of justifications to suit their original views, it is gradually being
felt in the Islamic finance industry. This will understandably touch on the
reputation of IFIs.42 Though not so prevalent, there have been incidences of
covert orchestration of fatw shopping by some IFIs in the bid to put through
their proposals for new financing instruments, which are deemed to be some
form of Islamisation of conventional products. While there is nothing inher-
ently wrong with such practice, it is when unnecessarily abused that the
Sharah may consider it objectionable. This is probably the reason why IFSB
warned against this phenomenon when it provides in its Guiding Principles
for Corporate Governance for Institutions Offering Only Islamic Financial
Services (Excluding Islamic Insurance (Takful) Institutions and Islamic Mutual
Funds) 2005:
Therefore, while it is acknowledged that genuine difference of opinions

in interpreting Islamic Sharah rules and principles is a blessing for the
Islamic financial services industry, cynical fatw shopping or fishing for
fatwthat is, asking Sharah opinions from a variety of Sharah schol-
ars and then picking the most convenient opinioncannot be consid-
ered an acceptable practice.43
42 M.K. Hassan and M.F. Dicle, Basel II and Corporate Governance in Islamic Banks, in
S.N. Ali (ed.), Integrating Islamic Finance into the Mainstream: Regulation, Standardization
and Transparency (Cambridge, MA: Islamic Finance Project, Harvard Law School, 2007),
31-50.
43 Islamic Financial Services Board, Guiding Principles for Corporate Governance for
Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance
(Takaful) Institutions and Islamic Mutual Funds) (Kuala Lumpur: IFSB, 2005), 25.

For an international standard-setting body such as IFSB to acknowledge

and berate the practice of fatw shopping, one might not need further evi-
dence to prove instances of this phenomenon. A preliminary literature sur-
vey reveals numerous studies on related issues, some of which expressly use
the term fatw shopping. As presented in Table 1, the findings of such stud-
ies are quite revealing, considering a number of challenges facing the Islamic
finance industry. Given the fact that the IFSB Guiding Principles mentioned
above has expressly conceded to the occurrence of fatw shopping or its other
dimensions since 2005,44 numerous studies reveal that some bank officials do
search for favourable scholars for quick recognition of products,45 and thereby
give an Islamic identity to products that are de facto conventional in nature.46
Other studies consider the phenomenon as discouraging to investors47 and
a threat to the future of the Islamic finance industry.48 It has also been lik-
ened to Sharah arbitrage49 practiced by some Islamic financial institutions,50
which might be due to the practice of outsourcing Sharah consultancy
survives.51 With no clear regulatory framework for cross-border Sharah advi-
sory practices52 and lack of standardisation of products and practices,53 the
future of the Islamic finance industry leaves much to be desired; hence, the
44 Supra note 52 at 25.

45 Hassan and Dicle, supra note 42.
46 F. Khan, How Islamic is Islamic Banking?, Journal of Economic Behavior & Organization
76(3) (2010): 818.
47 E. Bolton, Islamic Private Equity and Venture Capital, Journal of Corporate Treasury
Management 4(2) (2011): 95-105.
48 Malik et al., supra note 48 at 41-46.
49 D. Bassens, B. Derudder, and F. Witlox, Setting Sharia standards: on the role, power and
spatialities of interlocking Sharia boards in Islamic financial services, Geoforum 42(1)
(2011): 98.
50 D.K. Rahajeng, The Effectiveness of Sharah Supervisory Board Roles in Islamic Banks,
(13 April 2012). Available at SSRN: http://ssrn.com/abstract=2357831 or http://dx.doi
.org/10.2139/ssrn.2357831.
51 S. Arshad and N. Wardhany, Outsourcing the Islamic Way: A Look into the Challenges
Faced by Financial Institutions, in 2nd ISRA Colloquium, Sasana Kijang, Bank Negara
Malaysia, 27 November 2012, (Kuala Lumpur, 2010), 1-16.
52 S. Azmat, M. Skully, and K. Brown, The Shariah Compliance Challenge in Islamic Bond
Markets, Pacific-Basin Finance Journal 28 (2014): 47-57.
53 S. Farook and M.O. Farooq, Shariah Governance, Expertise and Profession: Educational
Challenges in Islamic Finance, ISRA International Journal of Islamic Finance, 5(1) (2003):
137-160.

need for a clear regulatory framework for both domestic and cross-border
Sharah advisory services.
Table 1 Selected studies on fatw shopping in Islamic finance
Use of Term Findings Context References
1. Fatw shopping / Not an acceptable Islamic finance IFSB (2005)54

Fishing for fatw practice
2. Fatw shopping Quick recognition Islamic finance Hassan & Dicle
of products (2007)55
3. Scholar search Islamic identity Islamic finance Khan (2010)56
for de facto conventional
products
4. Fatw shopping Discouraging to investors ukk market Bolton (2011)57
5. Fatw shopping A threat Islamic finance Malik et al.
(2011)58
6. Fatw shopping Sharah arbitrage Islamic finance Baseens et al.
2011)59
7. Fatw shopping Practiced by banks Islamic finance Rahajeng
(2012)60
8. Fatw shopping Caused by out-sourcing Islamic finance Shaista &
Sharah consultancy Wardhany
services (2012)61
9. Fatw shopping Lack of standardisation Islamic finance Farook & Farooq
(2013)62
10. Fatwa shopping No clear regulatory ukk market Amzat et al.
framework (2014)63

55 Supra note 54.
56 Ibid., p. 818.
57 Supra note 56.
58 Supra note 57.
60 Supra note 59.
61 Supra note 60.
62 Supra note 62.
63 Supra note 61.

The above references to fatw shopping are not isolated cases, as the phenom-
enon has been confirmed by one of the IFSB Sharah researchers who publicly
declared that there are notable instances of fatw shopping which are usually
done with inscrutable motives.64
As MacFarquhar65 rightly argued, unfortunately fatw shopping has helped
breed fatw chaos in some Muslim communities. This might not be unassoci-
ated with the growing scepticism of some onlookers to the controversial prac-
tices in the broader Islamic finance industry.
The incidences of fatw shopping briefly examined here are in different
dimensions. These dimensions are gleaned from the available literature and
observable market practices over the years. These include the following:
1. Proactive search;
2. Careless online search;
3. Negligent adoption of previous fatw;
4. Overbearing influence of some bank executives;
5. Geo-jurisprudential divergence on some Islamic finance products; and
6. Appointment of favourable Sharah scholars.
While the above dimensions are not exhaustive, as the Islamic finance indus-
try is still evolving as well as the fact that it is increasingly expanding into new
frontiers which are less regulated, one may arguably conclude that instances of
fatw shopping fall under more dimensions, if it does not fall under one.
5.1 Proactive Search

The most prevalent approach to fatw shopping, though not often so pro-
nounced, is the proactive search for scholars who will endorse a proposed
Islamic finance productlast stage of the process of product development
with financial inducement as the major consideration. Thus, such IFIs adopt
the policy of cash-for-fatwthe practice of which has eroded the original
philosophy of Islamic economics. This is confirmed from the response of a
64 The authors were thrilled when a senior researcher at the Islamic Financial Services
Board openly declared that there are covert instances of fatw shopping. This was made
public during the initial presentation of an earlier draft of this article at the 2nd Internal
Conference on Islamic Economics & Economies of the OIC Countries, Parallel Session 3,
Kuala Lumpur, 30 January 2013. The panel was chaired by Masudul Alam Choudhury.
65 N. MacFarquhar, The Media Relations Department of Hizbollah Wishes You a Happy
Birthday: Unexpected Encounters in the Changing Middle East (New York: Public Affairs,
2009), 126.

Dubai-based investment banker who frankly disclosed the way they go about
searching for the appropriate Sharah scholars who will give them the seal of
approval to the proposed Islamic finance product:
We create the same type of products that we do for the conventional mar-
kets. We then phone up a Sharah scholar for a Fatw [seal of approval,
confirming the product is Sharah compliant].... If he doesnt give it to
us, we phone up another scholar, offer him a sum of money for his ser-
vices and ask him for a fatw. We do this until we get Sharah compli-
ance. Then we are free to distribute the product as Islamic.66
One should quickly add that this attitude is not so common in regulated juris-
dictions, as some Sharah scholars consider it as unnecessary exaggeration.
But the perception persists and it presents a handicap for the credibility of
the industry and its gatekeepers.67 However, one cannot rule out this prac-
tice in conventional financial institutions that are trying to win the minds of
Sharah-inclined investors.68 This unhealthy practice calls for quality control
through proper accreditation and perhaps certification in the Sharah disci-
pline with particular reference to Islamic rules on transactions, known as fiqh
al-mumalt.
5.2 Careless Online Search

There is also the tendency of some IFIs to undertake an unguarded online
search for a favourable fatw, which also involves shopping for a favourable
scholar. This attitude has been deepened with the unlimited access people
have to the Internet, which unfortunately contains both reliable and fallible
information on a diverse range of issues. Such online search has resulted in
indiscreet adoption of fatw of leading scholars. Since every fatw has its
unique context and must be regarded as such, such unguarded online search
is counterproductive as it betrays the very essence of Sharah advisory in the
Islamic finance industry.
Previously issued fatw or Sharah resolution by a reputable scholar on a
particular issue, which is openly available online cannot take the place of an
emerging issue, which requires a new ruling. In fact, scholars often pronounce
the dynamic nature of fatw where a scholar may vary the extent of application
66 Supra note 9.
67 Supra note 62.
68 U.A. Oseni and M.K. Hassan, Regulating the Governing Law Clauses in ukk Transactions,
Journal of Banking Regulation 16 (2015): 220-249, doi:10.1057/jbr.2014.3.

of a particular fatw depending on certain information that was not available

as at the time the initial pronouncement was made. Such online fatw can-
not take the place of a well-reasoned ruling of a Sharah Board constituted by
experts of different aspects of fiqh al-mumalt. This does not undermine the
significance of online fatw on personal issues, particularly to Muslims resid-
ing in Western countries who in some cases might not have access to Muslim
scholars in their immediate locality.69
5.3 Negligent Adoption of Previous Fatw

It is observed that some IFIs, rather than consulting a qualified Sharah
scholar, prefer to adopt fatw issued by a particular scholar who previously
sat on their SSB to save costs. An instance, which readily comes to mind, is
the alleged misuse of Taqi Usmanis fatw. It is needless to add that Shaykh
Taqi Usmani is one of the leading scholars who have constructively shaped
the global Islamic finance industry, and set it on a sound footing since incep-
tion. The fatw in question deals with Sharah-compliant home financing.
Some Sharah-compliant financial institutions have used the signature of this
leading scholar as an endorsement of the Islamic finance products they are
offering. This Machiavellian use of a related fatw of Taqi Usmani has been
categorically rejected through a public statement he issued on his website on
13 October 2010 which is available online. The announcement is reproduced
below in extenso:
This is for information of all concerned that I have been receiving corre-
spondence from various places enquiring whether I have authorised any
Ijarah contracts of certain financial institution in America, Australia and
Canada. As evidence these companies have posted a 15 years old fatw of
mine on their websites. I would very explicitly like to declare the follow-
ing in this regard:
This fatw was actually issued 15 years ago in peculiar circumstances
prevalent at that time in favour of a house financing company, namely,
Al-Amin Company based in Jeddah which they had intended to imple-
ment at that time. This Fatw is no longer valid. As such, the use of this
fatw by other financial institutions is illegal and misleading.
69 S. Zaman, From Imam to Cyber-Muft: Consuming Identity in Muslim America, The
Muslim World 98(4) (2008): 465-474.

All such companies are requested not to refer to this Fatw nor to use it as
their marketing material, and immediately remove it from their websites,
failing which they may face legal action at their own cost.70
Though one may want to brush aside the recurrence of the above instance,
the fundamental issue raised in this case touches on the very basis of Sharah-
compliant financing. How can such IFIs, adopting an old fatw previously
issued on a separate form of contract, convince the public that the fatw is
applicable to new similar contracts mutatis mutandis? There are many consid-
erations that must be taken into account in the process of varying a previously
issued fatw of a particular scholar. Article 39 of Majallat al-Akm al-Adliyyah
provides that: Changing rules according to changing times is not to be
denounced.71 This principle is based on the legal maxim al-dt muakkamah
(custom has the force of law).72 It is important to quickly clarify that it is only
rulings that are derived from prevailing customary practices which do not con-
tradict the Sharah that have the force of law.73 To this end, the applicable rul-
ings can change depending on the time, place and even circumstance.
Nevertheless, it is important to clarify that peoples needs do change accord-
ing to changes in time, places and circumstances but that does not rule out
mandatory provisions of the law. As for the rulings that are derived from the
Sharah which are not necessarily derived from customs and traditions, the law
does not change regardless of the changes in time, places and c ircumstances.74
Issues like rib, gharar, and other prohibitive elements in Islamic finance con-
tracts do not fall under the custom and tradition exception. The above case
does not even fall under such categories of fatw that may be varied accord-
ing to time and place since a new fatw has not been issued yet on that subject
matter.
70 M.T. Usmani, Misue of a Fatw, 13 October 2010, Muft Muhammad Taqi Usmani
Homepage online at: http://www.mufttaqiusmani.com/index.php?option=com_content
&view=article&id=1%3Amisuse-of-a-fatw&Itemid=1, accessed: 8 November 2012.
71 C.R. Tyser, D.G. Demetriades, and I.H. Effendi, The Mejelle: Being an English Translation
of Majallahel-ahkam-i-adliya and a Complete Code on Islamic Civil Law (Lahore: Law
Publishing Company, 1980), Article 39 et seq.
72 G. Libson, On the Development of Custom as a Source of Law in Islamic Law: Al-ruju
il al-urfi aadu al-qawidi al-khamsi allat yatabann alayh al-fiqhu, Islamic Law and
Society 4(2) (1997): 131-155.
73 S. Mahmassani, Muqaddima f Ihy Ulm al-Sharah (Beirut, Dr al-Ilm li al-Malayin,
1962), 67-69.
74 A. Haidar, Durar al-Hukkm fi Sharh Majallt Al-Ahkm (Haifa: Abasid Press, 1925), Vol. 1.

5.4 Overbearing Influence of Some Bank Executives

Since the incorporation of the Sharah advisory role into the corporate gover-
nance of IFIs in the late 1980s and early 1990s and the institutionalisation of
Sharah consultancy, there have been repeated instances of overbearing influ-
ence of the managers of IFIs on their Sharah Boards. The question of the role
of SSB remains elusive in some jurisdictions while there are strict regulatory
frameworks in some others to ensure the independence of this strategically
unique body. For instance, Malaysia, apart from the new regime introduced
in Section 56 of the Central Bank of Malaysia Act 2009, it has also issued its
Sharah Governance Framework for Islamic Financial Institutions 2010 where
the independence of SSB is emphasised significantly.75
Despite the excessive emphasis placed on this issue of independence of
SSB, the overbearing influence of bank managers often prevail and in some
cases have led to conflict of interests, which prompted some Sharah Board
members to resign.76 Grais and Pellegrini reveal:
75 Principle 3.1 of the Sharah Governance Framework for Islamic Financial Institutions 2010
of Bank Negara Malaysia provides: The board [Board of Directors] shall recognise the
independence of the Sharah Committee and ensure that the committee is free from
any undue influence that would hamper the Sharah Committee from exercising objec-
tive judgment in deliberating issues brought before them. Correspondingly, the Sharah
Committee is expected to make sound decisions on Sharah matters in an independent
and objective manner. See Bank Negara Malaysia, Sharah Governance Framework for
Islamic Financial Institutions 2010 (Kuala Lumpur: BNM, 2010), 15.
76 According to Siddiqi, the current state of affairs in the industry comprises several issues
that call for serious concern. First, IFIs treat the advice of the Sharah experts as their
property and are under no obligation to share the experts advice. Therefore, the trans-
parency of this advice is reduced. Traditionally, Islamic religious opinions or fatw
have been a public good, but in the context of Islamic financial institutions, they have
in some ways become a private good. Second, there is a tendency in Islamic finance to
duplicate conventional financial instruments with some modifications in terms and
phrases, creating a semblance with interest-based instruments. Examples are ukk and
tawarruq. It can be argued that Sharah experts do not have the legal expertise or training
to understand all the consequences of these new instruments that they approve. Third,
the gamut of issues and the scope of Islamic economics are too vast to be mastered by
any one Sharah expert. The challenge is to cope with the emerging new issues in light
of the objectives of the Sharah. The existing education and training of scholars do not
equip them to meet that challenge. The Muslim global community (ummah) needs to
consider this problem at an international level. In the case of ukk, for liquidity purposes
and in the course of raising funds for major developmental projects, Shariah-compliant
investment certificates have been used. Though such efforts are borne out of the sincerity
and ingenuity of both Sharah scholars and lawyers, in some cases such ukk have to be

In principle, SSB members are required to submit an unbiased opinion in

all matters pertaining to their assignment. However, their employment
status generates an economic stake in the financial institution, which can
negatively impact their independence. The opinions of the SSB may, for
example, prohibit the bank engaging in certain profitable transactions or
impose a reallocation of illicit income to charity, resulting in a poorer
overall financial performance. Under these circumstances, the bank
managers may be tempted to use their leverage to influence SSB mem-
bers, producing what is commonly referred to as Fatw shopping or
Sharah advisory la carte.77
While relying on a specific case study, Ahmad and Raashed comment on

the role of Sharah Council of Islami Bank Bangladesh Limited (IBBL) that
despite the public guarantee that its activities are conducted according to
the Islamic Sharah, IBBL would fail on this test. It provides for its internal
Sharah Council an advisory role only, making the entire office subject to the
mercy of BoDs.78 They also referred to the IBBLs erstwhile chairmans remarks
on the execution of Sharah Councils supervisory power: If we are to grant the
Moulanas79 executive power, can they run the bank?.80
Such influence on the members of the SSB boils down to the nature of the
appointment of the Sharah scholars. Once the Board of Directors is given the
power to hire and fire such scholars, the idea of independence of SSB is pre-
posterous. It is believed that the mere fact that the SSB receives remunerations
from the IFIs betrays the very essence of independence. The concern is that
members of the SSB may legitimise dubious operations to ensure that they
structured in a way and manner that complies with the domestic laws of certain jurisdic-
tions. See U. Oseni, Dispute Management in Islamic Financial Institutions: A Case Study
of Near ukk Defaults, Journal of International Trade Law and Policy 13 (3) (2014): 198-
214. In a similar vein, there are some forms of tawarruq, such as the organised tawarruq
(tawarruq munazzam) which has been declared arm (prohibited) by the Islamic Fiqh
Academy of the Organisation of Islamic Cooperation (OIC) due to its semblance of a ficti-
tious sale. See Frank E. Vogel, S. Nazim Ali, and Umar A. Oseni, The Tawarruq Debate in
Islamic Finance (Cheltenham: Edward Elgar Publishing, forthcoming).
77 W. Grais and M. Pellegrini, Corporate Governance and Sharah Compliance in
Institutions Offering Islamic Financial Services, World Bank Policy Research Working
Paper 4054 (Washington, DC: World Bank, 2006), 9.
78 A.U. Faruq Ahmad and R. Raashed, Islamic Banking: Between Myth and Reality,
Australian Journal of Basic and Applied Sciences 7(6) (2013): 326.
79 Moulanas is an allusion to the Sharah scholars.
80 Supra note 87.

remain active on the board.81 In some remote cases, it is believed financial

inducement is another way of coercing some SSB members to do the bidding
of senior managers. When the relationship between the SSB and the bank
executives appears surreptitious, the consumers confidence in the IIFs may
gradually wane.82
5.5 Geo-jurisprudential Divergence on Some Islamic Finance Products

The nature of Islamic law which is transposed in Sharah rulings in the mod-
ern Islamic finance industry has, to a large extent, contributed to the increasing
practice of fatw shopping. There are diverging opinions on the permissibility
of certain widely used products in the Islamic finance industry. Such products
include bay al-inah, tawarruq and bai bi thaman jil or BBA (deferred payment
sale). Some GCC Sharah scholars believe Malaysian scholars are too liberal
in allowing the use of these products for financing purposes in the Malaysias
Islamic finance industry. These diverging positions are borne out of differing
interpretations of certain Sharah principles. They are now tied with geograph-
ical locations; hence, the existence of the most prominent geo-jurisprudential
divergence between Sharah scholars in Southeast Asian jurisdictions and the
GCC region. The implication of this geo-jurisprudential conundrum in Islamic
law within the context of Islamic finance is further described thus:
This allows differences to arise and exist between the countries and
regions, providing for fatwa shopping opportunities. Furthermore, fatwa
shopping increases the inconsistency between Islamic financial prod-
ucts, leading consumers and investors to be uncertain regarding the
Sharah compliance of the offered products and gradually leading them
to lose faith in Islamic finance as a whole.83
Rather than allowing investors to loose confidence in Islamic finance products

as a result of some of these geo-jurisprudential divergence, proper regulation
might be required to standardise cross-border Sharah advisory practices.
81 H.G. Rammal, The Importance of Sharah Supervision in Islamic Financial Institutions,

Corporate Ownership and Control 3(3) (2006): 204-208.
82 R.A. Abdel Karim, The Independence of Religious and External Auditors: The Case of
Islamic Banks, Accounting, Auditing & Accountability Journal 3(3) (1990): 34-44.

5.6 Appointment of Favourable Sharah Scholars

With the expansive access to information through different media, people
are now aware of the position of some leading Sharah scholars on certain
Islamic finance transactions. For example, scholars of different jurisdictions
hold diverse opinions on the validity of tawarruq (i.e., to buy on credit and
sell at spot value with the objective of getting cash) as an Islamic finance
instrument for ensuring liquidity. Hence, though not explicitly pronounced,
some IFIs consider the views of certain scholars before empanelling them on
their Sharah Boards. Though this overtly appears to be normal, its far-reach-
ing effect on the broader Islamic finance industry may not be inauspicious
in the long run. The IFIs go to the scholars who are favourably disposed to
their types of financial instruments. Rather than calling this fatw shopping,
it might appropriately be referred to as Scholar shopping. However, the two
phrases are synonymous, as the fatw itself emanates from the scholar. This
scholar-shopping phenomenon has permeated through the whole Islamic
finance industry. Though not ordinarily bad, as IFIs do strive to appoint the
most appropriate Sharah scholars on their SSB, there are some marginal
cases that have some ulterior motives in the search for favourable scholars.
Though people like Marinescu have likened the scholar-shopping phenome-
non to taayyur (preference or selection),84 it is used in a different context
while referring to fatw shopping. Farook and Farooq identified the underlying
problem that led to such instances of fatw shopping while arguing that the
lack of a widely agreed process of eliciting and establishing a juristic opinion
leads to fatw shopping.85 This makes a case for the need to standardise the
process through the instrumentality of law.
Regulation of fatw shopping is more needed in cross-border transactions
such as ukk. It is believed that in the absence of a clear regulatory frame-
work, there is the general tendency of endorsing a non-compliant ukk struc-
ture with outlandish justifications from the Sharah. This concern is more
likely to be the case in the contractual relationship of a Sharah advisor with
a ukk issuer than an Islamic bank. This is because such contractual relation-
ship with the bank is usually a long-term contract. So, the bank would incur
significant transaction costs for fatw shopping. For Islamic bonds [ukk], the
relationship can be short and one off. The issuing firm, moreover, can easily
hire an advisor of its choice.86 In the landmark resolution on ukk in 2008,
84 I. Marinescu, Where Does the Dirham Stop in a Sukuk Default?, Hastings Intl & Comp. L.
Rev. 35 (2012): 451-477.
85 Supra note 62.

the i nternational standard-setting body, AAOIFI emphatically advised Sharah

scholars to avoid the practice of hurried endorsement of ukk products with-
out verifying the authenticity of the ukk structures. The AAOIFI statement
provides:
Sharah Supervisory Boards should not limit their role to the issuance of
fatw on the permissibility of the structure of ukk. All relevant con-
tracts and documents related to the actual transaction must be carefully
reviewed {by them}, and then they should oversee the actual means of
implementation, and then make sure that the operation complies, at
every stage, with Sharah guidelines and requirements as specified in the
Sharah Standards.87
This timely warning from the international standard-setting body was spe-
cifically made for ukk transactions. Nevertheless, it also equally applies to
Islamic finance transactions. The statement reemphasised the importance of
regulation of Sharah advisory roles in the industry.
6 Legal Restrictions on Fatw Shopping: A Case Study of the

Malaysian Legal Framework
Though during the early days of Islam and in subsequent eras that saw the
evolution of fiqh, there was no need to legally restrict fatw making through
positive law. The focus then was to develop the Islamic corpus juris and teach
it to others in a manner that befits its underlying philosophy. However, with
the crystallisation of fiqh, the complexities of modern transactions, and the
positivist nature of formal legislations, one cannot think of any better way to
restrict the abuse of fatw making than the instrumentality of the law.
The Malaysian legal framework provides a good model for regulating fatw
making in order to curtail fatw shopping while allowing flexibility of Sharah
rulings through a two-tier Sharah infrastructure in the Islamic finance indus-
try. While the SAC is the statutory apex authority for the determination of
Islamic law for the purposes of Islamic financial business in Malaysia, the
Sharah committees serve as internal Sharah advisory bodies for the sole
87
Accounting and Auditing Organisation for Islamic Financial Institutions, AAOIFI
Resolution on ukk, February 2008, available online at http://islamicbankers.files.word
press.com/2008/09/aaoifi_sb_sukuk_feb2008_eng.pdf.

purpose of advising the IFIs for the purposes of Islamic financial business.88
Section 58 of the Central Bank of Malaysia Act, 2009 (Act 701) provides that,
in the event of a conflict between the Sharah ruling given by a Sharah com-
mittee of an IFI and that of the SAC, the ruling of the latter shall prevail. In
addition, within the same industry, an IFI is not allowed to appoint any mem-
ber of the Sharah committee of another IFI as a member of its own Sharah
committee in order to avoid conflict of interest. Such restriction and clear
delimitation of the law has completely shut out possibility of fatw shopping
in Malaysias Islamic finance industry.89
In a recent case, it was contended that the legal restriction on fatw shop-
ping or regulation of fatw making in the Islamic finance industry has con-
ferred more statutory powers on the SAC to the extent that it now performs
judicial or quasi-judicial functions.90 This was the bone of contention in Tan
Sri Abdul Khalid bin Ibrahim v. Bank Islam Malaysia Bhd91 where the court clar-
ified the position of the law regarding the statutory powers conferred on SAC.
The High Court held that the function of this apex Sharah body in Malaysia is
merely ascertainment of the Islamic law on financial matter which is not the
same as judicial or quasi-judicial functions. Such ascertainment is necessary
in proceedings involving Islamic finance matters since the court is not suf-
ficiently equipped to deal with the issue whether a transaction under Islamic
banking is in accordance to the religion of Islam or otherwise.92 The court fur-
ther observed that it still has to decide the ultimate issues which have been
pleaded.93 The Court of Appeal upheld the position of the High Court and
further observed:
88 The main duties and responsibilities of the Sharah Committee of IFIs in Malaysia are:
responsibility and accountability, advise to BoDs and the IFI, endorse Sharah policies
and procedures, endorse and validate relevant documentations, assess workd carried out
by Sharah review and Sharah audit, assist related parties on Sharah matters, advice on
the matters to be referred to the SAC, and provide written Sharah opinions. For the full
details of the duties and responsibilities of the SAC, see Supra note 84 at 34-35.
89 See Clause 5.4 of Section V (Confidentiality and Consistency), Principle 5, The Sharah
Governance Framework for the Islamic Financial Institutions, 2010. See supra note 84 at 20.
90 This was the argument of the counsel in Tan Sri Abdul Khalid bin Ibrahim v. Bank Islam
Malaysia Bhd [2013] 3 MLJ 269.
91 [2012] 7 MLJ 597 at 614.
92 Ibid.
93 Ibid.

The duty of the SAC is confined exclusively to the ascertainment of the

Islamic law on financial matters or business. The judicial function is
within the domain of the court i.e. to decide on the issues which the par-
ties have pleaded. The fact that the court is bound by the ruling of the SAC
under s 57 does not detract from the judicial functions and duties of the
court in providing a resolution to the dispute(s) which the parties have
submitted to the jurisdiction of the court. In applying the SAC ruling to
the particular facts of the case before the court, the judicial functions of
the court to hear and determine a dispute remain inviolate. The SAC, like
any other expert, does not perform any judicial function in the determi-
nation of the ultimate outcome of the litigation before the court, and so
cannot be said to usurp the judicial functions of the court.94
There was a further appeal to the Federal Court of Malaysia but there was an
indication in February 2014 that the parties have decided to pursue out-of-court
settlement.95 The legal tantrums Islamic finance lawyers on both sides of the
coin have thrown at each other since the SAC controversy cropped up brings to
the front burner the implication of regulating Sharah rulings or fatw in the
Islamic finance industry.
Not anybody can give a valid Sharah ruling on Islamic finance products
and services in Malaysia. Before one can give a valid ruling, such a person must
be a member of either a Sharah committee of an IFI or a member of the SAC
of Bank Negara Malaysia (BNM). Then, for a Sharah scholar to be qualified
to sit on any of the two bodies, he or she must fulfil the following require-
ments as outline in the Sharah Governance Framework for Islamic Financial
Institutions 2010:96
1. A member of a Sharah Committee shall be a Muslim individual. A com-

pany, institution or body shall not constitute a Sharah Committee for
the purpose of the Framework.
2. The majority of members in the Sharah Committee shall at least hold
bachelors degree in Sharah, which includes study in Ul Fiqh (the ori-
gin of Islamic law) or Fiqh Muamalt ( Islamic transaction/commercial
law) from recognised university.
94 See Tan Sri Abdul Khalid bin Ibrahim v. Bank Islam Malaysia Bhd [2013] 3 MLJ 269 at 277.
95 Selangor MB was plaintiff in out-of-court settlement with BIMB, The Rakyat Post,
10September2014,availableathttp://www.therakyatpost.com/news/2014/09/10/
selangor-mb-plaintiff-court-settlement-bimb/.

3. It is reasonable to expect that the majority members of the Sharah

Committee should be able to demonstrate strong proficiency and knowl-
edge in written and verbal Arabic, and have good understanding in
Bahasa Malaysia and the English language.
4. The Sharah Committee may comprise experts from relevant back-
grounds such as finance and law, which could support the depth and
breadth of the Sharah deliberations. However, these members must not
form the majority of the Sharah Committee.
5. The Sharah Committee preferably shall comprise members of diverse
backgrounds in terms of qualification, experience and knowledge.
In order to further prevent instances of fatw shopping or pseudo-fatw,

Section 31 of the Islamic Financial Services Act 2013 of Malaysia (IFSA) pro-
vides that:
No person shall be appointed, reappointed or accept any appointment as

a member of a Sharah committee unless such person meets the require-
ments as set out in any standards as may be specified by the Bank under
subparagraph 29(2)(a)(ii) and has obtained the prior written approval of
the Bank.
This legal restriction is only limited to the Islamic finance industry. It seeks to
prevent fatw shopping and possibly reduces such phenomenon to near-to-
zero. For this reason, the new legal framework in Malaysia makes the Sharah
committee members legally liable for the products they approve.97
97 See sections 28 and 29 of the Islamic Financial Services Act 2013 (Act 759) of Malaysia.
Section 28 of the Act provides:
(1) An institution shall at all times ensure that its aims and operations, business,
affairs and activities are in compliance with Sharah.
(2) For the purposes of this Act, a compliance with any ruling of the Sharah Advisory
Council in respect of any particular aim and operation, business, affair or activity
shall be deemed to be a compliance (c) within 30 days of becoming aware of such
non-compliance or such further period as may be specified by the Bank, submit to
the Bank a plan on the rectification of the non-compliance.
(4) The Bank may carry out an assessment as it thinks necessary to determine whether
the institution has rectified the non-compliance referred to in subsection (3).
(5) Any person who contravenes subsection (1) or (3) commits an offence and shall, on
conviction, be liable to imprisonment for a term not exceeding 8 years or to a fine
not exceeding 25 million ringgit or to both.

These measures are meant to curtail instances of fatw shopping and ensure
unsuspecting consumers of Islamic financial products and services are ade-
quately protected. The centralised Sharah governance system in Malaysia
recognises the towering role of the SAC of BNM at the macro-level and the sup-
plementary nature of the functions of Sharah committees at the micro-level.
So, since every IFI is statutorily mandated to establish a Sharah committee,
the probability of having instances of fatw shopping is almost zero.98 Hence,
in order to avert instances of fatw shopping, proper legislations should be
put in place, and it is more practicable to centralise the Sharah governance
system for proper monitoring.99
The above analysis emphasises the intersections between law, finance and
Sharah which is contextualised within the Islamic finance framework. For a
proper regulation of the phenomenon of fatw shopping, a proper Sharah
governance framework is required. As emphasised above, this can only be
realised through the instrumentality of law.
Thus, it is evident that fatw making in Islamic finance should follow a set
of guidelines and it should be subject to review by other relevant bodies. The
above Sharah governance framework model provides a good alternative to an
unregulated Islamic finance industry and prevents instances of fatw shopping.
7 Conclusion
This aspect of Sharah governance literature remains a very new area in Islamic
finance scholarship. Further research is required to explore the cost-benefit-
98 There is no doubt that the model of Sharah governance adopted in a particular jurisdic-
tion largely influences the dynamics of the SSB and the duties of the Sharah scholars.
Though there are different models of Sharah governance, a centralised system seems to
be more effective in curtailing the perceived excesses in Sharah advisory. In this section,
we examine the Sharah governance framework in Malaysia, which has proved to be a
sustainable model of a centralised approach in Sharah governance. Malaysia is one of
the few jurisdictions that adopt the centralised approach in Sharah governance. It is
therefore pertinent to observe that Islamic finance legislations, whether as an enabling
law or regulations, play a significant role in regulating the duties of the members of SSB.
This legal regulation of Sharah advisory role has significantly curtailed instances of
fatw shopping in the three jurisdictions.
99 W. Hegazy, Fatws and the Fate of Islamic Finance: A Critique of the Practice of Fatw in
Contemporary Islamic Financial Markets, in S.N. Ali (ed.), Islamic Finance: Current Legal
and Regulatory Issues (Cambridge, MA: Islamic Finance Project, Harvard Law School,
2005), 133-149.

analysis of fatw shopping in the Islamic finance industry. It thus appears that
apart from shopping for favourable fatw to sign off on certain new Islamic
finance products, another dimension to the discourse is shopping for schol-
ars who are known to be favourably disposed to certain forms of transactions.
While one may not categorically berate the general practice of fatw shopping,
which currently appears in form of a clandestine process within the Sharah
governance framework in some jurisdictions, when it is tainted with elements
of financial inducement for favourable fatw, it takes on a different look.
Legal restrictions to curtail instances of excessive fatw shopping can only
be introduced through proper legislations or regulations that provide for a cen-
tralised and transparent Sharah governance framework for every jurisdiction
across the world. Once IFIs are given the free hand to embark on unrestricted
voyage, which may involve navigating in uncharted waters, there is always
the tendency that they will end up in murky waters, which may spell doom
to the entire Islamic finance industry. Therefore, without a proper regulation
of Sharah advisory process in IFIs operating under the laws of a particular
jurisdiction, the key players may end up taking the laws into their hands and
manipulating the market as well as the consumers of Islamic finance prod-
ucts. This will defeat the very underlying philosophy of Islamic economics and
finance.

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arab law quarterly 30 (2016) 107-137 Arab Law

The Legal Implications of Fatw Shopping

fatw fatw shopping Islamic finance Sharah Supervisory Boards Sharah

koninklijke brill nv, leiden, 6|doi 10.1163/15730255-12341319

With global Sharah-compliant assets hitting a record high of $1.3 trillion as

arab law quarterly 30 (2016) 107-137

arab law quarterly 30 (2016) 107-137

the likelihood of such instances of fatw shopping, it is widely believed that

2 Fatw: Its Meaning and Legal Implications

arab law quarterly 30 (2016) 107-137

arab law quarterly 30 (2016) 107-137

money, this is not permissible. The Sharah (Islamically lawful) way is to

arab law quarterly 30 (2016) 107-137

arab law quarterly 30 (2016) 107-137

In order to constantly meet the challenges of modern complex societies and

arab law quarterly 30 (2016) 107-137

It is however important to enumerate those from whom fatw cannot be

The above considerations are of great concern to the subsequent discussion

3 The Nature and Performance of Sharah Supervisory Boards

To better situate the discussion on the significance of fatw in Islamic finance

A Sharah Supervisory Board (SSB) is an independent body of specialised

arab law quarterly 30 (2016) 107-137

supervising the activities of the Islamic financial institution...The fat-

It is now a standard practice of every Islamic financial institution (IFI) to

arab law quarterly 30 (2016) 107-137

now geared toward standardisation. For example, the regulators in Bahrain,

arab law quarterly 30 (2016) 107-137

contributions as not representing the traditional fatw making process.32 In

arab law quarterly 30 (2016) 107-137

4 What Is Fatw Shopping?

Fatw shopping is a methodical process of finding the right fatw or formal

35 Foster, supra note 9.

arab law quarterly 30 (2016) 107-137

Fatw shopping refers to seeking opinion and rulings by Islamic scholars

arab law quarterly 30 (2016) 107-137

5 Incidences of Fatw Shopping

While fatw shopping is a common phenomenon in the modern Muslim soci-

Therefore, while it is acknowledged that genuine difference of opinions

arab law quarterly 30 (2016) 107-137

For an international standard-setting body such as IFSB to acknowledge

44 Supra note 52 at 25.

arab law quarterly 30 (2016) 107-137

Table 1 Selected studies on fatw shopping in Islamic finance

Use of Term Findings Context References

1. Fatw shopping / Not an acceptable Islamic finance IFSB (2005)54

54 Supra note 52 at 25.

arab law quarterly 30 (2016) 107-137

5.1 Proactive Search

arab law quarterly 30 (2016) 107-137

5.2 Careless Online Search

arab law quarterly 30 (2016) 107-137

of a particular fatw depending on certain information that was not available

5.3 Negligent Adoption of Previous Fatw

arab law quarterly 30 (2016) 107-137

arab law quarterly 30 (2016) 107-137

5.4 Overbearing Influence of Some Bank Executives

arab law quarterly 30 (2016) 107-137

In principle, SSB members are required to submit an unbiased opinion in

While relying on a specific case study, Ahmad and Raashed comment on

arab law quarterly 30 (2016) 107-137

remain active on the board.81 In some remote cases, it is believed financial

5.5 Geo-jurisprudential Divergence on Some Islamic Finance Products

Rather than allowing investors to loose confidence in Islamic finance products

35 Foster, supra note 9.

44 Supra note 52 at 25.

54 Supra note 52 at 25.

81 H.G. Rammal, The Importance of Sharah Supervision in Islamic Financial Institutions,