Fatwa repositioning: the hidden struggle for Shari’a compliance within Islamic financial institutions

Abstract

Islamic Financial Institutions (IFIs) have recently witnessed remarkable growth triggered by an increasing Islamic awareness, rising oil revenues in the Gulf and IFIs’ holistic business model. The key selling factor, however, is their Shari’a-based business proposition which often requires some financial sacrifices e.g. being ethical, responsible and philanthropic. It also requires them to refrain from investments in tobacco, alcohol, pornography or earning interest. On the other hand, for IFIs’ sponsors and managers, the key motivational factor of entrance into the Islamic financial market is not their desire for achieving Shari’a objectives through the holistic business model but rather the desire to tap this highly profitable market where customers are inclined to pay a premium for Shari’a compliance. In order for IFIs to be accepted by the market, they need to be certified by Shari’a scholars, known for their integrity and expertise in Shari’a. One can, therefore, expect potential tensions between IFIs’ managers and Shari’a scholars. The purpose of this research is, thus, to probe the struggle for achieving a high level of Shari’a compliance in the presence of a desire for business objectives within Islamic banking.

The research explores the following questions. Firstly, who determines and defines Shari'a compliance? In other words, is it the Shari’a scholars who dictate Shari’a compliance or
managers or an alliance between the two? Secondly, what are the various levels of Shari’a compliance within IFIs? Thirdly, what causal and intervening factors determine the level of Shari’a compliance within IFIs? Fourthly, what strategies are adopted by Shari’a scholars and managers to tackle this phenomenon? Lastly, what is the prevailing level of Shari’a compliance in IFIs in the present scenario? The study explores these questions using Grounded Theory (GT) as a methodological framework. The choice of GT for this research was triggered by two factors; i) non-availability of sufficient literature in this area and ii) the entwinement of the related hidden phenomena with deep social intricacies. Data, which was steered by theoretical sampling, consists mainly of in-depth interviews with a number of key stakeholders from three significant cases and a regulatory body. The findings reveal that Shari’a compliance is a complex process and is determined by a combination of religious, social, ideological, structural, regulatory and self-interest forces. Though Shari’a scholars can apparently be seen as the supreme authority in defining, dictating and implementing Shari’a compliance, the practical phenomenon is opaque because of the managers’ substantial ‘invisible hand’ in the whole process. While many Shari’a scholars employ considerable efforts in making their respective institutions genuinely Shari’a-compliant, managers, on the other hand, try to tap the market with the tag of Shari’a certification obtained from Shari’a scholars. This involves the exercise of a number of strategies e.g. avoidance, controlling, coercion, compromising, confrontation and separation on the part of the two parties.

As a result, the study illustrates that Shari’a compliance is not an absolute term. Rather it is constantly being positioned and repositioned- termed as fatwa repositioning in this study- by the combination and intensity of the above-mentioned forces and strategies. It varies from ‘superficial’ to ‘reasonable’ levels on a continuum with two extremes; ‘deep’ and ‘no’ Shari’a compliance. The research has three main implications: theoretical, methodological and practical. On the theoretical side, the research contributes to the Islamic finance literature in particular and organizational control literature in general. The study claims that organizational control is much more complex in IFIs because of the struggle for achieving divergent objectives (pursued by different authorities) through the same institution. There is a latent struggle between the two parties to control each other. Interestingly, Shari’a scholars are generally not in control of what they are supposed to be controlling i.e. Shari’a compliance. On the methodological front, the study suggests some new analytical techniques e.g. a snapshot view of the coding framework and a combination of manual and computer-assisted analysis. From a practical standpoint, the study suggests that Islamic banking is currently in a critical stage. It can either become a viable alternative to the conventional banking system by genuinely incorporating Shari’a objectives into its business model or pave its way to collapse by its existing struggle to achieve business objectives through Shari’a certification from Shari’a scholars.

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ORCID for Ian Harwood: orcid.org/0000-0002-8647-2169

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