Islam Compliance Beyond Shariah Compliance

1 Islam-compliance, beyond Shariah-compliance:
2 Toward a broader socioeconomic transformation

3
4 Mohammad Omar Farooq

5 Associate Professor of Economics and Finance, Gulf University
6 Bahrain; dr.mohammad.farooq@gulfuniversity.edu.bh; farooqm59@yahoo.com
7 [Pre-publication Author Manuscript: July 2022; For published version, contact

8 Arab Law Quarterly, https://brill.com/view/journals/alq/aop/article-10.1163-
9 15730255-bja10121/article-10.1163-15730255-bja10121.xml]
10
11 Abstract
12 With the emergence and growth of the Islamic Finance industry Muslims now
13 have at their disposal comprehensive Shariah-compliant financial services.
14 However, the notion of Shariah-compliance has rarely been deconstructed;
15 essentially, it constitutes a prohibition-driven enterprise. While the avoidance of
16 the forbidden (Haram) is fundamentally important, Islam encompasses a great
17 deal more than the impermissible. Approaching the relevant issues from the
18 perspective of Shariah-compliance, where legal aspects are overemphasized,
19 leads to legalism where the principles, norms and values based on the Qur’an and
20 Sunnah are largely ignored or compromised.
21 Limiting itself to merely avoid the Haram has significantly handicapped the
22 industry from identifying and endeavoring to synergistically address the broader
23 socio-economic challenges. In this paper, a modified conceptualization based on
24 a more nuanced framework of “Islam-compliance” is proposed and explored,
25 especially from the perspective of value-orientation in Islam. The notion and
26 framework of Islam-compliance has broader implications beyond Islamic
27 finance.
28
29 Keywords: Islamic, Islamic finance, Shari‘ah-compliance, Islam-compliance,

30 prohibition-driven, value-orientation.

The author gratefully acknowledges the feedback received from Dr. Ahmed Alkhan, Dr.
Mahbubur Rahman, and Mezbah Uddin Ahmed. Dr. Stephen Connolly at Imperial College
London deserves special mention for his detailed critique and editorial work. Of course, the
author is solely responsible for the thoughts presented
Electronic copy available at: https://ssrn.com/abstract=4159917

31 1 Introduction
32 As part of the twentieth century Islamic revivalist ethos, one of the key
33 developments that has captured the imagination of a sizable segment of the
34 Muslim population, earning their loyal engagement, is Islamic Finance (IF). The
35 industry has grown beyond the expectation of many and continues to record
36 steady growth even beyond the Muslim world where many non-Muslim majority
37 countries have been taking a keen interest, albeit in only some of its aspects. This
38 interest is not necessarily in relation to the introduction of Islamic finance to
39 their home markets; rather, beyond making available to local Muslim
40 communities, especially in the Muslim world, most regard is given over to Islamic
41 capital market activities and corporate banking. Obviously, access to the savings
42 of Muslims as a source of capital is the primary motivation.
43 The most important dimension of this enterprise is Shari‘ah-compliance.1 While
44 also known as Halal Finance, its hallmark is that it is based on compliance with
45 the Shari‘ah, which begs the question, what does Shari‘ah-compliance mean?
46 And, is it adequate to equate with something that can be robustly classified or
47 categorized as “Islamic”?
48 In this conceptual paper, the limitation of Shari‘ah-compliance as a “prohibition-
49 driven” enterprise is articulated making the case that to adequately meet the
50 expectation of Islam as a comprehensive way of life (i.e., covering every aspect of
51 life), for the full benefit of human existence, there is a need for “Islam-
52 compliance”, for which Shari‘ah-compliance is necessary, but not sufficient.
53 The rest of the article is divided into the following sections: (2) the relationship
54 between Shari‘ah-compliance and avoidance of prohibitions; (3) The Shari‘ah as
55 legalistic construct; (4) Benchmarking for performance of Shari‘ah-compliant
56 finance; (5) The limitations of Shari‘ah-compliant finance; (6) Value-oriented
57 Islamic Law and Jurisprudence; (7) The conceptualization and operationalization
58 of “Islam-compliance”; and (8) Conclusions.
59
60 2 Shari‘ah-compliance, the hallmark distinction of Islamic Finance

61 Just what constitutes Islamic and non-Islamic has always been an essential part
62 of Muslim discourse, including IF. This explains why the term “Islamic”, almost
63 like a brand, became part of the overall Islamic paradigm. Thus, we hear about
64 Islamic society, Islamic state, Islamic community, Islamic economics, Islamic
1 W. Grais, W. and M. Pellegrini, Corporate Governance and Shariah Compliance in Islamic

institutions Offering Islamic Financial Services (Washington, DC: World Bank Publications,
2006), World Bank Policy Research Working Paper 4054; S. Habib, Fundamentals of Islamic
Banking and Finance (West Sussex, UK: John Wiley, 2018).

65 management, Islamic philosophy, and, of course, IF. However, this term or label
66 was not found adequate or suitable for the new industry that emerged during the
67 second half of the 20th century, the IF industry. Thus, IF is also widely known as
68 Shari‘ah-compliant finance; “Shari‘ah-compliance” being its most distinguishing
69 or defining feature.2
70 The Accounting and Auditing Organization for Islamic Financial Institutions
71 (AAOIFI) is the key international standard-setting organization for the industry.
72 Its scope covers establishing Shari‘ah, accounting and auditing standards, as well
73 as ensuring corporate governance standards for the industry. After enumerating
74 its objectives AAOIFI’s Shari‘ah Standards delineates the following:
75 AAOIFI carries out these objectives in accordance with the precepts of
76 Islamic Shari’a which represents a comprehensive system for all aspects of
77 life, in conformity with the environment in which Islamic financial
78 institutions have developed. This activity is intended both to enhance the
79 confidence of users of the financial statements of Islamic financial
80 institutions in the information that is produced about these institutions,
81 and to encourage these users to invest or deposit their funds in Islamic
82 financial institutions and to use their services.3
83 The relevant text of the AAOIFI’s certification program, the Certified Islamic
84 Professional Accountant (CIPA) stipulates the following:
85 Principle 3.1 IFIs shall have in place an appropriate mechanism for
86 obtaining rulings from Shariah scholars, applying Fatawa and monitoring
87 Shariah compliance in all aspects of their products, operations and
88 activities.4
89 Another international standard-setting organization, with a focus on regulatory
90 standards, is the Islamic Financial Services Board (IFSB).
91 For Islamic financial institutions, various sorts of standards are set by two
92 autonomous international institutions: the Accounting and Auditing
93 Organization for Islamic Financial Institutions (AAOIFI) and the Islamic
94 Financial Services Board (IFSB). The AAOIFI sets the Shariah-compliance
95 standards for entering the Islamic financial markets, while the IFSB issues
96 global prudential standards and guiding principles for the Islamic financial
97 services industry in order to promote and enhance its soundness and
98 stability. Overall, the objective is to build the confidence of the populace in
2 A. Alkhamees, A Critique of creative Shariah compliance in the Islamic finance industry

(Leiden, Netherlands: Brill Nijhoff, 2017), 8-9.
3 Accounting and Auditing Organization for Islamic Financial Institutions, Shari’a
Standards (Bahrain: AAOIFI, 2010).

4 Accounting and Auditing Organization for Islamic Financial Institutions, CIPA: Shariah
Standards & Shariah Governance (SS & SG): Study Text (Bahrain: AAOIFI, 2017), 287.

99 Islamic finance by ensuring the transparency of transactions and
100 protection of depositors’ interests.5
101 Along with the AAOIFI and IFSB, other auxiliary institutions, including the
102 International Islamic Financial Markets (IIFM) and International Islamic Rating
103 Agency (IIRA) as well as national regulators, represent the core of the
104 infrastructure supporting the industry, ensuring Shari‘ah-compliance.
105 Shari‘ah compliance seems to be a term employed distinctively by the IF industry.
106 Although the underlying recognition of the Shari‘ah is seemingly ubiquitous,
107 Shari‘ah-compliant governance, Shari‘ah-compliant education, Shari‘ah-
108 compliant marriage, Shari‘ah-compliant entertainment,6 and so on, are nowhere
109 apparent. Similarly, while Shari‘ah standards for finance (IF, that is) and Shari‘ah
110 standards for accounting (again, for IF) exist, there are no corresponding
111 Shari‘ah standards for business, the economy, management and leadership, or,
112 for that matter, Shari‘ah standards regarding governance. The issue is whether
113 such unique application of the term Shari’ah Compliance to Islamic finance is
114 commensurate with Islam as a comprehensive way of life and the broader
115 socioeconomic objectives.
116
117 3 The Shari‘ah as legalistic construct

118 The importance of the Shari‘ah has been central to the Islamic perspective even
119 though it is seldom recognized that its currently evolved construct as a legal code
120 and framework does not accord with the Qur’anic and Prophetic legacy. In fact,
121 the Shari‘ah is often erroneously equated with Islamic law, whereas Islamic law is
122 more appropriately understood as Fiqh (jurisprudence). At the very least, it needs
123 to be recognized that Shari‘ah and Fiqh are not one and the same7 and merely
124 complying with Shari’ah in a narrow, legalistic sense is neither consistent with
125 the tenet that Islam provides comprehensive guidance for life nor adequate for
126 achieving the broader pursuits and aspirations of societies. Although a detailed
127 discussion of this understanding and interpretation is beyond the scope of the
128 paper, other research8 is both illuminating and, for some, even shocking,
129 regarding the later development of the concept of the Shari‘ah and the term itself
130 which is quite separate from that found in the Qur’an and Hadith. Essentially, a
131 Shari‘ah-centered understanding emerged as the basis for legalistic discourse,
132 where everything related to Islam was subordinated to legal matters, paving the
5 Z. Hasan, Leading Issues in Islamic Economics and Finance: Critical Evaluations

(Singapore: Palgrave-Macmillan/Springer, 2020), 247.
6 As an alternative term, Halal entertainment is becoming widely used.
7 R. Ahmed, Shariah Compliant: A User’s Guide to Hacking Islamic Law (Stanford, CA:
Stanford University Press, 2018).

8 M. O. Farooq and N. El Ghattis, ‘In Search of the Shariah’, Arab Law Quarterly 32(4)
(2018), 315-354.

133 way for legalism to broadly take hold of the Islamic discourse and Muslim
134 societies.9
135 One of the hallmarks of this Shari‘ah construct is seen in the various revivalist as
136 well as radical Islamic groups seeking its “implementation” in the Muslim-
137 majority countries. Unfortunately, the manifestation of this agenda was primarily
138 via the introduction of the Hudood laws (punishment codes) for some specified
139 religious infractions while ridding all that is Islamically prohibited from the
140 society. Ironically, despite the rhetoric and passion for Islam, what was missing
141 throughout was the acceptance and pursuit of the positive aspirations for the
142 broader society, often identified as the Maqasid al-Shari‘ah or higher objectives
143 of the Shari‘ah.10 Even this Maqasid construction (of the Shari‘ah) does not have
144 sufficient specificity to operationalize its tangible realization at the societal level.
145 Addressing such legalistic bias, Farooq (2011) has proffered a value-oriented
146 approach to Islamic law and jurisprudence, calling for the Maqasid al-Islam,
147 instead of Maqasid al-Shari‘ah.11
148 Islamic finance emerged in the context of a legalistic environment. Notably, the
149 original aspiration of the revivalist movement was to effect a renaissance to usher
150 in a comprehensive change charting an Islamic direction.12 A pivotal part of the
151 discourse was to delineate an Islamic economy so that the economies of the
152 Muslim-majority countries would be based on Islamic principles, values and
153 norms.13 However, as Farooq (2020) elucidates, the aspiration for introducing an
9 M. Kamali, Islamic Law in Malaysia: Issues and Development (Kuala Lumpur, Malaysia:
Ilmiah Publishers, 2000), 174; M. O. Farooq and F. Hadi, ‘Islam and Business: Beliefs, Values and
Norms’ in M. al-Shammari, M. Farooq, and H. Masri, Islamic Business Administration: Concepts
& Strategies (London, UK: Macmillan, 2020), 3-17; K. Abou El Fadl, Reasoning with God:
Reclaiming Shari’ah in the Modern Age (New York, NY: Rowman & Littlefield, 2014), 47.
10 H. Visser, H. ‘The Ethics of Islamic Finance’, International Conference of the International
Society for the Intercommunication of New Ideas, 30-31 August, 2018, XIII, Wroclaw,
https://personal.vu.nl/h.visser/2018.The%20Ethics%20of%20Islamic%20Finance.docx,
accessed July 20, 2020; R. Hassan, ‘Reforming Islamic Finance: Why and How?’ Journal of King
Abdulaziz University-Islamic Economics 33(2) (2020), 67-80.
11 M. O. Farooq, Toward Our Reformation: From Legalism to Value-oriented Islamic Law
and Jurisprudence (Herndon, VA: International Institute of Islamic Thought, 2011).

12 M. Mohamad, ‘Islamic Finance as the Means to Revival of Islamic Renaissance’, speech by
PM Dr Mahathir bin Mohamad, 11 November, 2010, https://www.labuanfsa.gov.my/general-

info/media/islamic-finance-as-the-means-to-revival-of-islamic-renaissance, accessed 3 May
2021.
13 S. Mawdudi, ‘Principles and Objectives of Islam’s Economic System’, Criterion (Karachi)
4(2) (1969), 44–58; S. Mawdudi, The Economic Program of Man and Its Islamic Solutions
(Lahore, Pakistan: Islamic Publications, 1975); M. Al-Sadr, Our Economics: Discovery Attempt
on Economic Doctrine in Islam (English translation of Iqtisaduna) (2 vols.), (Tehran, Iran: World
Organization for Islamic Services, 1994); K. Ahmad (ed.), Studies in Islamic Economics
(Leicester, UK: Islamic Foundation, 1980); T. Kuran, ‘The Genesis of Islamic Economics: A
Chapter in the Politics of Muslim Identity’, Social Research, 64:2 (1997), 301–304; M. Chapra,
The Future of Islamic Economics: An Islamic Perspective (Leicester, UK: Islamic Foundation,
2000); M. Chapra, ‘Mawlana Mawdudi’s Contribution to Islamic Economics’, The Muslim World,
94 (2004), 163–180.

154 Islamic economy was deemed too daunting and impractical, after which the focus
155 shifted to IF with its considerably narrower remit and the avoidance of seriously
156 or fundamentally upsetting the status quo, especially concerning those holding
157 the political and economic power.14
158 Making it a perfect fit according to the contemporary post-colonial agenda, the IF
159 enterprise would not be assessed on the basis of the broader objectives or
160 maqasid of Islam,15 but rather on the avoidance of some key prohibitions, like
161 Riba (blanketly equated with interest), Gharar (consequential, avoidable
162 uncertainties in a contract or transaction) and Maisir or Qimar (gambling or
163 excessive speculation). This orientation has been described by some Muslims as
164 well as other scholars and experts as “prohibition-driven”.16
165 Indeed, emphasis on maqasid orientation is still not a major concern, as one
166 Shari’ah scholar stated:
167 [T]he mandates of Shari’ah Supervisory Boards are restricted to opining
168 on whether an Islamic financial transaction complies with Shari’ah and
169 suggested that the regulators could change this by providing larger
170 mandates to Shari’ah Supervisory Boards to help serve maqaṣid al-
171 shari’ah.17
172 Of course, if there is a regulatory mandate the situation can change, but currently
173 the industry is focused on Shari’ah-compliance or “prohibition-driven” mode.
174 Notably, being able to avoid Islamic prohibitions is an important step forward,
175 which can provide foundation for working toward achieving broader aspirations.
176
177 4 Benchmarking for performance of Shari‘ah-compliant finance

178
179 Corresponding to the launch and development of the IF industry, is the robust
180 growth of a whole genre of academic and polemical research work focusing on the
181 field. Concomitantly, the emergence and parallel growth of related
182 undergraduate and graduate academic programs, including’ an entire university
183 specialized in the subject (INCEIF: Global University of Islamic Finance,
14 M. O. Farooq, ‘Islamic Finance Eclipsing Islamic Economics: Causes and Consequences’

History of Economic Ideas, 20(1) (2020), 53-85.
15 T. Moqbel, Evaluating the Shariah Compliance and Operationalising Maqasid al-
Shariah; The Case for Islamic Project Finance Contracts (Durham, UK: Durham University,
2014).
16 M. El Gamal, Islamic Finance: Law, Economics and Practice (Cambridge, MA: Cambridge
University Press, 2010), 8; H. Visser, Islamic Finance: Principles and Practice (Cheltenham, UK:
Edward Elgar, 2013), xii; S. Ali, Modern Challenges to Islamic Law (Cambridge, UK: Cambridge
University Press, 2016), 120.
17 A. Alkhan, ‘The Maqasid al-Shari’ah and Islamic Finance Debate: The Underlying
Philosophy and Perspective of Shari’ah Scholars’, Arab Law Quarterly, 36, 1-31, 15,
https://doi.org/10.1163/15730255-BJA10075.

184 Malaysia), as well as an explosion in books and research papers, both theoretical
185 and empirical, published in a fair number of specialized journals on IF and
186 economics has occurred.18
187 A key focus of most of these works relates to the performance of IF in general and
188 Islamic banking in particular; especially in relation to dual banking systems when
189 comparing the industry and institutions against their conventional counterparts.
190 The performance of the industry is currently assessed according to its latest size
191 estimate (how many trillion dollars), the growth rate of the industry, the range of
192 various Islamic financial products, geographical expansion of the industry across
193 the globe, the extent of Shari‘ah-compliant Islamic activities19 to maintain
194 religious reputation, as well as the profitability and risk associated with Islamic
195 banks and other IF activities. Based on these benchmarks, the industry is hailed
196 as a resounding success.
197 With its modest beginnings in 1975, the industry has reached each successive
198 trillion denominational mark at a faster and faster rate with the performance of
199 Islamic financial institutions becoming comparable to their conventional
200 counterparts. Almost all Muslim-majority countries have some manifestation in
201 the sector, in addition to those with a robust presence. Many western countries
202 have either Islamic banks, Islamic windows through their conventional banks,
203 and/or participation in Islamic capital market activities. Almost all major global
204 financial powerhouses (HSBC, Citibank, Standard Chartered, etc.) have varying
205 degrees of IF activities, especially in the Muslim-majority countries. With the
206 Dow Jones/S&P taking an interest in Shari‘ah-compliant Islamic market indices
207 since 2000, Islamic security market activities have received global attention and
208 awareness. The industry gained additional positive attention once the resilience
209 of Islamic banks was recognized during the 2007-8 crisis when it became
210 apparent they did not suffer the significant losses of their conventional
211 counterparts.20 Non-Muslim luminaries, including the Pope, have called for
212 exploring IF based on its resilient performance.21 As IF gains greater visibility,
213 non-Muslims are exploring the ethical convergence, as exemplified in the
18 Some of the leading journals devoted to the field of Islamic banking, finance and
economics include: Review of Islamic Economics (1991-), Islamic Economic Studies (1993),
International Journal of Islamic and Middle Eastern Finance and Management (2008-), ISRA
International Journal of Islamic Finance (2009-), Journal of Islamic Accounting and Business
Research (2010-), Journal of Islamic Financial Studies (2015-), and many more.
19 A. Bhatti and S. Azmat, Rethinking Islamic Finance: Market, Regulations and Islamic
Law (New York, NY: Routledge, 2018).

20 M. Farooq and S. Zaheer, ‘Are Islamic Banks more resilient during financial panics’,
Pacific Economic Review 20(1) (2015), 101-124.

21 ‘Vatican Paper Supports Islamic Finance, France wants its share of Sharia Banking’, The
Brussels Journal, 2009-03-12, https://www.brusselsjournal.com/node/3819, accessed 30 May

2021.

214 Edinburgh Declaration of 2018 jointly issued by the UK Islamic Finance Council
215 and the Church of Scotland.22
216 Indeed, the in-built positive features of IF provide it with inherently greater
217 stability because Islamic principles require the avoidance of many risk-
218 augmenting activities, including derivatives associated with serious speculative
219 biases23 and short selling with destabilizing impacts.24 However, apart from these
220 aspects, the benchmark to assess the performance and relevance of IF seems to
221 be overly narrow, and it largely fails to capture the broader, positive aspirations
222 of the society. While acknowledging the success of IF from within its currently
223 narrow framework for assessment, attention must be paid to the broader
224 challenges facing societies and the extent to which contemporary IF is duly
225 interfaced or not to contribute toward addressing those challenges.
226
227 5 The limitations of Shari‘ah-compliant finance

228 The central feature of IF is that it is Shari‘ah-compliant. There are two views
229 about Shari‘ah-compliance. The first being that Shari‘ah-compliance essentially
230 incorporates or is based on all relevant Shari‘ah principles. Dismissing the
231 distinction or relevance of the concept of “Shari‘ah-based”, Ali explains:
232 In general, Shariah compliance means adherence and conformity with the
233 Shariah principles. In the context of Islamic financial transactions, this
234 means that all the financial transactions must comply and conform to
235 Islamic law and rules of commercial transactions (ahkam fiqh al
236 mu’amalat). These law and rules on the other hand are derived and
237 deduced from the primary sources of the Shariah (that are Divine in
238 origin), i.e., injunctions of the Quran and the directives and practices of
239 the Prophet s.a.w, normally referred to as the Sunnah; as well as the
240 secondary sources of Shariah that are based on human interpretation and
241 reasoning, whether at the strongest level of ijma’ (consensus of all jurists),
242 or in the form of qiyas, istihsan, istishab, istislah etc. Thus, it is submitted
243 that Shariah compliance originates from a Shariah base or a Shariah
244 framework of principles, injunctions, directives, rules and prohibitions. It
22 R. Paveley, ‘A moral approach to finance’, Church Times, September 28, 2018,
https://www.churchtimes.co.uk/articles/2018/28-september/features/features/a-moral-
approach-to-finance, accessed 25 May 2021.
23 A. Turner, Between Debt and the Devil: Money, Credit and Fixing Global Finance
(Princeton, NJ: Princeton University Press, 2016).

24 E. Avgouleas, ‘The vexed issue of short sales regulation when prohibition is inefficient and
disclosure insufficient’, in K. Alexander and N. Moloney (eds), Law Reform and Financial
Markets (Cheltenham, UK: Edward Elgar, 2011).

245 follows that if an act is Shariah-compliant, it should be considered as
246 Shariah-based as well.25
247 However, as mentioned previously, the alternative understanding is of a relevant
248 distinction or gap and from this perspective Shari‘ah-compliance is basically
249 prohibition-driven, i.e., focused on the avoidance of a few key proscriptions
250 (Riba, Gharar and Maisir, as well as eschewing whatever transaction is forbidden
251 in itself). Shunning prohibitions is an important part of the Islamic way of life.
252 Regardless, however fundamental, these represent only a miniscule aspect of the
253 faith, the vast domain and pursuit of the broader aspirations of life being one of
254 permissibility while avoiding that which is proscribed.26 The following images of
255 a road and its verges serves to provide a useful and relevant illustration by way of
256 analogy.
257
258
259 A standard, modern road requires markers, including a divider for the opposite
260 lane as well as separating the pavement from the roadside. One does not expect
261 proper roads without such markers which are intended for the safety of the road
262 user. Indeed, drivers are required to have a license, which requires that they
263 know the rules so that their presence on the road is compliant with the pertinent
264 laws, regulations and codes. Thus, crossing the yellow divider without reason
265 constitutes a violation of the rules or traffic laws. Similarly, the presence of
266 roadside markers alerts the driver to remain on, not outside, the carriageway.
267 Additional road signs guide the driver in navigation.
268 Keeping road markings in a visible and understandable condition is vital
269 for road safety. They help road users to navigate the road systems, making
25 E. Ali. (n.d.). ‘Shariah-compliant to Shariah-based Financial Innovation: A question of
Semantics or Progressive Market Differentiation’, http://irep.iium.edu.my/35516/3/Session_1_-

_Dr_Engku_Rabiah.pdf, accessed 20 May 2021.
26 Y. Al-Qaradawi, The Lawful and the Prohibited in Islam (Cairo, Egypt: Al Falah
Foundation, 2000).

270 us aware of upcoming hazards and of key bits of information to help us
271 drive appropriately for the situation.27
272 For the sake of pertinence, the roadside is incidental to the road, which, itself, is
273 subservient to the fundamental desire to achieve movement towards an intended
274 destination, not just the instrumentality of being, driving or moving on its
275 surface. In the context of this analogy, the markers can be viewed as prohibitions,
276 while the road itself represents life with all its aspirations and goals ahead in
277 addition to having to address the attendant problems and challenges. By being
278 Shari‘ah-compliant or prohibition-driven, the IF industry is primarily focused on
279 the roadside, not the road. To appreciate the relevance of this illustration, it is
280 important to bring the collective, broader life into the picture.
281 As Zubair Hasan, 2009 IDB laureate for his contribution to Islamic economics
282 and finance, posits about the real limitation of the industry:
283 The compulsions for unidirectional convergence have put experts and
284 scholars alike under pressure to make Shariah norms somehow adaptable
285 to the demands of modern finance and its increasingly willful mechanisms.
286 Islamic finance now operates more as a supplement to the conventional
287 system, rather than in parallel as a competitor. This has made public
288 opinion in the Muslim world turn to another presumably more potent
289 issue: the convergence between the instruments Islamic finance has been
290 using, and their compliance with Shariah norms.28
291 Indeed, the current Shari‘ah-compliant mode, especially as part of the dual
292 banking system, has not earned greater confidence from the Muslim population,
293 where, instead of posing real competition to its counterpart, it is preoccupied
294 with matching the performance of conventional finance and celebrating that as
295 its main success. While Shari‘ah-compliance, as a means towards the avoidance
296 of key prohibitions, is indispensable from the viewpoint of Islam our greater
297 concern should be about Shari‘ah-compliant finance when it is branded ‘Islamic’
298 finance”. This is because Islam involves a great deal more than merely addressing
299 the forbidden, its real story being in dealing with life to fulfil its needs and
300 aspirations while avoiding the few specified prohibitions. Using the label “Islamic
301 finance” to achieve Shari‘ah-compliance alone can be regarded as an inadvertent,
302 but important, misrepresentation. So, what would be more desirable in this
303 context? Would it not be to identify the broader challenges facing the society to
304 attempt to address those in light of its major aspirations, which might move the
305 matter of assessment from merely Shari‘ah-compliance to “Islam-compliance”?
27 “What is the importance of road markings,”
https://www.threecountieslining.co.uk/news/importance-road-
markings#:~:text=Keeping%20road%20markings%20in%20visible,drive%20appropriately%20f
or%20the%20situation, accessed 25 May 2021.
28 Hasan, supra note 5, 264.
10

306 It needs to be noted that in pursuit of such a shift to Islam-compliance, one
307 should not hold Islamic finance industry or blame it because the broader
308 challenges, problems or aspirations are not a task or responsibility that can be
309 shouldered by any one industry, including Islamic finance industry. Such a shift
310 requires a paradigmatic change toward a broader conceptual and policy
311 framework, involving all relevant stakeholders in a society. It is correctly argued
312 by one of the Shari’ah scholars, Sheikh Fareed Hadi:
313 Islamic finance cannot be held accountable for achieving maqasid of a
314 whole Islamic economy … [T]here might be a perception that Islamic
315 finance is responsible for achieving the maqasid of an Islamic economy …
316 [but] there are other components within an Islamic economy that needs to
317 contribute into achieving maqaṣid.29
318 One of the leading Shari’ah scholars, Sheikh Nizam Yaquby echoes Sheikh Hadi
319 and articulates:
320 Islamic finance has been generally criticised for not fulfilling maqaṣid.
321 However, when you read many of the writings in this regard, you realise
322 that there might be a certain perception from those who write in the area
323 of maqaṣid. For example, it seems they are writing about macro-economic
324 issues, such as distribution of wealth, elimination of poverty, economic
325 development, etc. However, it is not fair to put all these major maqaṣid on
326 the shoulders of Islamic banks – it is not a fair presumption. This is
327 because achieving such major maqaṣid is not solely the mandate of Islamic
328 banks. This is the mandate of a whole Islamic state […] the Islamic
329 economy of any Islamic system must be drawn from these objectives [...].30
330
331 Sheikh Yaquby’s elucidation is right on target, because as pointed out in this
332 paper, pursuing and achieving broader aspirations of the society cannot be
333 shouldered by any specific sector, including Islamic finance industry. However,
334 even just as one key stakeholder of the economy, does the industry have any
335 relevant role to play? Notably, the acknowledgment that the industry’s
336 fundamental mandate and preoccupation are Shari’ah compliance, and not
337 anything more than that are quite revealing. The attitude of those who are
338 intimately involved with the industry clarifies that the problem is not just that the
339 burden of broader aspirations cannot be placed on Islamic finance industry, but
340 also that its main mode would be Shari’ah compliance [avoiding what is haram
341 and provide services “in a halal way”, as stated by Sheikh Yaqubi.
342
343 […] No Islamic banks kept in their articles of association that they will
344 eradicate poverty, or achieve the equal distribution of wealth, or
345 participate in the entire economic development of the country, etc. This is
346 something beyond their capability, this is the responsibility of an entire
29 Alkhan supra note 17 at 25.

11

347 government – it is a fiscal policy issue which must be dealt with on a
348 macro-level by any state that endeavours to get itself developed, and all
349 the state plan such as the ministries of education, information, economy,
350 awqaf, etc., must be goaled towards these ends. Therefore, to ask Islamic
351 banks to do all this – Islamic banks never claimed that they will achieve
352 these goals; of course no doubt they will participate in it, no doubt, but
353 their main platform is to allow Islamic banking customers to buy, sell,
354 trade, deposit, etc., in a ḥalal way.31
355
356 Thus, there is an entrenched perception and stance that the contemporary
357 Islamic finance is correct in its focus on Shari’ah compliance in a narrow sense.
358 However, with almost half a century’s experience with the industry, there is an
359 expectation that building on the achievement of its current Shari’ah compliant
360 mode, a broader, more holistic approach and perspective is indispensable, if we
361 all care about those broader aspirations.
362
363
364 6 Goal-orientation and problem-solving approach in a value-

365 oriented perspective
366 Almost without exception, Muslim-majority countries have a set of persistent,
367 fundamental problems to overcome: (1) poverty and deprivation of basic needs;
368 (2) the high rate of unemployment or underemployment coupled to a
369 dysfunctional education system; (3) the various ways people are exposed and
370 vulnerable to exploitation and injustice; (4) entrenched and widening inequality
371 as a function of the concentration of wealth; (5) ecological imbalances
372 threatening the collective human existence; (6) the many systemic misalignments
373 in the economy32 and in governance;33 and (7) widespread or endemic corruption
374 due to bad governance. Of course, these are by no means unique to the Muslim-
375 majority countries, however, since this article concerns Islam it is natural to
376 narrow the focus to the Muslim world.
377 While not being the responsibility or liability of any particular group or sector in
378 the society these problems require solutions such that all relevant parties and
379 sectors have a role to play, including the financial sector in general34 and IF

32 D. Wu, and D. Olson, D. Pandemic Risk Management in Operations and Finance:
Modeling the Impact of Covid-19 (Cham, Switzerland: Springer, 2020); G. Bitros, ‘Destabilizing
asymmetries in central banking: With some enlightenment from money in classical Athens’, The
Journal of Economic Asymmetries 23 (2021), https://doi.org/10.1016/j.jeca.2021.e00199,
accessed 25 May 2021.
33 A. Klettner, ‘Corporate Governance and the Global Financial Crisis: The Regulatory
Response’, in T. Clarke, and D. Branson (eds), The SAGE Handbook of Corporate Governance
(London, UK: Sage, 2012), 557.
34 J. Zhuang, H. Gunatilake, Y. Niimi, M. Khan, R. Hasan, N. Khor, A. Martin, P. Bracey and
B. Huang, ‘Financial Sector Development, Economic Growth, and Poverty Reduction: A
12

380 industry in particular. The issue is whether the industry is duly interfaced with
381 the broader society to synergistically address these challenges.
382 Indeed, as detailed above, the emergence of the industry was part of the broader
383 aspiration of the society to seek a healthy, robust and balanced transformation in
384 an Islamic direction. In any society, the financial sector plays a key role in its
385 economic development.35 The same is applicable to the IF industry, as, unless the
386 industry wants to remain sidelined (at the roadside) with the burden shouldered
387 by the sector’s conventional counterparts or non-financial sectors, the industry
388 and sector itself needs to be synergistically interfaced, otherwise the broader
389 aspirations cannot be achieved.
390 Part of the challenge of the IF industry is that it has emerged and operates as a
391 stand-alone enterprise. As illustrated in Figure 1, financial institutions are part of
392 a financial system. Unfortunately, Islamic financial institutions do not operate in
393 a compatible Islamic financial system. Instead, they are generally part of a dual
394 banking system while also being interfaced with the
395 global financial system that does not reflect Islamic
396 principles, values or parameters. Additionally, a
397 financial system is part of an economic system, but
398 Muslim-majority countries do not have economic
399 systems that reflect the principles, values and
400 parameters of Islam. In turn, an economic system is
401 part of a larger society or social system. The reality
402 is that these societies in general do not reflect
403 Islamic principles, values and parameters. Thus, IF
404 activities primarily occur within the framework of
405 Islamic financial institutions, without being Figure 1: Systemic interfaces
406 embedded in a financial system, in an economic system or in a society that
407 broadly reflects Islamic norms. Thus, it is no wonder the IF industry operates in a
408 constrained or handicapped ecosystem and the higher expectation of
409 transitioning beyond mere Shari‘ah-compliance, avoiding a few key prohibitions,
410 might not be warranted.
411 From the perspective of the Islamic banks, they are offering a Shari‘ah-compliant
412 alternative to their conventional counterparts, thereby allowing Muslims to avoid
Literature Review,” Asian Development Bank Economics Working Paper Series #173 (2009),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1617022, accessed June 5, 2021.
35 E. Ahmad and A. Malik, ‘Financial Sector Development and Economic Growth: An
Empirical Analysis of Developing Countries’, Journal of Economic Cooperation and Development

30(1) (2009), 17-40; L. Jungsoo, ‘Financial Sector and Economic Development: A Survey’, ADB
EDRC Reports (1991), https://www.adb.org/publications/financial-sector-and-economic-
development-survey, accessed June 10, 2021; A. El Tiby and W. Grais, Islamic Finance and
Economic Development: Risk Management, Regulation and Corporate Governance (Hoboken,
NJ: Wiley, 2015).
13

413 the forbidden, which, in itself, is a compelling service. However, could this be the
414 industry’s real limitation, or is it an artificially self-imposed constraint in the
415 sense that it does not want to go beyond avoiding certain prohibitions? There is
416 good evidence to believe the latter reason might better accord with reality. From
417 Islamic as well as society’s Islamic perspective, life is not just about prohibitions
418 – there is more to life than just avoiding the impermissible.
419 A healthy, prosperous society wants to see, for example, the maximum
420 employment of its labor force to ensure the basic needs are fulfilled, to eliminate
421 exploitation, avoid corruption and, in the contemporary context, also see the
422 climate crisis tackled. Regardless of the financial input, a set of macro problems
423 or challenges must be resolved or addressed as well as certain collective
424 aspirations pursued and achieved. This matches the case of the road in relation to
425 one’s destination or goal-orientation; not just existing at the roadside.
426 Considering the seven challenges outlined above, there is a clear sense that being
427 Shari‘ah-compliant does not enable finance to be properly and adequately
428 interfaced with those challenges. To be so, requires the consideration of a number
429 of aspects in connection with Shari‘ah-Compliant Finance (SCF), as opposed to
430 Islamic Finance (IF). As will be elaborated here, IF, in its currently narrow
431 framework of SCF, could be broadened and thereby considered as Islam-
432 Compliant Finance (ICF), which is the theme of this paper. Notably, a time may
433 come when the distinction between IF and ICF may disappear, when IF would
434 not be merely Shari’ah compliant (i.e. prohibitions-driven), rather it would be
435 duly interfaced with the broader aspirations of Islam and society.
436
437 6.1 Recognition and acknowledgement of the gap

438 All those involved with the enterprise of Shari‘ah-Compliant Finance (SCF) need
439 to understand, recognize and acknowledge the gap between SCF and ICF; any
440 relevant change can only come about from this acknowledgment. Those who are
441 convinced Shari‘ah-Compliance (i.e., the avoidance of prohibition) is all that is
442 required and to aspire to will not find the conceptualization presented here
443 relevant. It is envisaged that the current gap between SCF and ICF should not be
444 difficult to recognize or acknowledge. If it is argued there is no such gap or that it
445 is not important and does not need addressing, then the issue is how will the
446 Shari‘ah-compliant finance industry address the broader challenges of society;
447 for more on this read on.
448
449 6.1.1 ICF requires a compatible and supportive national development framework
450 Whether concerning SCF or conventional finance (CF), achievement of the
451 broader goals of a society requires an economy duly aligned to pursue such aims
452 within the relevant national development framework. As SCF operates at the level
14

453 of the national economy, as well as being part of the global financial and
454 economic system, the gaps mentioned earlier are inevitable. The countries within
455 the Muslim world that have exhibited better economic development,
456 experiencing healthy growth and expansion of SCF, have been supported by a
457 relatively cohesive, robust and assertive development framework. Without it, the
458 simple existence and operation of SCF does not automatically transform the
459 economy toward achieving any broader aspirations.
460 Instead of placing the responsibility of addressing the challenges on the
461 shoulders of the SCF industry – meanwhile the industry remains satisfied with its
462 current level of prohibition-driven services – the role of finance, as part of ICF, is
463 possible only when the industry works cohesively within a national system which
464 provides comprehensive and facilitating support to it. Currently, that is not
465 happening. Neither the SCF industry has a discernible and explicitly articulated
466 interest in pushing for an economy-level transformation nor does the broader
467 system and national governance in most cases have an interest in developing
468 such an economy which will allow finance to serve it for society to fulfill those
469 aspirations.36
470
471 6.1.2 ICF requires mapping out the industry’s role and activities to reach
472 specific, impact-oriented goals
473 While an economy and national framework focused on macro-goals or
474 aspirations is a must, that by itself will not ensure the desired outcome, unless
475 the role of the financial sector is mapped out to or interfaced with those goals and
476 aspirations, along with performance benchmarks to assess the impact and
477 progress over the long run.
478 For example, poverty alleviation programs, like the microcredit movement
479 exemplified by the Grameen Bank or Bangladesh Rural Advance Committee
480 (BRAC), have shown meaningful, substantive and replicable results because they
481 have framed the challenge of poverty as a problem while attempting to address it
482 in a problem-solving manner.37 Consider the case of Zakat, which is a
483 foundational Islamic duty on qualified Muslims, a part of which is supposed to be
484 allocated to the poor (fuqara) and the destitute (miskin). One of the reasons
485 Zakat has not had a long-term impact in reducing poverty is because most people
486 only consider it a religious duty. Qualified Muslims calculate their Zakat and give
487 to another relevant party directly as eligible recipients of the charity or to Zakat-
488 related institutions, thinking they have discharged their religious obligation in
489 the process. They have neither consciousness nor interest nor engagement to see
490 to it that their Zakat is systematically and methodically used to reduce poverty by
36 Farooq, supra note 14.

37 There are limitations of such poverty alleviation too, but the problem-solving focus of the
initiative has produced a net positive outcome for millions of people.
15

491 elevating the poor over the poverty threshold thereby gradually transforming
492 those who receive it into those who pay it. Which is why a mapped-out and
493 benchmarked approach becomes obligatory, whereby, via a problem-solving
494 approach, a plan based on relevant research is formulated to address existing
495 poverty leading to a visible, tangible and recorded impact.38
496
497 6.1.3 ICF requires a reconceptualization of the real economy

498 One of the distinctions claimed by industry advocates is that all SCF transactions
499 or activities are asset-linked (meaning, they are either asset-based or asset-
500 backed, but in practice most are asset-based). This is claimed to be evidence of
501 the close connection of SCF to the real economy.39 However, a real-economy
502 orientation involves more than just being asset-linked, especially if what this
503 entails is asset-based; accordingly, six aspects are involved:
504 At the simplest level, the real economy can be conceptualized in terms of
505 the dynamics of production, consumption, trade, technology, institution,
506 and human capital.40
507 Absent an understanding of the dynamics involving these six aspects, one is
508 unable to properly deal with the real economy. And, to achieve the broader
509 aspirations of society, finance must be duly interfaced with the full spectrum of
510 the real economy; of course, within a prioritized framework.
511
512
513 6.1.4 ICF requires structural changes in the current Islamic banking structure
514 At the outset of the SCF industry, no examination of the various options or novel
515 ideas and solutions available was conducted, resulting in its adoption of the
516 structure of conventional commercial banking. Dominated by the global financial
517 powerhouses, the fundamental problems associated with the conventional
518 financial superstructure, contributing to the ever-increasing concentration of
519 wealth and resultant widening inequality, have been duly inherited (Glattfelder,
520 2010; Glattfelder, 2013).41
38 M. Farooq, ‘The Challenge of Poverty and Mapping Out Solutions: Requisite Paradigm
Shift from a Problem-Solving and Islamic Perspective’, Journal of Islamic Economics, Banking
and Finance 5(2) (2009), 45-76.
39 M. Kahf, ‘Islamic Banking and Development: An Alternative Banking Concept?’ (2005),
http://monzer.kahf.com/papers/english/ISLAMIC_BANKING_AND_DEVELOPMENT_March_
2005_IN_HASSAN_AND_LEWIS_HANDBOOK.pdf, accessed May 27, 2021.
40 M. O. Farooq and M. Selim, ‘Conceptualization of the Real Economy and Islamic Finance:
Transformation Beyond the Asset-Link Rhetoric’, Thunderbird International Business Review

61(5) (2018), 685-696, 687.
41 J. Glattfelder, ‘Ownership Networks and Corporate Control: Mapping Economic Power in a
Globalized World’, Dissertation #19274 (ETH, Switzerland: 2010); J. Glattfelder, ‘Decoding
16

521 The same financial superstructure also fosters the spreading gap between the real
522 and financial/monetary sector, leading to increasing financialization involving
523 the rise of the financial sector where financial capitalism pushes the players in
524 the financial sector to try to acquire wealth without making the relevant
525 contribution to the real economy. Financialization was partly but significantly
526 responsible for the last global financial crisis.
527 Furthermore, if increasing wealth ownership, as part of the vision and philosophy
528 of shared prosperity, is recognized and upheld from the Islamic perspective,
529 commercial banking structures that engage customers as no more than
530 depositors and borrowers is incompatible with that goal.
531 Farooq (2019) makes the case for a collective approach based on the Qur’anic
532 commandment of Ta‘awun or cooperation (5/al-Ma’ida/2) which is a
533 fundamentally neglected area in the context of SCF, with the concept itself
534 reduced or confined to Takaful or Islamic insurance only.42
535 ICF requires that the currently adopted banking structure be fundamentally
536 altered or at least the framework broadened to adopt a more cooperative
537 framework, like credit unions, within an Islamic framework.
538
539 6.1.5 ICF requires broadening its sector coverage and more diversified risk-
540 taking
541 Unlike interest-based conventional banking and finance, one of the claimed
542 distinctions of SCF is that it is based on fair risk-sharing.43 Due to this
543 distinction, common equity-based products are also idealized, but in reality,
544 because of the risk-averse44 nature of commercial banking as institutions of
545 financial intermediation, Islamic banks have shunned and marginalized profit-
546 loss sharing (PLS) type products and services as part of their portfolio of
547 activities.
complexity: uncovering patterns of economic network’, PhD dissertation, Swiss Federal Institute
of Technology (Springer, Berlin: 2013).
42 M. O. Farooq, ‘Banking Structure and Riba-Interest Equation: The Case for Ta’awuni
(cooperative) Finance’, Journal of Islamic Financial Studies 5(2) (2019), 90-108.

43 M. El Gamal, ‘An Economic Explication of the Prohibition of Riba in Classical Islamic
Jurisprudence’, Islamic Economic Studies 8(2) (2001), 29-58.

44 H. Askari, Z. Iqbal, N. Krichene and a. Mirakhor, Risk-sharing in Finance: The Islamic
Finance Alternative (Singapore: John Wiley and Sons, 2012).
17

548 Unfortunately, associated with the claim of fair risk-sharing,45 SCF is primarily
549 characterized by risk-shifting/transfer and risk-avoidance.46 SCF’s tendency
550 towards risk-shifting is illustrated by its overwhelming emphasis on contracts
551 that replicate the types of conventional transactions that yield fixed, guaranteed
552 (or indicative but predictable) return. Thus, exchange-based, debt-creating
553 products, including Murabaha, Salam, Istisna’, Tawarruq, Bai al-Ina, and service-
554 based products like Ijara, fees, etc. dominate those banks’ portfolios which are
555 SCF based.
556 As far as risk-avoidance is concerned, SCF-based activities are mostly focused on
557 trade or cash financing. Modern economies need robust activities in agriculture,
558 industrial/manufacturing and other entrepreneurial sectors, which are indeed
559 riskier. Thus, like conventional banks, as far as these sectors are concerned, SCF-
560 based banks usually operate in risk avoidance mode.47
561 As ICF aims to address the challenges faced by a given society, as well as the goals
562 it wants to achieve, financial institutions, according to the due structural and
563 other changes required, need to embrace and serve each of the key sectors of the
564 real economy.
565
566 6.1.6 ICF requires rising above legalism and embracing “value orientation”
567 Laws and legal frameworks are indispensable aspects of human societies. A
568 society needs law for the safety and protection of our rights as citizens and
569 human beings from potential abuses by others, whether individuals,
570 organizations or even governments. Among the many vital purposes of the law,
571 setting standards, maintaining stable order, minimizing conflict and resolving
572 disputes, as well as protecting legitimate rights feature prominently. However,
573 when the overreaching influence of law causes a society to fall victim to legalism,
574 then its very purpose is very likely to be undermined.
575 Like many other societies, Muslims have also fallen victim to legalism. Under the
576 influence of literalism and a jurisprudential-centered understanding of Islam, the
45 A. Diallo and A. Suayb, Sustainable Development and Infrastructure: An Islamic Finance

Perspective (Cham, Switzerland: Palgrave Macmillan, 2021); Seif El-Din, ‘Income Ratio, Risk-
Sharing and the Optimality of Mudarabah’, Journal of King Abdulaziz University: Islamic
Economics 21(2) (2008), 37-59.
46 S. Lajis, ‘Fintech and Risk-Sharing: A Catalyst for Islamic Finance’, in M. Zulkhibri and T.
Manap (eds), Islamic Finance, Risk-Sharing and Macroeconomic Stability (Cham, Switzerland:
Palgrave Macmillan, 2019), 237-254. Lajis (2019) refers to risk avoidance as “[an] immoral act
and thus is abhorred in Islam as it entails ‘earning money without effort’ ” and that it is “rampant
by way of transferring and shifting the risk exposures to others” (p. 239). Obviously, this
reference to risk avoidance is at the transactional or microjuristic level. The connotation in which
risk avoidance is mentioned here is in its broader sectoral sense.
47 M. Asutay, ‘Islamic Banking and Finance: Social Failure’, New Horizon, 169 (October-
December 2008), 1-3.
18

577 gap between form and substance, or between the legal and spiritual dimensions,
578 has become more pronounced. A pivotal work of Farooq (2011) documented and
579 exposed to a nicety the grip of legalism on Muslim societies according to much of
580 the orthodox legal tradition, whereby, in the name of Shari‘ah and Fiqh, much of
581 Islam has been turned upside down, in particular justice and fairness, despite the
582 fundamental role of values.48 Correspondingly, the presence of laws, rules and
583 codes prevail contrary to the principle of justice.
584 O believers! Stand firm for justice as witnesses for Allah even if it is against
585 yourselves, your parents, or close relatives. Be they rich or poor, Allah is
586 best to ensure their interests. So do not let your desires cause you to
587 deviate ˹from justice˺. If you distort the testimony or refuse to give it, then
588 ˹know that˺ Allah is certainly All-Aware of what you do. (4/an-Nisa/135)
589 It is generally assumed that where something can be determined to be based on
590 the Qur’an and Sunnah then the laws concerned (Ahkam; Fiqh) will have been
591 derived in connection with the Shari‘ah and thereafter the principle of justice is
592 assumed to be axiomatically fulfilled. The stark reality, however, could not be
593 further from the truth. This is because, in the case of something known with
594 unambiguous certainty from the Qur’an and incontrovertible Prophetic
595 narrations, the laws based on these sources cannot but reflect justice. However,
596 much of what is known as the Shari‘ah, and by the same token Fiqh, is based on
597 human interpretation, and, since human interpretation is fallible, there is always
598 the possibility the laws and codes so derived may or may not reflect justice,
599 especially regarding ever-changing contexts and circumstances. In light of this
600 potential gap, scholars like Ibn Qayyim (d. 1350 AD) underscored the centrality
601 of values like justice throughout Islamic discourse in general and legal discourse
602 in particular.
603 The principles and fundamentals of the Sharia concerning the injunctions
604 and the good of humankind in this life and the next are all based on
605 justice, mercy, the good of man, and wisdom. Every situation in which
606 justice succumbs to tyranny, mercy to cruelty, goodness to corruption,
607 wisdom to foolishness, has nothing in common with the Sharia, even if it is
608 the result of an allegorical interpretation [Ta‘wil]. For the Sharia is the
609 justice of God among His servants, the mercy of God among His creatures,
610 His shadow upon His earth, and His wisdom, which is both the proof of
611 His own existence and the best witness to the authenticity of His
612 Prophet.49
613 If the compendium of Islamic law axiomatically attends to concerns of justice and
614 welfare, then Ibn al-Qayyim’s perspective would be redundant or superficial.

49 Ibn al-Qayyim, I’lam al-muwaqqiin an rabb al-alamin, 3 (undated), 3,
http://islamport.com/w/qym/Web/3167/806.htm, accessed May 29, 2021.
19

615 Anything based on fallible human interpretation requires circumspection in
616 derivation, formulation, and, especially, the enactment of laws. In terms of justice
617 and welfare, without explicit consideration of the impact on society and
618 individuals, the outcome is not guaranteed. When Shari‘ah – presently suffering a
619 form of myopic reductionism at the hands of Muslims – is reduced to laws, rules,
620 and codes the beauty, balance, wholesomeness, and efficacy of Islam’s role in
621 human life is fundamentally compromised. Which is why the prevailing concept
622 and framework of Shari‘ah-compliance is inadequate to achieve the broader
623 imperatives of Islam, and the need to move beyond Shari‘ah-compliance, Islam-
624 compliance is an imperative.
625
626 6.1.7 ICF seeks a prosperity-sharing, Zulm-free, world which is broader in scope
627 than just a Riba-free world
628 A world free of hunger and poverty is a value-oriented goal not a legal
629 imperative. Because of the teaching of the Prophet(s), “He is not a believer whose
630 stomach is full while his neighbor goes hungry,”50 a Muslim society does not
631 imprison satiated people who care not for the hunger and poverty around them;
632 this being a matter of value or principle, not law.
633 The Islamic conception concerning transacting one’s life is that it should fulfill all
634 human needs and aspirations without indulging in extravagance and waste.
635 “O children of Adam! Wear your beautiful apparel at every time and place
636 of prayer: Eat and drink but waste not by excess, for Allah loves not the
637 wasters. Say: ‘who has forbidden the beautiful gifts of Allah which He has
638 produced for His servants and the things clean and pure (which He has
639 provided) for sustenance? Say: They are in the life of this world, for those
640 who believe, (and) purely for them on the Day of Judgment. Thus, do We
641 explain the signs in detail for those who understand.” (7/al-A’raf/31-32)
642 A legalistic, literalist and form-oriented understanding of Islam cannot go beyond
643 feeding the hungry when they knock at the door asking for food. This is sad and
644 unfortunate because the commandment to feed the hungry is not meant to just
645 satisfy a person asking for food, rather it is to sensitize everyone to feed the
646 hungry at the moment of need while also systematically working together to
647 eliminate hunger so that people do not have to knock at each other’s doors
648 seeking sustenance in the first place. This is part of the true legacy of Islam and
649 the Prophet(s). Chapter (Surah) 76 of the Qur’an is known as al-Insan and
650 addresses human beings, mentioning believers in the following way:
651 They are those who fulfil their vows and fear a Day of sweeping horror,
50 Sunan al-Kubra al-Baihaqi, 19049/18099,
https://www.abuaminaelias.com/dailyhadithonline/2012/08/12/not-believer-neighbor-hungry/,
accessed May 28, 2021.
20

652 and give food—despite their desire for it—to the poor, the orphan, and the
653 captive,
654 saying to themselves, “We feed you only for the sake of Allah, seeking
655 neither reward nor thanks from you.” (76/al-Insan/7-9)
656 The spirit of these verses cannot be realized merely through laws or legalistic
657 approaches. It requires human-empathy and human-centered development
658 where fundamental human dignity is recognized and upheld, and the system or
659 society collectively ensures an environment and framework where people can live
660 productive and high-quality lives. To meet such Islamic values and achieve these
661 broader aspirations Shari‘ah-compliance, focusing merely on avoiding
662 prohibitions, is fundamentally deficient.
663 Inspired and guided by the Qur’an, Muslims envision a Zulm-free world free of
664 injustice and exploitation, based on shared prosperity. Every relevant sector or
665 stakeholder needs to synergistically work toward such a Zulm-free environment.
666 The financial sector, being pivotal to the economy, must play its part too. When
667 its role is constrained according to mere Shari‘ah-compliance, a Riba-free (or, as
668 commonly claimed, interest-free) world might result, but that does not
669 automatically translate to a Zulm-free world, especially in contemporary societies
670 broadly impacted by rent-seeking enterprises and behavior.51
671
672 6.1.8 ICF seeks to remove the harms of Riba with the benefits of other Halal
673 provisions, including Qard Hasan
674 One glaring deficiency of SCF is reflected in its partial approach to the core
675 teachings of Islam, to embrace and uphold Islam comprehensively especially in
676 respect of not avoiding or neglecting any major aspects of the holistic Deen
677 (religion).
678 O you who believe! Enter into Islam wholly; and follow not the footsteps of
679 the evil one; for he is to you an avowed enemy (2/Al-Baqara/208).
680 So, do you believe in part of the Book and disbelieve in part? Then what is
681 the recompense for those who do that among you except disgrace in
682 worldly life; and on the Day of Resurrection they will be sent back to the
683 severest of punishment. And Allah is not unaware of what you do (2/al-
684 Baqara/85).
685 Concerning the relevance of these verses in the context of this paper, prohibitions
686 like Riba (usury) are an indispensable part of Islam. Just as a believer cannot
51 M. O. Farooq, ‘Exploitation, Profit and the Riba-Interest Reductionism’, International
Journal of Islamic and Middle Eastern Finance and Management 5(4) (2013), 292-320; M. O.
Farooq, ‘Rent-Seeking Behaviour and Zulm (Injustice/Exploitation) Beyond Riba-Interest
Equation’, ISRA International Journal of Islamic Finance 11(1) (2019), 110-123.
21

687 embrace and uphold other of its aspects while ignoring the prohibition on Riba, it
688 is equally important that its required avoidance must also go alongside the other
689 imperatives of Islam. One particular aspect especially relevant in connection with
690 Riba is the Qur’an’s categorical prohibition of the practice and therefore the
691 consensus among Muslims that it is Haram. However, concomitant with the
692 staunch Qur’anic prohibition, wherein Allah and His prophet(s) declare war
693 against those practicing Riba, is the mandate to facilitate the fulfilment of
694 people’s needs. This explains why, before prohibiting Riba as part of building a
695 Zulm-free world, the Qur’an provided facilitating aspects as guidance with which
696 to prepare society. A relevant account from the opening chapter of mankind
697 involves the story of Adam and Eve. When created and placed in Paradise they
698 were told its entirety and amenities were theirs to enjoy, except for a single
699 prohibition:
700 And We said, ‘O Adam! You and your wife dwell in this Garden, and eat
701 freely from it wherever you please – but do not approach this tree for you
702 will become of those who transgress.’ (2/al-Baqara/35)
703 Notice God’s initial guidance towards the provisions of life for its easement prior
704 to prohibiting or restricting something. The same applies in the case of the key
705 prohibition concerning Riba; before broaching the subject, prior to its categorical
706 prohibition, the Qur’an specifically draws attention to Qard Hasan, loaning in the
707 name of God, with a reward promised for such in the hereafter.
708 Who is the one who would give Allah a good loan [Qard Hasan] so that
709 Allah multiplies it for him many times? Allah withholds and extends, and
710 to Him you are to be returned (2/al-Baqara/245)
711 Interestingly, Qard Hasan can encompass interest-free loans as well.
712 Before broaching the issue of Riba, the Qur’an spends several verses (2/al-
713 Baqarah/270-274) discussing Infaq (spending), a pursuit not necessarily
714 synonymous with charity or donations.52 Rarely mentioned or acknowledged is
715 the significance of this, that the Qur’an in the first instance indicates what is
716 needed for people to conduct a life with facility and dignity followed by the
717 invocation of relevant prohibitions (e.g. Riba in this case). It follows that, even on
718 the basis of Riba, human life cannot be restricted leading to financial hardship
719 without first ensuring a Halal (permissible) and abundantly available recourse.
720 Notably, the verses covering Riba in Surah al-Baqara are further predicated by
721 juxtaposing Riba and Sadaqah (charity).
52 A. Ibrahim, R. Alatrash and M. O. Farooq, ‘Hoarding versus Circulation of Wealth from the
Perspective of Maqasid Al-Shari’ah’, International Journal of Islamic and Middle Easter Finance
and Management 7(1) (2014), 6-21.
22

722 Allah will deprive Riba of all blessing, but will give increase for deeds of
723 Sadaqah: For He loves not creatures ungrateful and wicked. (2/al-
724 Baqarah/276)
725 The stipulated prohibition of Riba is inseparable from a society’s provision of
726 ample Sadaqah and Infaq for its various needs. While the Qur’an simply invokes
727 this as an imperative, the ways of sharing resources can be of various types,
728 including Zakat, Sadaqah, Waqf, Qard Hasan, etc., the key being society’s right in
729 respect of access to the resources of designated people (those possessing the
730 Nisab) and the responsibility to extend their “surplus”.
731 And they ask you what they should spend. Say, "The excess or surplus
732 [beyond needs]." Thus, Allah makes clear to you the verses [of revelation]
733 that you might give thought (2/al-Baqara/219)
734 Explaining the Qur’anic designations of Riba as Haram and trading/exchange as
735 Halal, Saeed draws attention to an often overlooked point, according to 2:275
736 Riba (i.e. Haram) and profit (i.e. Halal) stand juxtaposed, however, profit is
737 presented as permissible not an imperative (unlike the imperative to avoid Riba).
738 In the subsequent verse (2:276) the Qur’an in this context alternatively contrasts
739 Riba with Sadaqah.53
740 It must be noted there does not appear to be a contrast between Riba and profit.
741 Instead, the analogy appears to be between Riba and Sadaqah. Two points
742 support this view: firstly, the Qur’an does not go on to exhort trade (Bay’), but
743 merely states its lawfulness; secondly, immediately after, verse 2:276 contrasts
744 Riba and Sadaqah as per the Qur’an in verse 30:39 where the term Zakat appears
745 to be synonymous with Sadaqah. Confirmation of the existence of this
746 relationship between Sadaqah and Riba is provided by the well-known exegete,
747 al-Razi (d.606/1209). Furthermore, Fazlur Rahman, an influential and
748 Modernist Pakistani scholar states:
749 According to the Qur’an, the opposite of riba is not bay’ (trade) but sadaqa
750 (charity). The prevailing confusion about the problem, we submit, was due
751 to riba and bay’ being considered opposed to each other. The result was the
752 juristic hair-splitting was substituted for the moral importance attaching to
753 the prohibition of riba.54
754 This Riba-Sadaqa contrast is of profound relevance, which will be further
755 elaborated (vide infra). Focusing on Riba and other prohibitions constitutes
756 Shari‘ah-compliance, parallel to which involves building a system, as well as a
757 relevant framework based on available resources, to achieve the positive
758 aspiration of “Islam-compliance”. Unfortunately, our pursuit in the field of
53 A. Saeed, Islamic Banking and Interest: A Study of the Prohibition of Riba and its
Contemporary Interpretation (Leiden, Netherlands: Brill, 1996), 25-26.

54 F. Rahman, ‘Riba and Interest’, Islamic Studies 3(1) (1964), 1-43, 31.
23

759 finance is now stuck in a narrowly defined and understood mode – Shari‘ah-
760 compliance.
761
762 7 The conceptualization and operationalization of “Islam-

763 compliance”
764
765 The notion of Shari‘ah-compliance, so distinctively used in the context of IF, has
766 led to the emergence of Shari‘ah, Accounting, Audit, Regulatory and other
767 Standards, as derived by the likes of the AAOIFI and IFSB and national
768 regulators. In some cases, Islamic Financial Institutions (IFIs) in various
769 jurisdictions have their own Shari‘ah Supervision Boards (SSB) for setting such
770 standards. However, as the industry needed better standardization, both in the
771 global and national context, the relevant government authorities, including the
772 central banks, recommended or mandated the adoption of these standards to
773 secure banking licenses to operate Islamic banks, with the AAOIFI’s standards
774 covering products, accounting, governance, and ethics, while the IFSB’s
775 standards primarily focusing on addressing regulatory concerns.
776 Before proceeding further, it is important to note that while IF as an industry has
777 grown steadily and robustly since its modern inception in the 1970’s, its
778 contribution to the developmental imperatives of various economies still remains
779 vague and unspecified. As exemplified in the statement of one of the leading
780 industry personalities, Shaikh Muhammad Taqi Usmani in his 2002 book, the
781 reality is quite inconclusive. He writes:
782 Once, during a press conference in Malaysia, the author was asked a question
783 about the contribution of the Islamic Banks in promoting the Islamic
784 economy. My reply to the question was apparently contradictory. I said ‘they
785 have contributed a lot and they have contributed nothing’.55
786 To many, who are not familiar with Shaikh Usmani’s assessment, this might seem
787 shocking, but his observation is quite illuminating. He elaborates:
788 When it was said that they have contributed a lot, what was meant is that it
789 was a remarkable achievement of the Islamic banks that they have made a
790 great breakthrough in the present banking system by establishing Islamic
791 financial institutions meant to follow Shari‘ah. It was a cherished dream of the
792 Muslim Ummah to have an interest-free economy, but the concept of Islamic
793 banking was merely a theory discussed in research papers, having no practical
794 example. … It was indeed a courageous step on the part of the Islamic banks
795 to come forward with a firm resolution that all their transactions will conform
55M. Usmani, An Introduction to Islamic Finance (London, UK: Kluwer Law International,
2002), 111.
24

796 to Shari‘ah and all their activities will be free from all transactions involving
797 interest.56
798 Shaikh Usmani mentioned another contribution of Islamic banking, due to its
799 development a significant number of Shari‘ah scholars engaged themselves with
800 the enterprise to deal with the practical aspects of business and finance, and in so
801 doing, “the wheel of evolution of [the] Islamic legal system has re-started.”57
802 What accounts for the opposite sentiment in relation to the contributions of the
803 IFIs, however? After detailing some specific deficiencies (as practiced) of IF,
804 Usmani points out the following:
805 According to the Islamic principles, business transactions can never be
806 separated from the moral objectives of the society. Therefore, Islamic banks
807 were supposed to adopt new financing policies and to explore new channels of
808 investments which may encourage development and support the small scale
809 traders to lift up their economic level. A very few Islamic banks and financial
810 institutions have paid attention to this aspect. Unlike the conventional
811 financial institutions who strive for nothing but making enormous profits, the
812 Islamic banks should have taken the fulfillment of the needs of the society as
813 one of their major objectives and should have given preference to the products
814 which may help the common people to raise their standard of living. They
815 should have invented new schemes for house-financing, vehicle-financing and
816 rehabilitation-financing for the small traders. This area still awaits attention
817 of the Islamic banks.58
818 This somber assessment of the disconnect between IF and the “fulfillment of the
819 needs of the society” is eye-opening, once again demonstrating precisely why
820 Shari‘ah-compliance is limited in scope and commitment because its priority and
821 focus is the avoidance of prohibitions rather than meeting the broader needs and
822 aspirations of society.59 Identifying the “social failure” of Islamic banking and
823 finance (IBF), Asutay highlights the disappointment.
824 [D]espite such a novel origin, with the internationalisation and
825 unprecedented growth in their assets base and financing since 1980s, the
826 lives of Muslim individuals have not been significantly affected by such
827 development of IBF, as the social dimension is limited to zakat and other
828 non-systematic charitable activities, which negates systematic economic
829 development. … the value addition of IBF to the local economy has further
830 declined, and the contribution of IBF for economic development through
831 real economy has been rather elusive.60
56 Ibid.
57 Ibid, 112.
58 Ibid, 115.
59 M. Asutay, ‘Islamic moral economy as the foundation of Islamic finance’, in V. Cattelan
(ed), Islamic Finance in Europe: Towards a Plural Financial System (Cheltenham, UK: Edward
Elgar, 2013), 55-68.
60 Asutay supra note 47 at 2.
25

832
833 Iqbal and Mirakhor acknowledge the underexploited potential of IF.

834 the concepts of Islamic finance are not fully explained and exploited—
835 especially in the areas of economic development, inclusion, access to
836 finance, and public policy.61
837 While there are a multitude of empirical works on the relative performance of
838 Islamic banks, there are very few empirical works documenting the impact of IF
839 (or SCF, to be more specific) on economic development. Even the few works in
840 the subject are usually only focused on economic growth rather than broader
841 economic development. In a study of 13 states covering the 2000-2014 period,
842 Boukhatem and Moussa found, “strong evidence to suggest that financial system
843 development stimulated economic growth in the selected MENA countries over
844 the studied period. Furthermore, … while Islamic financial development can
845 boost economic growth, this positive effect is hindered by underdeveloped
846 institutional frameworks.”62 Their conclusion adds credence to the
847 conceptualization of the real economy by Farooq (2018) wherein the dynamics of
848 such includes six components, including institutions.63 Indeed, the general
849 impact of banking on development is not an empirically settled matter.
850 Boukhatem and Moussa cite a number of studies that document a positive
851 impact, while others show negative to inconclusive results. They also found the
852 experience of IF ambiguous, “The combined results of empirical studies in this
853 area therefore remain inconclusive about the question of whether the
854 development of Islamic banks promotes economic growth.”64
855 A fundamental problem with the lack of relevant studies resides in the context of
856 SCF as these are not its concerns, leave alone its effect being mapped out to
857 achieve certain broader developmental goals and measurement of its impact. This
858 is where the relevance of Islam-compliance beyond mere Shari‘ah-compliance
859 becomes an imperative. However, this raises the issue of the practical or applied
860 nature of Islam-compliance, how would it be distinguished from the application
861 of Shari‘ah-compliance in IF and beyond?
862
863 7.1 Islam-compliance and a national development framework

864 How a country develops and addresses its core economic problems is not a
865 mystery. While there are differences in the experience of the developed (western)
Z. Iqbal and A. Mirakhor (eds), Economic Development and Islamic Finance (Washington,
61
DC: World Bank Publications, 2013), 1.

62 J. Boukhatem and F. Moussa, ‘The effect of Islamic banks on GDP growth: Some evidence
from selected MENA countries’, Borsa Istanbul Review 18(3) (2018), 231-247.
64 Boukhatem and Moussa, supra note 62.
26

866 versus the emerging economies, in the case of the latter the prerequisite of a
867 planned development framework has been instrumental. There is a robust
868 literature as well as accumulated practical experience related to economic
869 development, the details of which are beyond the scope of this paper. The essence
870 of such development frameworks and public leadership can be summarized
871 according to the following priorities:
872 (1) Elimination of poverty and fulfillment of the basic needs for all, which is
873 part of the notion of shared prosperity.
874 (2) Reduction of high rates of unemployment or underemployment and
875 development of a functional and productive education system.
876 (3) Elimination of the ways people are subjected to economic exploitation and
877 injustice.
878 (4) Reformation of the system that structurally contributes to entrenched and
879 widening inequality, including concentration of wealth, while spreading
880 ownership of capital and wealth.
881 (5) Address ecological imbalances threatening the entire ecosystem and
882 embracing sustainable development.
883 (6) Removal or minimization of many systemic misalignments in the
884 economy.
885 (7) Elimination or significant reduction of corruption and bad governance.
886 Any country wanting to pursue Islam-compliance at the national level to achieve
887 human-centric development for sustainable, shared prosperity, while avoiding
888 what is prohibited, cannot avoid integrating these priorities into their national
889 development framework. The real and robust benefits of IF can be duly harvested
890 in the context of a development framework to which all the sectors, including the
891 financial sector, must be appropriately aligned. Such a framework will provide
892 the necessary ecosystem where sectors, institutions and various stakeholders can
893 synergistically pursue and contribute to Islam-compliant development. An Islam-
894 compliant national development framework and ecosystem would become the
895 enabler for IFIs to play a role, not only to gain profit as commercial institutions
896 but also incentivized to operate to take relevant initiatives and risks.
897
898 7.2 Islam-compliance at the institutional level

899 The macro priorities mentioned in the previous section can be mapped out in a
900 problem-solving manner and benchmarked for assessing the progress of national
901 targets. Representing the public sector, governments can provide leadership in
902 establishing the ecosystem to engage the commercially oriented, private sector to
903 synergistically achieve the broader goals of Islam-compliance. However, although
904 government may or will do what it is supposed to do or what it can, how does this
905 relate to IFIs and what can they do at the institutional level?
27

906 In this paper, the scope to offer detailed possibilities is limited. However, some
907 indicative observations and suggestions based on the notion of Islam-compliance
908 can be made to provoke further exploration.
909 First and foremost, though IFIs have made a valuable contribution through
910 Shari‘ah-compliant finance (SCF) before any improvement can take place
911 acknowledgment of the gap between SCF and Islam-compliant Finance (ICF) is
912 required. If the industry is thoroughly satisfied with SCF constituting “Islamic”
913 Finance without acknowledging the gap then the likely outcome is that the notion
914 of ICF would be dismissed and business will continue as usual.
915 Secondly, once acknowledged, together with the realization that the burden of
916 ICF would not entirely devolve to the IFIs with their indispensable role in the
917 comprehensive national undertaking, IFIs need to identify the areas in which
918 they can play their part. Some potential ideas are presented as examples below.
919
920 7.2.1 Risk diversification toward promoting businesses in the area of business,
921 manufacturing and agriculture
922 As mentioned earlier, on the banking side the industry is primarily focused on
923 trade and cash/liquidity financing, limiting its engagement from contributing to
924 other important and broader sectors of the economy. Broadening the scope of
925 engagement would involve taking risks beyond those currently entertained, but
926 within a nationally supported framework where the government can facilitate
927 such activities either through public-private partnership, which will reduce the
928 risk on the part of the financial institutions, or through other incentives for the
929 financial institutions to cover additional or special risk.
930
931 If the regular banking framework is found unsuitable for undertaking these types
932 of enterprises, considering the Islamic/Qur’anic concept of cooperation
933 (Ta‘awun), IFIs could establish a consortium to fund them, particularly in the
934 area of agriculture and manufacturing. Of course, government can further
935 incentivize such financing through agreeing to share part of the risk.
936
937 7.2.2 Mobilizing all relevant resources – savings and investment

938
939 In section 6.1.8 above, the Qur’anic imperative of Infaq (spending) and its
940 surplus (‘Afwu) was discussed. It is important to note here that Infaq not only
941 covers consumer spending or charity, but also the facilitation of resources
942 available to society in the form of investment for profit and not-for-profit
943 activities. A fundamental pitfall in thinking among Muslims is not utilizing
944 Qur’anic guidance and the Prophetic legacy for systematic problem-solving. The
945 concept of Infaq and the duty of utilizing the surplus are often thought of only at
28

946 the individual or, at most, the institutional but not at the systematic level. Except
947 for the mandated alms, per the obligatory duty upon qualified Muslims, society is
948 supposed to utilize its surplus in positive and creative ways through the allocation
949 of Zakat, Sadaqa, Waqf, and, especially, Qard Hasan to contribute toward solving
950 its major problems.
951 In the Muslim world the institution of Waqf (endowment) is often utilized toward
952 funding orphanages and mosques, but rarely for more long-term impact-oriented
953 purposes like education, health, research or creating income-earning
954 opportunities for the deprived and disadvantaged. Without mobilizing these
955 resources and without utilizing the mobilized resources in a benchmarked,
956 problem-solving manner, it is not possible to harvest all the potential benefits.
957 The contemporary concept of “social business”, introduced and advocated by
958 Nobel Laureate Muhammad Yunus, is pertinent65 (Yunus, 2009) where the
959 surplus can be made available to various sustainable, socially relevant enterprises
960 to help achieve better fulfillment of basic needs, create income-earning
961 opportunities, spread ownership alongside reducing inequality while also helping
962 address the existential global ecological threat.
963 Another key area of neglect is the mobilization of Qard Hasan. The Qur’an
964 emphatically draws attention to Qard Hasan to the extent that God is presenting
965 himself as the borrower, so that all the good deeds humans do and all the Infaq
966 engaged in, in the path of and for the sake of Allah, will be rewarded multi-fold.
967 Qard Hasan should not be built into the profit-oriented commercial banking and
968 finance framework. The relevance of Qard finance relates not only to social
969 business and microfinance, with emerging works showing how Qard Hasan can
970 be built into the monetary policy as part of central banking instruments (Selim,
971 2019; Selim, 2020).66
972
973 7.2.3 Incentivizing a set of priorities that enhance ICF

974 Business projects seeking IFI financing can be evaluated according to their
975 relevance in enhancing ICF for the broader economy. Based on an appropriate
976 evaluation, such projects can be interfaced with government incentives like tax
977 benefits or even subsidies. The question regarding why IFIs as commercial
978 (profit-oriented) institutions should offer such incentives may appear legitimate
979 from the perspective of SCF, where the concern is the avoidance of prohibitions,
65 M. Yunus, Creating a World Without Poverty: Social Business and the Future of
Capitalism (New York, NY: Public Affairs, 2009).
66 M. Selim, ‘The effectiveness of Qard-al-Hasan (interest free loan) as a tool of monetary
policy’, International Journal of Islamic and Middle Eastern Finance and Management 12(1)
(2019), 130-151; M. Selim and M. K. Hassan, ‘Qard-al-Hasan-based monetary policy and the role
of the central bank as the lender of last resort’, Journal of Islamic Accounting and Business
Research 11(2) (2020), 326-345.
29

980 but this is not a valid proposition from the ICF angle because it is expected from
981 all stakeholders to perform their due part and facilitation in the society and
982 economy. Moreover, there exists a profitable angle too. An economy cannot grow
983 merely through financing trade-related activities and consumption. As people’s
984 income generally come from their participation in the production of goods and
985 services, which allows them to earn and gradually boost to a higher and higher
986 income, more people have access to the productive means from which they
987 generate rising income and wealth providing an overall gain for the financial
988 institutions as well. IFIs often tend to focus on each transaction at the micro
989 level, rather than looking at the big picture. So, what are the areas where IFIs,
990 working with or without the public sector, can incentivize various activities?
991
992 7.2.3.1 Projects or enterprises that have meaningful job creation impact
993 Generally, banks as financial intermediaries do not consider the matter of job
994 creation among their concerns. This is because their main concern is to
995 determine the risk and return from the parties seeking financing. As long as the
996 parties are creditworthy and the prospective project is potentially profitable, post
997 due diligence, banks approve the application. IFIs are no exception here either,
998 as, apart from the consideration of risk and return, the only additional matter in
999 evaluating an application for finance is Shari‘ah-compliance.
1000 Conversely, ICF requires the creation of employment opportunities. Under ICF,
1001 an IFI will have a template with which to consider various potential impacts in
1002 relation to several ICF priorities. The employment effect of a project would be an
1003 important concern and the application will contain information about relevant
1004 impact analysis focusing on the aspects required. If the employment impact
1005 analysis appears reasonable, the applicant can receive certain flexibility or
1006 concessions regarding the terms of the contract.
1007
1008 7.2.3.2 Projects or enterprises that are compatible with sustainable development
1009 and thus due regard for environmental concerns
1010 Sustainable development did not traditionally feature among the concerns of
1011 financial institutions, including IFIs. In recent decades, there is growing
1012 recognition of the climate crisis with the finance industry, at both the
1013 international and national level, embracing sustainable development as a key
1014 priority.67 As more institutions attempt to incorporate Sustainable Development
1015 Goals (SDGs) into their vision and operation, impact-oriented guidelines from
67 S. Zimmermann, ‘Same same but different: How and why banks approach sustainability’,
Sustainability 11 (2019), 1-20; Ernst & Young (Tapestry Network), ‘How banks are defining and
internalizing sustainability goals’, May 7, 2020, https://www.ey.com/en_bh/banking-capital-
markets/how-banks-are-defining-and-internalizing-sustainability-goals, accessed 20 May 2021.
30

1016 relevant international organizations and national entities have emerged.68 These
1017 guidelines include reporting and self-assessment, impact analysis, target setting,
1018 plans for target implementation and monitoring.
1019
1020 7.2.3.3 Projects or enterprises that may enhance the fulfillment of the basic
1021 needs of the broader population
1022 Basic needs fulfillment is a national agenda not related to any specific sector.
1023 Since the introduction of the Basic Needs Approach (BNA) in the 1970s it has
1024 given rise to more comprehensive approaches, including the paradigm of
1025 Sustainable Development, but the thrust of BNA remains embedded in
1026 subsequent theoretical and policy developments.
1027 [BNA’s] main foundation is a consequentialist ethic that argues that a good
1028 society is one in which all people will be able to meet their basic needs. A
1029 person is said to be poor if he or she is unable to meet his or her basic needs.
1030 In general, BNA is more concerned with poverty experience in the present
1031 than with long-run growth per se and more concerned with inequality in the
1032 distribution of growth’s benefits than its absolute speed.69
1033 Renowned economist Manfred Max Neef aptly articulated (Braun, 2019):
1034 That the aim of development must be neither producerism nor consumerism,
1035 but the satisfaction of fundamental human needs, which are not only needs of
1036 humanity, but needs of being as well.70
1037 A society that embraces the vision of having the basic needs of its people fulfilled
1038 requires the mobilization of ALL the resources and institutions for this purpose,
1039 including the financial sector in general and its financial institutions. With the
1040 public-private synergy, financial institutions can incentivize those businesses that
1041 cater to producing and distributing goods and services to serve the basic needs.
1042
1043 7.2.3.4 Projects or enterprises that contribute to spreading ownership

1044 A key aspect of economic development that helps address people’s need through
1045 income-generating employment opportunities is to gradually spread the
68 Societe Generale, ‘Principles for Responsible Banking’, 2021,

https://www.societegenerale.com/sites/default/files/documents/2021-
04/Societe%20Generale_Principles%20for%20Responsible%20Banking_Report%20and%20Self
-Assessment_2021.pdf, accessed 22 June 2021.
69 D. Watson, “Poverty and Basic Needs’, in P. Thompson and D. Kaplan (eds.), Encyclopedia
of Food and Agricultural Ethics (New York, NY: Springer, 2014), 1539-1535.
70 A. Braun, ‘The 7 Basic Human Needs That Successful Businesses Focus On’, Entrepreneur
2019, https://www.entrepreneur.com/article/337055, accessed June 21, 2021.
31

1046 ownership of wealth. Societies that care about this have found many ways to
1047 facilitate spreading ownership.
1048 In many developed countries people-oriented businesses utilize the Employee
1049 Stock Ownership Program (ESOP). According to the National Center for
1050 Employee Ownership, there are more than 6,600 ESOPs covering, conservatively
1051 estimated, 32 million employees in the US. There are an additional 3,800 profit
1052 sharing and stock bonus plans that are also like ESOPs. Several big US
1053 corporations, e.g., Publix with 200,000+ employees, are majority owned by their
1054 employees, while many more companies are also wholly employee-owned. These
1055 organizations believe in human- or people-centered business and the benefits of
1056 such a structure is obvious. Public incentives for ESOPs include tax benefits
1057 according to designated categories, like S and C corps.71 ESOPs are a great way to
1058 spread ownership to enhance the fulfillment of the Qur’anic imperative not to
1059 allow wealth to circulate among a few rich people (59/al-Hashr/7).
1060
1061 7.2.3.5 Projects or enterprises that harness the power of cooperation (Ta‘awun)
1062 and institutional profit-sharing
1063 Islam emphatically calls for building relationships and enterprises based on
1064 cooperation (Ta‘awun) (5/al-Ma‘ida/2). Not only is the theme of cooperation as
1065 well as cooperatives terribly underdeveloped and underexplored in the Islamic
1066 context, even within IF the idea of cooperation has been relegated to insurance or
1067 Takaful alone. According to the modern conventional context, a broad discourse
1068 about cooperation and cooperatives exists, together with the niche field of
1069 “cooperative economics”.72
1070 Unfortunately, the area of IF has neither benefited from the Qur’anic imperative
1071 of Ta‘awun nor has it exploited the robust experience of cooperative thinking and
1072 enterprise. First of all, those interested in IF (or, more correctly, finance from an
1073 Islamic perspective corresponding to the “Islam-compliance” framework
1074 presented here) should be thinking about building various types of enterprises
1075 based on cooperation. Secondly, governments with a genuine and comprehensive
1076 interest in IF should foster an environment and develop a policy framework to
71 “Why Companies Love ESOPs?” https://esopassociation.org/articles/why-companies-
love-esops, accessed 10 June 2021.

72 T. Sager, Bibliography of Cooperative Economics, 1929-1975 (Vance Bibliographies,
1979); J. Bonin and L. Putterman, Economics of Cooperation and the Managed Economy (New
York, NY: Routledge, 2001); M. Young, How to Fix the Future (Using Cooperative Economics),
Lulu.com, 2012; J. Restakis, Humanizing the Economy: Co-operatives in the Age of Capital (BC,
Canada; New Society Publishers, 2010); J. Dawson, H. Norberg-Hodge, A. Bates, A. Hancock and
G. Dismukes, Cooperative Economics and Creating Community (Createspace Independent Pub,
2013); G. Patmore and N. Balnave, A Global History of Co-operative Business (New York, NY:
Routledge; 2018); J. Roumasset and S. Barr (eds), The Economics of Cooperation: East Asian
Development and the Case for Pro-Market Intervention (New York, NY: Routledge, 2019).
32

1077 support an economy based on cooperation. Thirdly, IFI’s should duly incentivize
1078 impact-oriented, cooperation-based enterprises by offering financing at a lower
1079 rate or engage with them via various PLS modes as part of mutually beneficial
1080 risk-sharing.73
1081 Furthermore, while PLS has relevance at the contractual level, there is a need for
1082 institutional profit-sharing, which can be accomplished through ESOPs or other
1083 relevant ideas, for the owners to believe in and practice the value of a Shared
1084 Economy.74
1085
1086 7.2.3.6 Projects or enterprises that optimize local resources for greater domestic
1087 value added
1088
1089 Even though the nostalgia for a single Ummah (community) persists, the reality
1090 is the Muslim world consists of a collection of deeply fragmented independent
1091 nation states. Thus, each economy must find its competitive place in the world,
1092 including the Muslim world. Many Muslim-majority countries in Asia and Africa
1093 still lag in terms of benefiting from increasing their added domestic value. Even
1094 the oil-rich rentier economies are finding it difficult to transition to the age of
1095 sustainability. And, then there are the countries in Africa rich in natural
1096 resources, yet unable to duly benefit from these because of low added domestic
1097 value.
1098 As the governments of these countries evolve an independent development
1099 framework, autonomous from their colonial legacy, finance in general and IF in
1100 particular can help by offering incentives to the businesses that contribute
1101 additional local value.
1102
1103 7.2.3.7 Projects or enterprises that uphold best ethical practice to avoid
1104 economic injustice and exploitation
1105
1106 While injustice and exploitation are difficult to quantify, everyone knows it when
1107 seen or experienced. The world is full of economic injustice and exploitation.
1108 Furthermore, the rich have the political power to subvert the public interest by
1109 distorting or manipulating the policy-making authorities and regulators to their
1110 advantage. As societies recognize the need for – to embrace – the culture of good
73 UNDP IICPSD, ‘I for Impact: Blending Islamic Finance and Impact Investing’, (Istanbul,
Turkey: United National Development Programme and Istanbul International Center for Private
Sector in Development, 2017); V. Cattelan (ed), Islamic Social Finance: Entrepreneurship,
Cooperation and the Sharing Economy (New York, NY: 2018).
74 See several such exemplary cases in Farooq and Hadi, supra note 9.
33

1111 governance it is eminently possible to confront and address the current
1112 exploitative scenario.
1113 For example, the government as well as private organized groups can establish
1114 institutions that monitor and gather information about unjust, illegal or unethical
1115 labor practices (corresponding to very low wages not reflective of the profitability
1116 of the enterprise or sector; non-payment of compensation; breach of contract;
1117 holding of migrant labor hostage by not allowing them free movement or through
1118 withholding their passports; exploitation of migrant labor via sponsorship
1119 systems; lack of labor standards; child labor, etc.).
1120 By law, firms or businesses demonstrating a record of injustice and exploitation,
1121 documented through legal indictments or widespread client complaints, could be
1122 denied financing. Conversely, those companies with a solid, positive record in
1123 this respect could be afforded concessional rates of financing.
1124
1125 8 Conclusions
1126
1127 This paper makes the case that when the term Shari‘ah-compliance is employed,
1128 while this means the avoidance of certain prohibitions, it does not
1129 comprehensively reflect the positive imperatives of Islam; which is why Shari‘ah-
1130 compliance is better understood as prohibition-driven, Halal finance.
1131 Halal or Shari‘ah-compliance is fundamentally important as a necessary
1132 condition for finance to be “Halal”, but not sufficient for it to be “Islamic”. This
1133 accounts for the gap between what “Islamic” finance should be and what
1134 Shari‘ah-compliant finance is. This requires recognition as the first step toward
1135 addressing, from the Islamic perspective, the broader challenges facing societies.
1136 That’s the context in which the notion of “Islam-compliance” becomes relevant.
1137 To become “Islam-compliant” requires that the burden should not rest entirely
1138 on the shoulders of IFIs. Rather, it has to be part of a broader, national
1139 undertaking with the financial sector in general and Islamic finance sector in
1140 particular playing their privileged part.
1141 Several key areas, which involve both the public and private sectors, are
1142 identified as potential ways of designing suitable interventions. While many of
1143 these ideas are already separately in practice throughout various parts of the
1144 world, synthesizing a coherent and robust pathway for the Muslim-majority
1145 countries to deal with their broader problems requires them embarking on their
1146 own journey of learning. Some of these ideas may prove beneficial and others
1147 may not. The main purpose of the paper, however, is to provoke a discourse on
1148 thinking beyond “Shari‘ah-compliance” to engage all stakeholders to think in
1149 terms of “Islam-compliance” with the aim of identifying their respective roles
1150 therein to have the desired impact.
34

1151 Importantly, the changes desired are not necessarily expected to originate from
1152 the IF sector or its institutions, with the exception of the odd visionary or
1153 conscientious industry leader. There are already some powerful stakeholders and
1154 players getting too comfortable with the status quo. Desired change to a large
1155 extent has to be demand driven. The people, the users of finance, must also have
1156 their role in demanding that while they appreciate the notion and framework of
1157 Shari‘ah-compliance, they also need their broader challenges addressed in a
1158 problem-solving manner, for which they are not satisfied with the currently
1159 narrow definition of Shari‘ah-compliance; rather there needs to be purposive,
1160 impact-oriented “Islam-compliance”.
1161
1162 Table 1. Shari‘ah-compliance vs. Islam-compliance
Shari‘ah-compliance Islam-compliance
Scope Prohibition-driven Goal-oriented, while respecting
prohibitions
Approach Micro-juristic Comprehensive
Economic philosophy Compatible with conventional Human-centered development
Level Limited to transactional or Takes into account macro or
institutional considerations economy level considerations
Sector focus Primarily trade-financing and All pertinent and eligible
consumer financing sectors, but inclusive of
development-leading sectors,
e.g., agriculture,
manufacturing, etc.
Risk Primarily Risk-shifting; risk- Appropriate risk-taking, but
avoiding duly risk-sharing
Spreading ownership Little to no role in spreading Spreading ownership as a key
ownership role
Profit-sharing Transactional Transactional plus institutional
Employment creation Unconcerned A key concern
Sustainability Not a Shari‘ah requirement A fundamental requirement,
focusing on both
intragenerational and
intergenerational fairness
Inequality and Unconcerned An important concern, as per
concentration of wealth the Qur’anic imperative [59/7]
Prohibitions Main concern, which is valid A key consideration, but as part
and a must. of a concern about Zulm and
exploitation.
Seeks a Riba-free world, but The aim being a Zulm-free
not necessarily a Zulm-free world, and thus usury-free
world world as well
1163
35

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1 Islam-compliance, beyond Shariah-compliance:

2 Toward a broader socioeconomic transformation

4 Mohammad Omar Farooq

7 [Pre-publication Author Manuscript: July 2022; For published version, contact

29 Keywords: Islamic, Islamic finance, Shari‘ah-compliance, Islam-compliance,

Electronic copy available at: https://ssrn.com/abstract=4159917

60 2 Shari‘ah-compliance, the hallmark distinction of Islamic Finance

1 W. Grais, W. and M. Pellegrini, Corporate Governance and Shariah Compliance in Islamic

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2 A. Alkhamees, A Critique of creative Shariah compliance in the Islamic finance industry

Standards (Bahrain: AAOIFI, 2010).

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117 3 The Shari‘ah as legalistic construct

5 Z. Hasan, Leading Issues in Islamic Economics and Finance: Critical Evaluations

Stanford University Press, 2018).

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and Jurisprudence (Herndon, VA: International Institute of Islamic Thought, 2011).

PM Dr Mahathir bin Mohamad, 11 November, 2010, https://www.labuanfsa.gov.my/general-

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177 4 Benchmarking for performance of Shari‘ah-compliant finance

14 M. O. Farooq, ‘Islamic Finance Eclipsing Islamic Economics: Causes and Consequences’

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Law (New York, NY: Routledge, 2018).

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227 5 The limitations of Shari‘ah-compliant finance

22 R. Paveley, ‘A moral approach to finance’, Church Times, September 28, 2018,

(Princeton, NJ: Princeton University Press, 2016).

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25 E. Ali. (n.d.). ‘Shariah-compliant to Shariah-based Financial Innovation: A question of

Semantics or Progressive Market Differentiation’, http://irep.iium.edu.my/35516/3/Session_1_-

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27 “What is the importance of road markings,”

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29 Alkhan supra note 17 at 25.

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364 6 Goal-orientation and problem-solving approach in a value-

31 Alkhan supra note 17 at 27.

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437 6.1 Recognition and acknowledgement of the gap

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36 Farooq, supra note 14.

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