Applicability of Church Autonomy and Religious Question Doctrines to the ShariiAh Board in Islamic Financial Institutions

Abstract

Shari’a is the divine law of Islam. The Islamic Finance Industry provides financial products in accordance with Shari’ah, i.e. Shari’ah-compliant products. In 2010, financial experts estimated the worth of Shari’ah-compliant assets at almost 1 trillion dollar globally. Islamic finance practice is not limited to Sharia-based legal systems. UK is ranked as 9th country in holding Shari’ah-compliant assets while United States is home of at least nine financial institutions that provide Shari’ah-compliant products. It means that a large portion of Islamic finance transactions is conducted in a non-Islamic legal environment. Hence, Islamic financial institutions use a business model which is based on reference to Islamic legal norms that are not enforced as the law of the state. Under this model, a Shari’ah board — consisting of Islamic scholars — verifies compliance of the financial products with Shari’ah, and its verification is a required condition prior to the contract. However, since Shari’ah is arguably a governing law of the contract— along with a law of financial centers e.g. New York or London — the contract can be challenged on the ground that it does not comply with Shari’ah before a court; a concept referred to as “Sharia risk”. This paper examines the interplay between the ex-ante determination of compliance of an Islamic finance transaction by Shari’ah board and its ex-post determination by a court in the United States where the religious question and church autonomy doctrine bar the court from adjudicating a religious question.