Judicial Decision-Making in Islamic Banking and Finance

Abstract

In a globalized economy it is important for Western lawyers and investors to understand Islamic banking and finance. Islamic banking’s rapid growth in the past two decades has come as surprise to many in the financial markets. More surprising is that the legality of most financial transactions is decided by a select group of jurists sitting on Shari’ah Supervisory Boards. Islamic banking is a financial system governed by the Shari’ah. Many often misperceive Islamic banking as traditional financial practices veiled in Islamic legal fiction. This misconception is due in part to a lack of understanding of the Islamic legal principles and the process by which jurists form those principles. In recent years the legal opinions of these jurists have been subject to unfair criticism from both Western and Islamic scholars. In response to the criticism and scant discussion of judicial decision-making in Islamic jurisprudence this paper analyzes the judicial decision-making of the jurists on Shari’ah Supervisory Boards.In doing so this paper provides a background into Islamic banking, relevant concepts of the Shari’ah, and offers a framework for comprehending the judicial decision-making regulating financial institutions. The paper examines two methods of judicial-decision making, legalism and the economic theory, as they apply to the jurists on Shari’ah Supervisory Boards. Although viewed as distinct theories, I argue that the holistic nature of the Shari’ah inevitably weaves the two methods together. Legalism is the best means of analyzing the judicial decisions that determine Shari’ah compliance. By adding the element of piety to the economic theory of judicial decision-making I further argue that pecuniary income plays a limited role and that jurists prefer piety to other economic elements. Thus, the added element of piety directs Islamic jurists to strictly adhere to religious texts. I conclude that ultimately piety motivates the jurists to use legalism, as legalism generates a sincere attempt at interpreting Divine law and limits the jurist’s liability before AllahSWT.Finally the paper calls for a broader discussion on whether Western theories of judicial decision-making, and therefore concepts of legal realism, should be used to analyze Islamic jurists. While the influence of non-legal factors on the U.S. judiciary has been readily discussed and empirically tested by Western academics, there is inadequate dialogue among scholars of the Shari’ah. Although the religious and non-governmental nature of Islamic jurists helps insolate or limit the effect of some non-legal elements, it would be naive to assume that economic, political, strategic, or psychological influences are completely absent from the decision-making process. Accordingly, the paper concludes with a series of hypotheticals expanding Western theories of judicial decision-making to Islamic jurisprudence.