Notional Selection: Form and Substance in Islamic Finance
In the preface to “Major Barbara”, the Noble Prize-winning playwright George Bernard Shaw wrote that “[t]he universal regard for money is the one hopeful fact in our civilization, the one sound spot in our social conscience…Not the least of [money’s] virtues is that it destroys base people as certainly as it fortifies and dignifies noble people.” Thus, the very process of wealth accumulation justifiably demands prudence and forethought, and should not always devolve into a zero-sum game. In seeming recognition of the ‘negativity’ of money as a store of wealth and as a medium of exchange, Islamic financial doctrine has evolved to become a primarily prohibition-driven industry, one that, inter alia, purports to curb individual irrationality. As Rice University Professor Mahmoud A. El-Gamal puts it in his 2006 book “Islamic Finance: Law, Economics, and Practice”, “Islamic jurisprudence introduces injunctions that aim also to protect individuals from their own greed and myopia.”

It is important, according to the book, to recognize that finance as it was originally envisaged in a classical Islamic context, especially in view of the prohibitions against ‘riba’ and ‘gharar’, was intended, among other things, to contribute to transaction efficiency. How Islamic financial jurisprudence ‘transitioned’ from a largely prohibition-based construct to a present-day form-centric standard and the implications of such a transition on the evolution of Islamic financial doctrine are the primary subject matters that Professor El-Gamal explores in the book. According to El-Gamal, Islamic finance as it is practiced today (by volitional choice or in mandatory adherence to Shari’a principles) is underpinned by rent-seeking practices that place emphasis on legal arbitrage, at the risk of ignoring altogether the ethical and moral foundations of classical Islamic financial doctrine. For instance, the book takes a dim view of the legal intricacies involved in structuring asset-backed leasing bonds or ‘sukuk’. El-Gamal contends that not only such legal maneuvering is unnecessarily intricate, but a sukuk’s rather unwieldy structure may also impose deadweight efficiency losses on the part of the sukuk issuer.

The convergence of Islamic financial practices with western financial norms is a mixed blessing. Conformity to shari’a-compliant but legal arbitrage-motivated transaction modes, El-Gamal argues, is self-defeating: not only do such practices disregard the aims of Islamic law, but the focus on financial engineering (i.e., synthesizing or substantially replicating conventional Anglo-Saxon financial forms and contracts for Islamic markets with a view towards promoting such synthetic forms and contracts as ‘Islamicized’ investment instruments) may eventually constrain the growth of the Islamic finance sector by, among other things, alienating prospective clients among the burgeoning Muslim middle class. For modern Islamic banking and finance to become transaction-efficient, truly Shari’a-compliant, and relevant to the investment needs of the Muslim middle class, Professor El-Gamal recommends a industry-wide shift in emphasis from the contemporary focus on financial formalism and legal structures to placing greater importance on the social and ethical aspects of Islamic economic jurisprudence. If, in the words of George Bernard Shaw, “[t]he first duty of every citizen is to insist on having money on reasonable terms”, then, El-Gamal argues, by placing heightened emphasis on the moral and spiritual substance of Islamic financial jurisprudence, the financial and investment needs of the growing Muslim middle class would be better served.