Is compliance with Shariah principles enough for Islamic finance?

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Compliance with Shariah Principles May Not Be Sufficient for Islamic Finance

Islamic finance is increasingly being held to a higher standard beyond mere adherence to Shariah law. While ensuring a financial structure is permissible under Shariah principles (the "first patty") remains fundamental, there is a growing expectation that it should also actively promote societal welfare and produce wholesome outcomes, known as tayyib (the "second patty"). This dual requirement suggests that simply meeting a checklist of Shariah-compliant criteria may no longer be enough to attract and satisfy stakeholders in the Islamic finance sector.
The Evolution of Shariah Compliance Standards

Historically, Shariah compliance in Islamic finance has often been interpreted as a procedural checklist, focusing on avoiding prohibited elements such as interest (riba), gambling (maysir), and uncertainty (gharar). This approach ensures that transactions are legally valid and permissible according to Islamic jurisprudence. For instance, a financing agreement for a plantation business could be structured to avoid interest and adhere to specific contractual sequences, thus meeting the basic requirements of Shariah compliance.
The Importance of Maqasid Al-Shariah and Tayyib Outcomes

Beyond procedural compliance, a deeper understanding of Islamic finance emphasizes the realization of maqasid al-Shariah, the higher purposes and objectives of Islamic law. This involves assessing whether the financial activities contribute positively to human welfare and produce ethically sound and beneficial outcomes, or tayyib. A banker noted that this broader perspective is crucial, as a purely Shariah-compliant product might still have negative consequences, such as environmental degradation from financing certain industries, even if legally structured.
The Appeal of 'Ethical Finance'

The discussion around whether to rebrand Islamic finance as 'ethical' finance highlights a perceived gap between its current perception and its intended impact. Some believe that the term 'ethical finance' might resonate more broadly, suggesting that the current understanding of 'Islamic finance' may be too narrowly focused on religious adherence rather than on the universal values of justice and beneficence. This perspective draws parallels to Adam Smith's distinction between justice (preventing harm) and beneficence (actively doing good), arguing that while justice is foundational, beneficence is necessary for a society to truly flourish.
Designing Finance for Human Flourishing

The challenge lies in ensuring that the pursuit of maqasid does not become another superficial checklist. Instead, it should prompt a fundamental re-evaluation of how financial institutions and products are designed from the ground up to serve the intended ends of Shariah. This first-principles approach aims to foster innovation and ensure that Islamic finance genuinely contributes to human flourishing, making it not just lawful but also inherently worthy of investment.

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Is compliance with Shariah principles enough for Islamic finance?

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