Financial Engineering 259
of institutions and their customers. They need to assume an active role in
understanding the nature of business and banking. Special training institu-
tions can be set up to develop targeted training for Shari’ah scholars in areas
outside their expertise, and for economists and bankers in matters pertaining
to Shari’ah law. Such cross - training will help each party to understand the
other’s point of view.
Standardization
The introduction of new products can benefi t greatly from the standard-
ization of contracts and unifi cation of standards across markets. Shari’ah
scholars can play a positive role in this regard. Regulators can help in defi n-
ing accounting, reporting and supervisory standards, which can help reduce
the costs involved in introducing new products to different markets.
Judicial use of “Law of Necessity”
It is observed that Shari’ah scholars tend to invoke the law of necessity
(dharoora) to accommodate pressing demands from bankers or customers.
Extreme caution should be observed in making sure that a practice allowed
under the law of necessity does not become a rule. Frequent use of such
exceptions may not only contaminate the essence of the system, it may also
raise suspicions in the minds of those who have put their trust in the system.
Check on Shari’ah Arbitrage
In Islamic jurisprudence, the act of combining several contracts in a manner
which creates an effect or behavior that is either prohibited or counterintui-
tive to the essence of Islam is called hila (artifi ce), and has been condemned
throughout history. Such an act is the equivalent of regulatory arbitrage where
an innovation is introduced to circumvent regulations. The industry and
Shari’ah scholars will be watching closely to ensure that such acts are nullifi ed.
A recent example of arbitrage is tawarruq (reverse murabahah) which
creates a debt obligation by pretending a sale of a real asset which, in real-
ity, does not change hands. This practice has been declared void by OIC
Shari’ah scholars. Although it is still practiced in the market, its occurrence
has declined considerably since the ruling in 2009.^4
CONCLUSION
The scope of fi nancial engineering and derivatives in Islamic fi nance will be
determined by several factors. The most critical of these factors is how suc-
cessfully the industry is able to adhere to the objectives of Shari’ah, which
are the ultimate goal of each action.
Chapra (2008) compiles different views on these objectives and
highlights those designed to promote the well - being of humans through