Paper Title (use style: paper title)


 

http://www.ojs.unito.it/index.php/EJIF ISSN 2421-2172 1 

 

Judicial Decision-Making in Islamic Banking and 

Finance 

 
* 
Syracuse University College of Law 

 

   
Abstract— 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. First the paper provides a background into 

Islamic banking and the legal framework of the Shari’ah. Second 

paper examines two methods of judicial-decision making, 

legalism and the economic theory, as applied to Islamic jurists. 

Although viewed as distinct theories, I argue that the holistic 

nature of the Shari’ah inevitably weaves the two methods 

together. 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. 

Keywords-judicial decision-making, ijtihad; legalism; fatwa; 

fiqh, legal theory 

I.  INTRODUCTION:  AN OVERVIEW OF THE SHARI‟AH AND 
ISLAMIC BANKING 

This paper aims to establish a framework and begin a 
dialogue for understanding, analyzing, and predicting the 
judicial decision-making process regulating the Islamic 
banking industry. The Islamic banking industry‟s estimated 
value is over a trillion dollars and has been growing ten percent 
per year since the 1990‟s [20]. Yet Islamic banking practices 
are almost entirely regulated by a select group of jurists and 
judicial institutions that decide whether or not a financial 
product, transaction, or contract is lawful under the Shari‟ah 
[20] [48]. Generally these decisions are in the form of a single 
fatwa, or judicial opinion.  

It is my understanding that the judicial decision-making 

of these private jurists is highly legalistic, and that a legalist 

method is the best way to assess and predict judicial outcomes. 

However I will make an attempt at critical analysis by 

exploring the economic theory of judicial decision-making and 

discussing the need for social-science based approaches 

founded on empirical research, as there are social and 

psychological factors that may influence rulings. While this 

article is written primarily for those seeking a deeper 

understanding of judicial decision-making in Islamic banking, 

there is also secondary purpose to the article that seeks to 

begin a constructive dialogue among scholars of Islamic 

jurisprudence
1

 as to whether or not a critical analysis of 

modern Islamic judicial decision-making is necessary, helpful, 

or even appropriate.  

 

A. Why the Study of Judicial Decision-Making in Islamic 

Jurisprudence Regarding Banking and Finance is Important. 

 

Thus far the study of Islamic banking and finance law by 

Western and most Islamic scholars has focused primarily on 

“what” is and is not permissible under the Shari’ah. However 

there has been little research in regards to the “how” and 

“why” jurists are reaching these outcomes and the process that 

takes them to their legal conclusion. If there is something 

other then a legalistic approach being used the question 

becomes how big an influence is it and whether or not other 

approaches should be discussed among practitioners of, and 

actors in, the world of Islamic banking law.  

If not adopted as a form of national governance, like in 

Saudi Arabia, the Shari’ah is binding on only those who 

accept it [12] [9].
2
 For the most part it is up to the individual, 

or bank, to regulate his or her own actions in accordance with 

the Shari’ah. So while Islamic banks may operate globally 

they are expected that to follow religious guidelines of the 

Shari’ah even when engaging in business within secular 

nations [35]. This concept expands the jurisdiction and role of 

the jurist in Islamic banking, making the study of his judicial 

decision-making process all the more important. It also 

increases the importance of studying Islamic jurisprudence in 

Western law schools
3
 because Islamic financial products, and 

the contracts that accompany them may begin to appear more 

frequently in Western litigation following the recent political 

shifts in the Middle East [35]. 

                                                           
1
 Jurisprudence is the “process by means of which jurists derive 

sets of guidelines rules and regulations Islamic from the 

principles of the Qur‟an and the Sunnah” [22]. 
2
 Al-Fahad discusses Saudi‟s adoption of Hanbali fiqh under a 

strict, now loosened, “Wahhabi” interpretation. 
3
 “As Professor W. M. Ballantyne notes, „Even where the Shari'a 

is not applied in current practice, there could be a reversion to it 

in any particular case. Without doubt, knowledge of the Shari'a 

will become increasingly important for practitioners, not only in 

Saudi Arabia, but in the other Muslim jurisdictions‟” [35]. 

Spencer J. Coopchik, Esq.
* 



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Although research leads me to believe that the legalist 

method is the primary form of judicial decision-making, 

testing the other models of judicial decision-making remains 

relevant as a means of supporting my initial belief. Therefore I 

am suggesting a dialogue as to whether other approaches, 

including economic models, applied by scholars studying 

decision-making of United State‟s federal judges should be 

applied to Islamic jurists who regulate the Islamic financial 

market [15].
4
 Because the role of the jurist in both legal realms 

is essentially the same, (as in both types of jurists decide what 

is and is not lawful conduct within the confines of the law) it 

is possible that other theories used to analyze judicial 

decision-making through social sciences may also be 

applicable in understanding and predicting Islamic judicial 

decisions. This is important for numerous reasons, principally 

because the Islamic banking industry is continuously growing 

and intends on expanding its cliental basis to religious 

Muslims in secular Western nations reaching a projected 

worth of four trillion dollars [20] [13]. Unfortunately, 

businesses and investors dislike the degree of uncertainty 

caused by the jurist‟s ability to reconsider rulings [48]. 

Therefore in order to create more confidence in the Islamic 

market it is crucial that judicial decisions regarding financial 

products are predictable, stable, and representative of future 

decisions on similar legal issues [48].  

In order to illustrate this point I will provide an example 

of how a single and unforeseen judicial decision by a 

prominent jurist can create a shift in the Islamic market place. 

 

In November 2007, an Islamic finance scholar, 

Sheikh Muhammad Taqi Usmani, questioned 

whether the issuance of sukuk
5
 was technically in 

compliance with the fundamental prohibition against 

interest. Usmani stated in a policy paper, “The time 

has come to revisit this matter, and rid sukuk of these 

blemishes.” These “blemishes” include, among other 

things, the now-common practice of marketing asset-

backed returns on the basis of the LIBOR rate 

benchmark, which is a “corruption” according to 

Usmani… Up to the time that Usmani released this 

statement, sukuk had been considered the backbone 

of Islamic finance and had allowed the system to 

grow and expand into more traditional investment 

arenas. 

                                                           
4
 In his research, Baum reviews legal, attitudinal, and strategic 

models. 
5
 “Sukuk are investment certificates. Sometime they represent 

„ownership‟ in the assets underlying the issue. Those with 

variable returns are based on mudarabah or musharakah. More 

popular are those with pre-determined, fixed incomes. The 

simplest of these is the one based on ijarah, i.e., lease or hire. A 

building (or an oil tanker) is purchased and rented out, the 

money capital for the purchase having been mobilized by selling 

certificates. Owners of these certificates would be entitled to 

receive a portion of the rent income” [52]. 

After Usmani‟s pronouncement, sukuk issuances 

dropped off dramatically. While many acknowledge 

that at least some of this decline may be attributed to 

the overall decline of worldwide financial markets, it 

is likely that Usmani‟s comments also contributed to 

the trend. Commentators, scholars, and investors 

were widely surprised and alarmed by how a single 

speech could set back progress and investment in a 

product that had proven so successful in recent years 

[48]. 
6
 

 

The example above demonstrates the need to study and 

understand the decision-making process as well as the 

influences and motivations on this select group of jurists and 

judicial institutions. Understanding how Sheikh Usmani 

reached his decision regarding sukuk can be best analyzed 

through the legalist method as applied in Islamic 

jurisprudence, which I will lay out later in the paper. However 

one may also try and look at the Sheikh‟s decision through 

other means of critical analysis, like the economic method, to 

find possible motivators for the timing of the opinion. In order 

to present those methods of judicial decision-making it is 

important that the reader understand the basics of the 

Shari’ah, Islamic banking, and the jurists regulating the trade. 

B. The Shari’ah Generally 

First, a disclaimer. This is a very broad and simplistic 

overview of a fourteen hundred year old legal tradition that 

encompasses all the earthy and divine aspects of an 

individual‟s life [22]. This section is intended to give the 

reader a basic overview of the Shari’ah in order to 

comprehend latter analysis of the legalist method in Islamic 

jurisprudence. Moreover I will focus only on Sunni legal 

tradition and schools simply because Islamic banks governed 

by Sunni Islamic jurisprudence and jurists are more prevalent 

[33] [35].
7
  Further research is suggested to those interested in 

the specific mechanisms of the Shari’ah mentioned here, as no 

single article could sufficiently articulate the workings of any 

legal system [16].  

Shari’ah is can be translated in two ways: first, religiously 

as “God‟s eternal immutable will for humanity,” a Divine law 

encompassing all the spiritual and the mundane, and second 

by as “Islamic law.”
8
 The former is more appropriate because 

while the Shari’ah is often legal in nature it sees a sacred 

component to all actions taken throughout ones existence and 

therefore all actions, including contracts or financial 

transactions, are subject to religious legal analysis and 

                                                           
6
 Sheikh Usmani‟s full opinion can be, and should be, 

downloaded from his website [53] for a better understanding of 

sukuk and the jurists role in the Islamic finance market. 
7
 In this regard, Kettell cites [18]. 

8
 The Oxford Dictionary of Islam, unlike Christian legal 

traditions Islam see‟s no separation between the sacred and the 

profane, all acts are encompassed and categorized under the 

Shari’ah [26].  



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categorization [33]. Contrary to the Western idea of an 

“Islamic Law” the Shari’ah is not codified, nor is there a 

singular vision on the various legal subjects within it [41]. For 

the purposes of this article, and in order to avoid more 

complex theological issues, this article will refer to the 

Shari’ah as a holistic Islamic law given by God and 

exemplified through his Prophet Muhammad as understood by 

scholars and jurists and applied in Islamic societies throughout 

history. Implementation, understanding, and development of 

the Shari’ah has differed over time and often changes in 

various regions of the world [51]. Like other legal traditions 

there are different schools of thought, legal theories, and 

“splits in the Courts” so to speak.  

Despite the perceived rigidity of religious law, individuals 

or institutions who choose the path of the Shari’ah have some 

leeway in following the law as it is often the case that 

differing judicial opinions will create areas where stricter or 

loser observance of a particular rule are both equally valid 

[12]. This is not to suggest that Islamic jurist decide 

“arbitrarily” as orientalists and a Supreme Court justice have 

suggested [47],
9
 but rather that there is the possibility of 

having differing yet equally valid legal rules on a particular 

issue [12]. The concepts of pluralism and public choice, 

described by Liaquat Ali Khan as elements of the “free-

markets” of Islamic jurisprudence will be discussed later as 

possible influences on the judicial decision-making process 

[12] [28].  

Differing opinions are often caused by the fact that jurists 

in different regions may study legal theory under different 

schools of law [12]. In Sunni Islamic Jurisprudence there are 

four main schools of law that were developed in the early 

eighth and ninth centuries [51]. These four schools or 

madhhabs (literally paths) are still predominant today and the 

early treatises of their founders are often cited as theoretical 

basis in fatwas
10

 regarding Islamic Banking [46]. The four 

schools are Hanafi, Maliki, Hanbali, and Shafi’i named after 

the founding jurist [31]. For the most part the schools agree on 

nearly every major aspect of the Shari’ah, however, despite 

reaching similar legal conclusions, their legal theories and 

methods of interpretation differ.
11

 It is often the case that one 

                                                           
9
 “Terminiello v. Chicago, 337 U.S. 1, 11 (1949) (Frankfurter, 

J., dissenting). In reference to Justice Frankfurter referring to an 

Islamic jurist deciding arbitrarily beneath a tree. “Frankfurter's 

imagery undoubtedly was inspired by the judicial archetypes 

devised by Max Weber, who described uncontrolled judicial 

discretion as “kadi justice”” [47]. Kadi‟s or Qadi‟s are Islamic 

Jurists appointed to a State judgeship and were inaccurately 

portrayed by Orientalists as arbitrary decision makers.  
10

 I am aware that “Fatawa” is the proper Arabic plural, 

however in order to create ease and limit confusion I opted for 

an Anglicized plural where the “s” creates distinction more 

noticeable to Western readers.     
11

 “Over time, the legal methods and conclusions of the most 

influential scholars evolved into distinct schools of thought. 

Because Muslims never created a formal church, Islamic legal 

school of law is predominant in a region; such rules and 

theories of one school are preferred over the other schools. For 

example the law of Saudi Arabia is entirely based on Hanbali 

fiqh, or substantive law [9].  

1) Fiqh 

The Western idea of an Islamic law is better expressed 

through the term fiqh. Fiqh is the substantive aspect of the 

Shari’ah in which clear legal rules are formed and derived 

from the Shari’ah sources, and unlike the Shari’ah, fiqh is 

mutable [26]. Fiqh is the Shari’ah as understood and declared 

by the jurists and therefore it is fallible [26] [47]. It is the 

“science of the Shari’ah” and contains judicial articulations of 

the law set forth by God and the Prophet [33]. The 

categorizations of lawful and unlawful acts are most easily 

found in the volumes of fiqh written by jurists and legal 

scholars rather then the Shari’ah sources like the Qur‟an 

where rules are more ambiguous [47] [30]. Fiqh should not be 

confused with siyasa, or state legislation [51] [46].
 
 

Under the Shari’ah all actions fall under five categories: 

1.) Wajib- an obligatory duty, the omission of which is 

prohibited and punishable [33].  2.) Mustahab- an action that 

is rewarded or recommended but omission of which is not 

prohibited or punishable [33].  3.) Mubah- a permissible act of 

which the Shari’ah is indifferent [33]. 4.) Makruh- an act that 

is disliked and should be avoided; avoidance of the act is 

rewarded but commission of it is not prohibited or punishable 

[33]. 5.) Haram- an action that is prohibited and intentional 

commission of the act is punishable [33]. Categories one 

through four are halal, meaning they are lawful (or 

permissible) even if disliked, unless it is wajib where omission 

of an act is unlawful. It is the role of the jurist to define which 

financial products or transactions are halal and which are 

haram under the Shari’ah.  

While the Shari’ah is often described as “jurists law,” the 

jurist can only seek to understand and expand applications of 

the law given by God and the Prophet Muhammad who 

comprise the sole legislative body [14].  The jurist states what 

the accepted law is, or should be, on a matter often deciding 

whether something is halal or haram. However when a novel 

issue arises the role of the jurist has best been best described 

as “searching” for the law rather than creating it, and thus a 

new rule is found instead of manufactured [55].   

                                                                                                     
orthodoxy formed around those private scholars who 

distinguished themselves by education, dialectical skill, and 

popularity with students and the public who consulted them. 

Over the years, many schools of law emerged as students 

collected the lectures and legal opinions of influential jurists and 

eventually wrote commentaries upon them. With a sufficient 

number of disciples preserving and expanding the work of a 

particular jurist (and especially when accompanied by popular 

and other external support), that jurist's corpus of opinions and 

accompanying legal methodology became known as a 

„madhhab‟” [46]. 



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The sources the jurists search and find the laws within are 

primarily the Holy Qur‟an, the literal word of God, and the 

Sunnah, which are the sayings (hadith) and actions of the 

Prophet [14]. The Qur‟an and the Sunnah are considered the 

primary sources of the Shari’ah and secondary sources, like 

fiqh manuals, cannot contradict them [14]. The Qur‟an only 

contains roughly 500 verses with legal substance out of the 

6,239 verses that make up it entirety [14].
12

 The normative 

verses discuss a wide range of legal subjects that can be 

broken up into two general categories, ibadat and mu’amalat 

[14]. Ibadat pertains to those actions in the spiritual realm, 

prayer, fasting and so on. Mu’amalat deals with social 

interactions in nature like contracts, wills, and riba [14].  Riba 

is the concept of interest that is explicitly prohibited by God in 

the Qur‟an and is the underlying unlawful (haram) custom that 

Islamic banks seek to avoid [26].  

2) Secondary Sources of Law 

While the Qur‟an offers the basic guidelines many norms 

and rulings in Islamic jurisprudence are based on or explained 

by the Sunnah [14]. The substance of the Sunnah is comprised 

of sayings uttered by the Prophet, and descriptions of his 

conduct by his companions and family [14]. The purpose of 

using the Sunnah is to clarify and expand on the few laws 

provided by the Qur‟an and find rules on legal issues where 

the Qur‟an is silent. In theory the Sunnah cannot contradict the 

Qur‟an for use in legal matters. The same categorizations of 

ibadat and mu’amalat also apply to rules derived from the 

Sunnah. More often then not the Qur‟an and the Sunnah do 

not explicitly state what the law is but rather contain the basis 

for the rule [14]. However, if the law stated in the two primary 

sources is explicitly clear it is absolutely immutable by any 

work of a jurist [11].  Thus secondary sources are used to 

expand, but not contradict, the law contained in the primary 

sources where the jurists search for rules [14].  

Secondary sources of the Shari’ah include: Ijma which is 

a consensus among scholars on a legal issues; Qiya’s which is 

the deduction or induction of a rule by analogy to the Qur‟an 

and the Sunnah; Maslaha, the public good; Urf, customary 

practices; and Istihsan which is defined “as either (1) the 

preference for a recognized source of law over reasoning by 

analogy (qiyas), or (2) the preference for one reasoning by 

analogy over another that is considered weaker” [39]. The two 

most important secondary sources of law for Islamic banking 

are those of fatwas and ijtihad [36].  Ijtihad is the basis for a 

fatwa. Fatwas are the legal opinions of jurists responding to a 

particular legal question posed by a party, often a bank 

manager, seeking guidance on the Shari’ah. More often than 

                                                           
12

 The number “500” was given by Imam Al-Ghazali who is one 

of the great Islamic jurists and philosophers, however to the 

average reader of the Quran the number seems high since many 

of the normative verses are repeated or overlap in presenting a 

general rule. Islamic Scholar John L. Esposito put the number of 

normative or “legal” verses in the Qur‟an at 90 [26].   

not, the jurist issuing a fatwa is not affiliated with any State 

institution [12]. It is typically the case that independent jurist 

are seen by the public as more inclined to issue honest ruling 

based on the Shari’ah than their counterpart Qadi’s, who are 

appointed by the state.
13

  

In the case of Islamic banking, a fatwa would be issued by 

a single independent jurist, or group of jurists, who have a 

background on the financial matter [36]. What is, and is not, 

permissible under the Shari’ah in Islamic banking is often 

decided in the form of a fatwa [36]. A jurist may even use a 

predecessor‟s fatwa as a form of precedent if it is on a similar 

issue [14]. Thus a fatwa may work its way into a more 

substantive legal position much like an authoritative case in 

Common Law jurisdiction [30]. In the Islamic Banking 

industry it is commonplace for fatwas to set normative 

standards much like substantive law [37]. However, because 

of regular innovation in the financial market place an issue can 

be complex, new, and outside the realm of prior rulings. When 

this is the case it is likely that the jurist will engage in the 

process of ijtihad.  

3) Ijtihad 

In the simplest sense, ijtihad can be viewed as judicial 

decision-making in the absence of a clear rule within the 

primary and secondary Shari‟ah sources [14]. Ijtihad is the 

process of “searching” for and “finding” the law discussed 

earlier, and is often described as the most difficult task a jurist 

can engage in [55] [28]. Like the scope of interpretation in the 

Common Law, ijtihad can be contrasted and constrained by a 

form of “imitation,” or non-binding precedent called taqlid 

[14] [55]. Taqlid can be viewed as “the solidification of each 

legal school into predictable collections of doctrinal rules… 

with recognized majority and minority rules comprising the 

doctrine of each school…[T]aqlid eventually became so 

entrenched in Islamic jurisprudence that „the text and the 

precedent of each school became the source of legitimacy in 

juristic thinking‟” [47]. 

Ijtihad is often used in fatwas regarding Islamic banking, 

since many of the issues involved with Islamic financial 

products are relatively new and require an expansion of the 

Shari’ah to accommodate or prohibit the action in question 

[36]. It is crucial for the purposes of analyzing judicial 

decision-making in Islamic banking that the process behind 

ijtihad is understood because heavily cited fatwas from 

respected jurists often become substantive law, or fiqh. 

However because “many Islamic countries do not endorse the 

notion of binding precedent…there is some degree of 

uncertainty as to whether a financial method or instrument 

currently considered Shari’ah-compliant will remain so for the 

length of any given project or investment plan” [48]. 

                                                           
13

 The public‟s preference for independent jurists and the 

mistrust of State qadi’s is highlighted and discussed in depth in 

two interesting articles: [12] and [10]. 



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Within this vast legal tradition lies a small subset of 

jurists whose ijtihad expands the application of the Shari’ah to 

the modern financial markets. These jurists are highly 

respected although not appointed by a State, and still mostly 

free from government interference as is often the case in 

modern Islamic jurisprudence [12]. These jurists not only 

regulate the banks in accordance with the Shari’ah but help 

shape the Islamic market as a whole. While they do not don 

wigs or robes, or preside over a courtroom, the history of 

Islamic law has shown us that they are indeed jurists who 

create fiqh through the process of ijtihad. In the Western sense 

they can be seen as informal jurists whose scholarly status 

allows them to say what the accepted law is on a matter as 

well as what it should be a new or novel issue. They act as 

private in-house arbitrators mediating the banks profit motives 

and the protective goals of the Shari’ah [23].
14

 However under 

the Shari’ah they are typically referred to as private jurist and 

are often seen as more credible then their State counter-parts 

because of their distance from the perceived corruption of the 

government [12].
15

  

II. ISLAMIC BANKING FORM AND FUNCTION 

The modern concept of Islamic banking in its 

contemporary institutional form is relatively new in 

comparison to the traditional commercial transactions that 

were Islamic in nature by their abstention from interest or 

overly risky trading.
 16

 Islamic Banking discussed here is 

roughly forty years old, and was created to serve Islamic 

communities investing and savings needs in the Middle East 

and South East Asia [52]. More recently Islamic banks have 

branched out into global investment banking and insurance 

markets with approval from the Jurists paving the way [20]. 

Furthermore, Islamic banking products are now growing in 

popularity in Western nations including the United Kingdom 

and United States [56] [13]. 

A. Prohibitions and Guidelines 

Islamic banking is most widely understood by Western 

financial practitioners as banking without interest (riba) and 

while the abstention of riba is the main concern, all other 

                                                           
14

 “It is from this perspective that the Shari'ah supervisory board 

(“SSB”) may be viewed as both an auditor (for the company 

offering the financial service or product) and a consumer 

advocate (for the company's clients)” [23]. 
15

 “Thus, all the four founders of the legendary schools of 

jurisprudence demonstrated through their personal life stories 

that Islamic law must be severed from the power of the 

government. Opinio-jurists, and not rulers, are the guardians of 

Islamic law. Opinions delivered in private chambers of honest 

and God-fearing opinio-jurists are more worthy of consideration 

than those issued by government judges or government opinio-

jurists. The inherent mistrust of rulers informs the enterprise of 

Islamic law” [12]. 
16

 Like the section before this is merely a brief overview, please 

see [33] for a better understanding of Islamic Banking, contracts 

and financial products. 

things prohibited by the Shari’ah are also impermissible in the 

Islamic banking industry [33].  Therefore it is the opinion of 

those in the industry that the key defining characteristic of 

Islamic banking is the attempt to have a profitable economic 

system built on the principles of morality laid out by the 

Shari’ah [2]. Simply put interest and risky investing are 

prohibited because God has declared them immoral and 

prohibited them [32].
17

 This moral ideal is expressed by 

various financial products and regulated by the jurists who 

balance the duality of profit motives and morality as desire for 

the former can often lead inhibition of the later [34].  

 An Islamic bank, like a Muslim person, is prohibited 

for investing and earning income from things that are 

prohibited under the Shari’ah including: destructive weapons, 

pornography, tobacco, alcohol, gambling, and prohibited 

animal products [33].
18

 Most importantly Islamic banks are 

prohibited from overly risky investing (gharar) or deriving 

profit from financial products that contain interest (riba) like 

mortgage backed securities [52]. This is largely the reason 

Islamic Banks faired well in the recent finical crisis and an 

example of how the Shari’ah functions as a shield rather than 

a wall [48]. 

According to Brian Kettell, a scholar on Islamic finance, 

there are six key principles of Islamic financial products 

designed to maintain the morality required by the Shari’ah, 

they are: 1. The prohibition of predetermined loan repayments; 

2. The encouraged use of profit and loss sharing; 3. The 

prohibition of “making money out of money,” meaning all 

financial transactions must be asset-backed; 4. The prohibition 

of overly speculative investing (gharar); 5. Only Shari’ah 

approved contracts are permissible; 6. Contracts are to be 

made and performed by all parties in good faith as defined by 

the Shari’ah. The basis of these principles can be derived from 

various verses in the Qur‟an and by acts or statements in the 

Sunnah prohibiting interest, gambling, and contracting in bad-

faith [33]. One can also tell that the Islamic fiscal principles 

often generate more risk for the bank than what would 

normally be expected in the secular interest based system 

because of the increased amount of profit-loss sharing [33].  

                                                           
17

 2: 275 (Y. Ali) “Those who devour usury will not stand 

except as stand one whom the Evil one by his touch Hath driven 

to madness. That is because they say: "Trade is like usury," but 

Allah hath permitted trade and forbidden usury. Those who after 

receiving direction from their Lord, desist, shall be pardoned for 

the past; their case is for Allah (to judge); but those who repeat 

(The offence) are companions of the Fire: They will abide 

therein (for ever)” [32]. 

2:276 “Allah will deprive usury of all blessing, but will give 

increase for deeds of charity: For He loveth not creatures 

ungrateful and wicked” [32]. 

3:130 “O ye who believe! Devour not usury, doubled and 

multiplied; but fear Allah. That ye may (really) prosper” [32]. 
18

 However it is often the cases that bank can invest in 

companies that deal with those products as long as no more then 

five percent of the company‟s revenue is from the prohibited 

products, and such “unlawful” or haram revenue that is received 

by the bank is donated to charity. 



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B. Islamic Financial Innovations 

 

In order to comply with the Shari’ah and the prohibition 

on riba the Islamic financial industry has introduced a variety 

of products founded on the principles above. Some basic 

products include: Murabaha contracts which is a sale of goods 

or real property with a pre-agreed profit mark-up on the cost 

[3];
19

 Mudaraba is a contract made between two parties one of 

whom provides the capital, the other manages the project, the 

profits of which are split at a pre-determined ratio; 

Musharaka, which is joint venture financing, profits and 

losses are shared by the investing parties based on a pre-

agreed ratio and equity respectively; Salam, which is the 

“purchase of a commodity for deferred delivery in exchange 

for immediate payment according to specified conditions or 

sale of a commodity for deferred delivery in exchange for 

immediate payment” [1].  Takaful, which is essentially a 

charity based insurance system deemed halal for not being 

overly speculative [2]. Furthermore, despite the variety of 

contracting options it is estimated Murabaha contracts make 

up eighty percent of Islamic financial transactions [5].  

Although these products may achieve similar goals and have 

similar outcomes when compared to their secular counterparts, 

the mechanisms that produce the profit are Shari’ah complaint 

and reflect the morality imposed by the Shari’ah.  

Take a Murabaha contract for example. If used to 

purchase a house, it serves the same purpose as a mortgage 

and concludes with a similar result yet contains no interest in 

the contract or in the course of dealing. While the outcome 

may appear the same to a Western mortgagor it is the 

mechanics of the Murabaha contract that differ from a 

traditional mortgage and make the contract halal [23]. Under 

Murabaha contract, if Family X wanted to purchase a new 

home they would go to Bank Y which would purchase the 

residence at the specified price and pay, $100,000. Bank Y 

would then re-sell the residence to Family X at an agreed upon 

profit mark-up of $10,000. Family X would pay back Bank Y 

during the course of a number of installments while 

simultaneously purchasing the house from Bank Y. Family X 

would end up paying $110,000 after all the installments were 

paid, and then gain full title in the house. While the Murabaha 

contract described creates a mortgage-like product, jurists 

unanimously agree that this is halal, and riba free, based on 

the principle that the terms and performance of the contract 

creates two sales rather then a sale of money [23]. This is 

based on the principle that God has “permitted trade and 

forbidden riba,” riba essentially being the sale of money now 

for money later [32].
20

  

                                                           
19

 “[S]eller informs [a] buyer of the cost at which the seller 

obtained an object of sale [which is to be resold to such buyer] 

and collects a profit margin either as a lump sum, or the seller 

may state the profit margin as a percentage or ratio of the seller's 

original purchase price” [3].  
20

 2: 275 “Allah hath permitted trade and forbidden usury. Those 

who after receiving direction from their Lord, desist, shall be 

pardoned for the past; their case is for Allah (to judge); but those 

 

C. Shari’ah Supervisory Boards 

 

The approval of an Islamic financial instrument is two 

fold: first it must be lawful in the jurisdiction that the product 

or contract is being used; and second the product must be 

lawful under the Shari’ah, which in some Islamic countries is 

the only requirement [23]. The judicial decision-making 

governing the second element is made by Shari’ah 

Supervisory Boards (herein after “SSB”). The SSB‟s role is 

“to assure the institutions clients that the business renders 

services in a Shari’ah complaint manner” [37]. An SSB is 

mandatory for any Islamic financial institution [23]. Even 

Western institutions like the Dow Jones Indexes, Citicorp, and 

HSBC now have SSB‟s for Shari’ah-complaint transactions 

and investing [33] [50].
21

  It should be noted however that the 

SSB may give deference to the rulings of other external and 

independent Islamic Institutions, namely the Accounting and 

Auditing Organization for Islamic Financial Institutions 

(AAOIFI) [37].
22

  

The primary focus of these boards and organizations is to 

ensure that Islamic financial products and practices are in fact 

Islamic and Shari’ah compliant [37]. “Whenever an Islamic 

corporate institution wishes to structure a financial transaction 

in accordance with Islamic law, the firm will consult either an 

external or internal Shari'ah board. The initial consultation 

typically leads to multiple review sessions followed by 

amendments to the structure and the documentation of the 

agreement after each review, as well as further monitoring and 

consultation after the transaction if necessary” [37]. 

Compliance with other institutions like the AAOIFI is 

normally self-motivated, however seven Islamic jurisdictions, 

including Bahrain, Dubai and Qatar, have adopted the 

AAOIFI‟s financial regulations as law governing banking 

transactions.
23

  

An SSB can be made up of one or more, regularly three, 

jurists [37].
 
They are scholars of Islamic law as well as 

economics and finance [37]. Members of SSB‟s are often, 

academics, former Judges or bank managers.
24

 However 

certain jurisdictions have required the members of SSB have a 

                                                                                                     
who repeat (The offence) are companions of the Fire: They will 

abide therein (forever)” [32]. 
21

 Seniawski refers to “Chase, UBS, and Deutsche Bank‟s 

Shari’ah complaint ventures” [50].  
22

 The best way for me to describe the AAOIFI or other fiqh 

academies is by comparing them and their work to a similar 

institution in the U.S, namely the American Law Institute 

(A.L.I.) and the Restatements. 
23

 AAOIFI has gained assuring support for the implementation 

of its standards, which are now adopted in the Kingdom of 

Bahrain, Dubai International Financial Centre, Jordan, Lebanon, 

Qatar, Sudan and Syria. The relevant authorities in Australia, 

Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and 

South Africa have issued guidelines that are based on AAOIFI‟s 

standards and pronouncements [1]. 
24

 Like Sheikh Usmani, mentioned earlier, who was a Supreme 

Court Justice in Pakistan and has held many other prestigious 

judicial positions [53]. 



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minimum of five years experience issuing religious rulings 

[33]. There is also an implied “character and fitness” type 

requirement to ensure that the jurist is mentally competent and 

pious enough to issue religious rulings [36].  

The primary role of the jurists on a SSB is to issue fatwas 

on financial transactions. However despite the presence trade 

standards set by groups like the AAOIFI disagreements can 

occur when the standards fall behind market innovation [23]. 

Take Sheikh Muhammad Taqi Usmani‟s fatwa regarding 

sukuk discussed earlier in this paper; it highlights the idea that 

a jurist can disagree with other jurists on the permissibility of 

a particular product even after it has been deemed permissible 

by a number of other jurists and even popular among investors 

[48]. Naturally investors view the risk caused by legal 

uncertainty negatively [48].  Therefore if a disagreement or 

split among the jurists occurs a bank would subsequently 

follow the law chosen by its SSB.
25

  

Essentially Islamic banking is an exercise in submission. 

The institution submits to the Shari’ah, as does the worshiper, 

the jurists guide the worshipers, and the SSB guides the 

institution. Just like individuals, banks are often confronted 

with questions regarding the lawfulness of a particular act 

under the Shari’ah. This is where the SSB will issue an 

opinion of law, a fatwa, on the matter thereby approving or 

disapproving of the act and subsequently creating a new 

regulation for the Bank to follow in order to remain Shari’ah 

compliant. This decision-making process is the subject of the 

following discussion and the general focus of proposed future 

discourse. 

 

III. JUDICIAL DECISION MAKING IN ISLAMIC BANKING 

 

The questions this discussion seeks to begin answering 

are, how do the jurists on an SSB make their decisions, and 

why do they arrive at their legal conclusions. In answering I 

will test two possible theories used by legal scholars analyzing 

judges in the U.S. court systems. These two methods of 

analyzing judicial decision-making are legalism and the 

economic theory. Despite the “realist” assertion that the 

Islamic banking system is a reaction to Islamic revivalism, and 

that modern fatwas on the issue of finance are promulgating a 

political ideology [6] it is my hypothesis that the legalist and 

economic theories, rather then any attitudinal theory, are the 

most accurate descriptions of the processes used by jurists in 

the Islamic banking industry.  

Essentially, the jurists on SSB rule on the basis of the 

Shari’ah and other influences like global politics are 

secondary. I am not denying the existence of possible political 

motives linked to ideological differences stemming from legal 

education in different schools or regions as research has 

shown that the judicial decision-making process is surrounded 

                                                           
25

 The binding authority of an institution‟s SSB is a regulation 

set forth by the AAOIFI, which member banks have agreed to 

follow. The presence of agencies like the AAOIFI or other fiqh 

academies is designed to create consistency among banking 

institutions. 

by numerous influences outside the law [15] [29] [49] [40]. 

However, I will not be discussing attitudinal theories in any 

detail, mainly because the economic theory “overlaps” with 

other strategic, sociological, psychological, pragmatic, and 

organizational theories of judicial decision-making [45].  

Therefore some of the aforementioned theories may be 

touched on impliedly [45]. 

 

A. The Legalist Theory 

 

The legalist method, or legalism, as described by the 

renowned Judge Posner, “hypothesizes that judicial decisions 

are determined by “the law,” conceived of as a body of 

preexisting rules found stated in canonical legal 

materials…[T]he legalist model comes complete with a set of 

rules of interpretation (“canons of construction”) so that 

interpretation too becomes a rule-bound activity” [45]. 

Essentially legalism presumes that the sole, or most 

influential, component of judicial decision-making is the law 

itself. “The ideal legalist decision is the product of a syllogism 

in which the rule of law supplies the major premise, the facts 

of the case supply the minor one, and the decision is the 

conclusion” [45]. This theory of a rule-bound jurists is equally 

applicable to the Islamic legal tradition when a jurist is called 

on to write a fatwa. Although realists and skeptics of Islamic 

finance criticize this formalist approach, I believe the legalist 

method is indicative of a sincere and humble effort by the 

jurist to apply Divine law to modern financial problems rather 

then “legalistic acrobatics” circumventing the goals Shari’ah 

[4] [5].  

Before a jurist can issue a fatwa he must meet a detailed 

set of procedural requirements [36]. The issue presented must 

be a real legal question posed by a party, in this case an 

Islamic bank [36] [42]. The question must be submitted to a 

jurist or jurists, here the SSB, who are familiar with the 

requirement, premise, and legal background of the issue so 

that they may arrive at a conclusion that reflects proper juristic 

form and the modern context of the current event [8]. 

Furthermore if the jurist is on an SSB and the questioner is the 

bank it will be compulsory for the bank to adhere to the 

decision of the fatwa, thus equity is required because of the 

immediate economic effect to the bank [36]. The traditional 

idea of equity has been ever present in the Shari’ah and 

remains a factor in balancing the goals of the Shari’ah and 

financial goals of the bank and its customers [38] [50].  

Finally a matter of healthy body and mind, the jurist should 

avoid issuing a fatwa if he is ill, hungry, thirsty, tired, or if the 

weather is too hot or cold; essentially the jurist should avoid 

issuing a fatwa when any emotional or physical reactions may 

influence the opinion [36]. To most this idea seems like 

common sense. However it is actually a quite meritorious 

regulation, as relevant research on American trial judges have 

shown the affects of the physical state on the soundness of 

judicial decision-making process [24].  After the initial 

procedural requirements are met the decision-making process 

begins. 

 



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1) The Legalist Theory in the Islamic Tradition 

 

In order to understand the legalist method in any legal 

tradition, one must first understand the accepted forms of 

interpretation in that legal system. Accordingly in Islamic 

jurisprudence each madhhab has a characteristic legal 

methodology, reflecting the schools preferences on the use of 

texts, tradition/customs and independent reasoning [46]. The 

means of interpretation are applied to the two primary sources 

of text, the Qur‟an and the hadith.  

Today there are three primary modes of interpretation in 

Islamic jurisprudence comparable to Common Law traditions 

of statutory interpretation. They are: originalism, based on the 

legal and normative customs of the people city of Medina 

when it was under the leadership of the Prophet; textualism, 

based solely on the text of Qur‟an and authenticated hadith; 

and purposavism or maqasid al Shari’ah, which is ijtihad 

based upon the purposes of the Shari’ah allowing legal 

reasoning to come directly from a general principle so long as 

it supports one or more purposes of the Shari’ah [46].
26

  

Purposavism allowed Islamic jurists to expand the body 

of fiqh around five necessary divine purposes: religion, life, 

mind, family, or property [46] [28]. The use of maqasid al-

Shari'ah became universally accepted after being advocated as 

a theory of interpretation by the renowned jurist Al-Ghazali 

[46]. It was seen as a middle ground between strict textualism 

and the perceived misuse of maslaha used by the Shafi and 

Maliki jurists respectively [46].
27

 “The interpretive 

approaches… show that Islamic law does not permit only one 

interpretation in any given matter... [b]ut rather, depending on 

whether a scholar adopts a strict or literal approach to 

interpretation or a purposive or contextual approach to 

interpretation in exercising ijtihad, different yet acceptable 

solutions to legal problems are quite possible” [28]. 

Therefore if the text of the primary sources is ambiguous, 

a jurist on SSB has generally two approaches under the 

legalist theory. First he can adopt and support prior rulings on 

the issue. Or second, if the prior works of jurist are 

inapplicable, split, or incorrect he can engage in ijtihad using 

the methods of interpretation above and find the rule on his 

own. If the jurist chooses the latter, the legalistic steps guiding 

ijtihad have been succinctly laid out by Shari’ah scholar 

Bernard Weiss in, Interpretation in Islamic Law: The Theory 

of Ijtihad, and can be broken down as follows. 

First the jurist must assess the reliability of text from 

which he intends to derive a rule; if the text is from the Qur‟an 

it is reliable [55]. If he is interpreting hadith assessing 

                                                           
26

 It should also be noted that in the earlier days of Islamic 

jurisprudence the Zahiri school used a strict 

constructionist/literalist approach. This approach did not leave 

room for ijtihad and was widely (and in my opinion unfairly) 

criticized by the other schools and has thus disappeared.  
27

 “Shafi'i operated on the premise that the textual materials at 

hand provided jurists with a full package of the original precepts 

of the supreme Law. But the early Malikis rejected this text-

comprehensivist paradigm. Malikis have insisted on using non-

textual evidence in the interpretive enterprise” [46]. 

reliability is more complicated because the jurist must analyze 

the chain of narration.
28

 After reliability has been accepted he 

can began interpretation consisting of two tasks: first, the 

linguistic task, where the jurist determines the meaning of the 

words in the text; and second, the jurist must interpret the 

words in their proper context [55]. In doing so he may 

compare the text with other texts or look at the overall purpose 

of the text [55]. After interpreting the text the jurist “may also 

wish to ferret out implications, allusions, nuances, analogical 

deductions and elliptical elements which he believes to be part 

of the broader meaning of the Law” [55]. Finally after the 

jurist has formulated an opinion, he must ensure that the text 

used in forming the opinion has not been abrogated [55]. 

 

2) The Legalist Method in Practice: A Case Study  

 

In order to explain the legalist method as applied in 

Islamic banking I will illustrate the method by using a fatwa 

issued by the SSB of the Kuwait Finance House [22].
29

 The 

question posed by the bank‟s management was, “What is the 

riba that is prohibited by the Qur‟an?” [22]. The question, 

albeit simple in structure, is of the utmost importance as it 

seeks to create a distinction between types of riba, therefore 

allowing the bank to charge a type of interest. Using the 

legalist method the jurist aptly answers the question in the 

fatwa below, concluding that there is only one type of riba and 

it is prohibited.   

The fatwa begins by citing to the primary sources of the 

Shari’ah, the Qur‟an and the Sunnah. First the jurist explains, 

“All the verses [in the Qur‟an] in which riba is mentioned are 

unqualified, such that they do not differentiate between one 

form of riba and another. Therefore recourse must be had, in 

interpreting their meanings, to the commonly accepted legal 

meaning that was derived from the collectivity of verses and 

hadith texts on the subject” [22].  

Then based on the sources the jurist goes on to define riba 

as the “excess for which no compensation is given in the 

contract” including “both riba for consumption and riba for 

planting (investment)” [22]. He further explains riba by 

shedding light on a trade done by a companion of the Prophet. 

However he subsequently excludes the use of the type of 

transaction by explaining the Prophet‟s disapproval of the 

transaction by other companions and supporting with a hadith 

condemning the practice. The hadith states “Gold may be 

exchanged for gold, but only in like quantities, and only hand 

to hand. Any excess will be riba…” The hadith continues with 

the same statement made repetitively however referring to the 

trade of silver, wheat, and dates in a like manner [22]. The 

fatwa continues to explain a disagreement in interpretation of 

                                                           
28

 Despite a detailed science of studying hadith, chains or 

narration, and ways of measuring reliability, less reliable hadith 

are often used in ijitihad to the dismay of many Islamic jurists 

[17]. 
29

 This fatwa was collected and translated by Shayk DeLorenzo 

from the Kuwait Finance House, al Fatawa al Shari‟yah, 

Question 416, p. 402. 



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the hadith above between jurists
30

 who interpret the hadith 

literally (as in only applying to the commodities mentioned, 

gold, silver, etc.) and other jurists interpreting it based on the 

purpose of the statement (therefore applying prohibition to 

other commodities traded in a similar manner).  

The fatwa then states that “the great majority of jurists, 

however held that the prohibition [of the hadith] extended 

further” and that detail of their arguments “may be found in 

the classical manuals of fiqh” [22]. The jurist then goes on to 

swear by his “life” that those jurist‟s who differentiate 

between types of riba, thereby allowing some forms of 

interest, have committed “a lie against Allah and his Prophet!” 

and that theirs is a “personal opinion with no basis in truth, 

and nothing even resembling a basis!” [22].  

The fatwa continues with a purposevist argument 

suggesting that the prohibition of interest creates other 

avenues of investing such a murabaha contracts [22]. He then 

cites a hadith admonishing those who engage in interest-based 

transactions and includes the chain of narration to validate its 

authenticity [22]. Finally the fatwa concludes with the 

statement “All of the above, in support of the lender and 

borrower, goes to prove the care of Islam in its legislation” 

[22]. 

This fatwa is an example of the legalist method, in that it 

begins with primary sources and works its way through the 

secondary sources as well as the rules of interpretation and 

concludes favoring taqlid rather then ijtihad by openly 

agreeing the majority opinion on legal issue.
 31

 The Scalia-like 

pathos rebuking those who misinterpret the sacred text is an 

added rhetorical touch to show the severity of the jurist‟s 

conviction in his method and possibly an attempt to persuade 

jurist‟s who deviate from the strict unqualified definition of 

riba [27]. 

The jurist in this instance did not engage in in-depth 

ijtihad. He argued there was sufficient evidence in the Qur‟an 

and the Sunnah to conclude that a clear rule existed and that 

making a distinction to that rule would improper interpretation 

of the Divine legislation. Furthermore, the discussion of 

differences in the opinions of fiqh by the schools as well as the 

differences in interpretation show a desire to choose between 

precedents (taqlid) rather then search for the rule 

independently within the primary sources of the Shari’ah. The 

jurist ultimately arrives at his conclusion by citing the 

“majority of jurists” and implying a purposevist approach to 

interpretation of the primary sources while simultaneously 

justifying it through taqlid [22].  

The choice of between the two interpretations can be 

described as the true decision that requires critical analysis. 

The jurist could have adopted either of the approaches and the 

decision would have remained valid. Essentially the jurist 

                                                           
30

 Referring to Hanbali jurists and a subset of Hanafi. The group 

of Hanafi mentioned here are the minority view on the issue and 

reach the conclusion through a literal interpretation. 
31

 The fatwa refers to ijma when mentioning the consensus of 

the majority of jurists, and refers to the qiyas, or analogy, in the 

purposivist argument of how the hadith applies to other 

commodities outside the one listed in the statement itself.  

could have found a distinction in the definition of riba thereby 

allowing the bank to use a “permissible” form of interest and 

derive profit from it. However keeping in principle with the 

legalist approach, and perhaps contrary to the banks wishes, 

the jurist adopted the majority approach because it has greater 

textual support in the primary sources of the Shari’ah and the 

substantive works of fiqh. He further condemns the minority 

approach allowing types of interest as “a lie” on the basis that 

it lacks any textual evidence in reaching its conclusion.  This 

fatwa demonstrates the immutability of the Shari’ah sources 

and the prohibition on interest. The use of purposivism in the 

fatwa is inherently legalistic in Islamic jurisprudence 

(although often viewed by textualists as a front for “judicial 

activism” in the Common Law) as the jurist justifies his rigid 

interpretation by highlighting the success or murabaha 

contracts [28].  

An interesting point of discussion, in that the fatwa does 

not end with the usual statement “Allah knows best,” as is 

typical in fatwas [47],
 
 but rather it ends with statement, “All 

of the above, in support of the lender and borrower, goes to 

prove the care of Islam in its legislation” [22. This statement 

further emphasizes the legalistic approach chosen by the jurist 

in that the fatwa’s conclusion is supported by “Islam and its 

legislation,” the Qur‟an and the Sunnah. The statement implies 

that the jurist found the texts so clear that it leaves no room for 

the alternative opinions. On the other hand, the customary 

“Allah knows best,” signing statement at the end of a fatwa is 

used to show the fallibility of the jurist in his interpretation; 

the possibility that the competing view may in fact be correct, 

and that, in fact, only Allah does know the true answer to the 

legal question [47].  The signing statement is indicative of the 

pluralistic nature of Islamic jurisprudence and the possibility 

of multiple yet equally valid opinions on a point of law [47].
32

  

 

3) Analysis of the Legalist Method 

 

It is my belief that the majority judicial opinions issued by 

SSB‟s are decided under a legalist theory. For the most part 

the Shari’ah and works of fiqh offer some text or foundation 

to guide the jurists decision-making process leaving less room 

for outside influence. However this formalistic approach has 

been attacked by legal realists as leading overly formalistic 

ends that ignore desired functional purposes of the Shari’ah 

like social justice [4] [25]. While there may be some merit to 

the claim from a purposivist perspective, I believe that as 

formalistic end is a product of legalism, and legalism is itself 

product of piety, rather then a means of circumventing the 

Shari’ah for profit.  

Yet even when the Shari’ah sources are clear the may 

have options in choosing between minority and majority 

approaches. As highlighted in the previous fatwa the jurist 

could have opted for a minority approach that would have 

                                                           
32

 Perhaps jurist here the jurist is unabashedly stating that the 

competing views are absolutely false and without merit. This 

issue of fallibility will be discussed further in the economic 

theory portion of the paper as it relates to possible motivations. 



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eased restrictions on the bank yet did not. The choice the jurist 

made, although primarily legalistic, may also have been 

influenced by secondary elements outside the text like money-

income and piety. The weight the jurist places on these 

secondary influences can best be hypothesized using the 

economic theory as laid out by Judge Posner in How Judges 

Think. 

 

B. The Economic Theory 

 

In Posner‟s seminal piece What do Judge’s and Justice’s 

Maximize?…, he concludes by suggesting that his economic 

theory of judicial decision-making should also be applied to 

“elected judges, to Continental European judges, to jurors, and 

to legislators” [44]. Answering Judge Posner‟s call for the re-

application his theory I suggest that it may also be applicable 

to the jurists on the Shari’ah Supervisory Board of an Islamic 

financial institution because despite the corporate nature of an 

SSB, “nonpecuniary income” is a large part of the jurists‟ total 

compensation [44]. Thus I will put forward similar hypotheses 

that Judge Posner and others have applied to U.S. Federal 

judges and re-apply them to the jurists of a SSB. In doing so I 

will look at possible variations or additional hypotheses that 

apply to economic analysis of judicial decision-making in 

Islamic banking.  

The economic theory of judicial decision-making is 

premised on the idea that jurists, like everyone else, are 

rational, self-interested, and seek to maximize their utility 

[45]. The economic elements of the judicial utility function 

include, “money income, leisure, power, prestige, reputation, 

self-respect, intrinsic pleasure of the work…” [45]  and in the 

SSB‟s case, piety. Furthermore these elements can be 

manipulated by the employer thus modifying the behavior of 

the job-holder [45].  

Because of the uniquely religious/corporate position of 

the jurists on the SSB I believe these elements are weighed 

differently then the state-appointed jurists that Posner‟s theory 

was originally applied to. First the employer‟s ability to 

manipulate behavior is greater in a private company, like a 

bank, then a federal judgeship with life tenure and a fixed 

income. Second the jurist behavior can be viewed as having 

two manipulators, God and the bank.
 33

 The jurist can forward 

or hinder the banks financial goals and conversely the bank 

can reward or punish the jurist [7]. Likewise the jurist can 

                                                           
33

 While the idea of God as a manipulator may raise some 

eyebrows, I do not intend to take God‟s name in vain. I say it 

only figuratively as means of properly applying the economic 

model to the jurist. God‟s role can be seen as an manipulator as 

God has the ability to modify constrain and motivate behaviors 

of the believer even if such modification is at odds with the 

employer. God is “Al Mughnî” (the “Enricher”) “Ar Razzâq” 

(“the Provider”), “Al Mughîth” (“the Sustainer”).  Because there 

are two manipulators a religious duty may come into conflict 

with secular work duty. For example a Muslim‟s religious duty 

to fast during Ramadan and her duty to work swiftly at her job 

may conflict. Whether she fasts or not depends on which reward 

she desires and modifies her behavior for. 

forward or hinder the goals of the Shari’ah and God can 

reward or punish the jurist. While profit and the goals the 

Shari’ah are by no means mutually exclusive, the line at 

which profit becomes unlawful is defined by the Shari’ah and 

thus an inevitable conflict will occur as the lines between 

halal and haram drawn.  

For the purposes of analysis I have assumed the jurists are 

more motivated to avoid punishment from God then the bank. 

I also believe that piety is an additional element functioning as 

both a motivator and constraint in its interactions with the 

other elements influencing the judicial decision-making 

process. Although piety is not mentioned in Posner‟s theory, 

no economic analysis of the Islamic jurist would be sufficient 

without discussing an element that has value in life and after 

death.  Furthermore in putting forth these hypotheses the 

elements will overlap with one another in forming a general 

economic theory of judicial decision-making in Islamic 

banking as it is possible for a jurist to be motivated by 

multiple elements at once.  

Finally, without empirical research it is difficult to 

validate these theories. The goal here is to simply approach 

this unique form of judicial decision-making as I believe 

Judge Posner would. While I am cognizant of possible errors 

in the economic analysis, they are due in part to limited 

material on the subject and the theoretical nature of 

economics. As Posner described, “…the heart of economic 

analysis of law is a mystery that is also an embarrassment: 

how to explain judicial behavior in economic terms…” [44]. 

And while the SSB is not totally “divorced” from obvious 

economic incentives like compensation, the dual nature of the 

SSB makes the value placed on these incentives ambiguous in 

comparison to the other nonpecuniary-income [44]. 

 

1) Money Income 

 

 The first and most obvious possible influence on the 

judicial decision-making process is money-income [7]. Here 

Posner would hypothesize that the influence of money-income 

is greater for the jurist on the SSB because, unlike federal 

judges, the jurists of an SSB do not have a permanently fixed 

income or similar job security. However despite the SSB‟s 

corporate role and the popularity of modern cynicisms view of 

organized religion, I believe the motivation for and influence 

of money-income is outweighed by the preference for the 

other nonpecuniary elements, like piety.  

Money-income for the jurist and money-income for the 

institution are firmly related. Each party, the bank and the 

SSB, has the ability increase or limit the other‟s money-

income [7]. Therefore the SSB and the institution are required 

to function symbiotically and not competitively as strained 

relations between the two parties will likely decrease the 

money-income earned by each party. If the jurists prohibit too 

many transactions or contracts the bank will have less revenue 

to pay the jurists, or more may terminate and replace them 

with other jurists who the banks perceives as more equitable to 

the banks financial needs. On the other hand if the jurist gives 

way to the banks money-income motivation and adopts the 



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motivation as his own he might be setting aside the Shari’ah at 

the expense of other elements. If the latter is the case the jurist 

may be gaining money-income and lose piety or prestige both 

of which may be seen as having greater value in the long term. 

What is more likely is that if a jurist declares a transaction 

impermissible the SSB will subsequently assist the bank in 

finding a Shari’ah compliant solution. Thus equity may 

require that a jurist function more like an arbitrator and less 

like clerk with a halal stamp of approval. 

Therefore, the likelihood the jurist will appease a bank 

and deem the impermissible halal is small because the other 

competing elements (prestige, piety, reputation etc.) combined 

and the jurists desire to secure a pleasurable afterlife will 

outweigh the motivation for money-income. However, 

leniency is also an accepted legalistic concept based in Islamic 

law‟s view of equity as established under the legalist method 

as a maxim or “golden rule.” The maxim creates the legal 

presumption that everything is permissible except what is 

explicitly forbidden by the Shari’ah [20] [3]. This 

presumption is what I call the “presumption of permissibility,” 

and it is prominent in Islamic banking [2]. This presumption 

encourages judicial restraint before prohibiting transactions, 

because unless the basis of the transaction is clearly prohibited 

by the primary sources it will be allowed. The point of 

mentioning this legal presumption is to re-affirm the idea that 

even if the jurist appears lenient it is still likely adherence to 

the Shari’ah and its legal presumptions motivating the ruling 

rather then money-income [20].  

 

2) Prestige 

 

 Because of the highly privatized nature of Islamic 

jurisprudence prestige should to be quite important to Islamic 

jurists [12]. In a sense, prestige would help the jurist develop a 

following of believers who rely on the jurist‟s rulings for 

guidance [12]. Thus prestige may increase the jurist‟s power 

and therefore the jurist can subsequently achieve other more 

ideological or political goals once a following is secured [12]. 

However the span of prestige appears limited, as fatwas 

regarding financial transactions and contracts reach a limited 

audience of interested individuals. Therefore the ability of a 

jurist on a SSB to gain a significant religious following is 

muddled by the complex and profane nature of financial 

transactions and their governing law.  Consequently it is more 

likely the jurist would be motivated to obtain prestige within 

his particular institution or the Islamic banking industry rather 

than for any grand political ambitions.  

Prestige is distinct from popularity because one who 

motivated by popularity wants to be “liked” by his peers, 

where as someone who is seeking prestige wants to be 

respected [44]. For example, if one of the jurists on an SSB is 

seen as a “yes-man” he may win friends among some of the 

bank managers but he is unlikely to gain any prestige amongst 

fellow jurist or scholars of Islamic law. Similarly, if a jurist is 

perceived as having a preference for money-income it may 

lead to criticism from more respected scholars and a loss of 

prestige as highlighted by the two fatwas cited earlier in the 

paper. The loss prestige of would limit the precedential power 

of his fatwas and may subsequently bar them from entering a 

position of substantive law. Therefore a jurist may be 

motivated to uphold the principles of the Shari’ah against 

money-income in order to maintain his prestige.  

In the alternative a jurist who is perceived as more lenient 

may gain favor among the bank managers of other institutions 

opening the door to possible memberships on other SSB‟s. 

However this is not prestige, and is something more akin to 

popularity as it likely to garner little respect from other jurists 

or academics. While popularity may play some role as an 

element here, I believe the desire to be popular in private 

sector differs in its former application to federal judges 

because of popularities close relation to money-income in 

commercial settings. Essentially, if a jurist desires to earn a 

reputation as being exceedingly lenient and “liked” for his 

leniency, his desire for popularity may be motivated by 

money-income rather than the desire to win friends among 

bankers.  

Furthermore the jurist‟s prestige is important for the bank. 

Because the bank seeks religious clientele the prestige of the 

jurists on its SSB arguably serves as a marketing tool [37].  

One can assume that more prestigious the members of the 

SSB, the more Shari’ah-compliant and trustworthy the 

institution will appear to religious account holders, investors, 

and partners. Therefore if the jurists are seen as profit 

motivated “yes-men,” than groups of the religious public, 

potential investors, will become more skeptical of the Islamic 

banking system than they already are [4]. Because prestige is 

important to both the jurist and the bank it is likely the jurist 

will be given more deference by the bank when developing a 

product or issuing a fatwa, thereby increasing the jurist‟s 

prestige among other members of the Islamic banking industry 

and subsequently protecting himself from the criticism of 

other jurists and academics.  

 

3) Power 

 

 Like prestige, a jurist‟s power or the lack thereof, in 

and outside an institution may motivate his rulings. However 

unlike a more public jurist, fatwas issued by an SSB garner 

less attention because the are directed at a very specific 

audience. Thus the concept of a “power trip” may be more 

popular among federal judges or qadi’s and is less likely to 

occur in the private domain of an SSB [44].
34

 However this 

does not mean jurists who specialize in banking are less 

motivated to gain power, but rather that power, like the other 

elements, is valued and manipulated differently. For the 

purposes of economic analysis there are two types of power 

that may motivate a ruling: power outside the institution, and 

power within the institution.  

                                                           
34

 A “power trip” is when the judge attempts to “change the 

world” through a ruling. Because the judicial decision made by 

the jurists on an SSB in are tailored to a very specific questioner 

and are generally in reference to a financial transaction there is 

unlikely a greater policy motives influencing the decision-

making process. 



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First power outside the institution, the less influential of 

the two. In highlighting the role power outside the institution I 

will focus Sheikh Usmani‟s fatwa regarding sukuk discussed 

early in the paper. Sheikh Usmani has acquired prestige and is 

a heavily cited authority in the world of Islamic banking [48]. 

Because of this prestige he also has a sufficient amount of 

power outside his respective institution such that he can 

influence the Islamic market place with a single fatwa [48].
35

 

While it is unlikely that the Sheikh‟s fatwa regarding sukuk 

was motivated by a self-interest in maximizing this power it is 

clear that he has gained authority in the industry and such 

authority may be a desirable form of nonpecuniary-income to 

other jurists. We can assume, however, that if a similar fatwa 

regarding sukuk were issued by a less-prestigious jurist, it 

would have had less influence outside the institution in the 

“free market” of Islamic jurisprudence [12] [28]. Therefore we 

can further hypothesize that if such power outside a jurist‟s 

respective institution is desirable a jurist may be motivated to 

attain more prestige and power so their fatwas’ receive 

recognition and gain wider influence.  

The effect to which the desire to maximize this type of 

power functions as a motivator for Islamic jurists is arguable.  

Essentially the question is to what extent do less powerful 

jurists of an SSB want the same amount of power as someone 

like Sheikh Usmani. In answering the question, I believe the 

jurists are pious such that the desire for power outside the 

institution would be secondary when issuing a ruling as the 

key goal is to uphold the Divine law, rather then increase the 

jurist‟s fortitude in the financial world. In a sense piety 

requires humbleness, and a humble jurist cannot, or should 

not, be motivated by power when interpreting God‟s law. Thus 

the jurists‟ motivation for power outside the institution is 

limited.  

 However the second type of power, power inside the 

institution is likely to play a greater role in the judicial 

decision-making process. Because of the fatwa’s non-binding 

nature in the “free-market” of Islamic law, as well as the 

accepted fallibility and pluralism of ijtihad, the jurist‟s power 

is most often limited to the institution that has posed the 

question [37] [28]. Therefore it is more likely that the jurist is 

motivated to maintain enough power in his institution so that 

his position on the SSB remains a relevant and authoritative. 

Thus power within an institution is more influential and may 

motivate a jurist to prohibit a transaction so that the institution 

will continue seek approval of a reformed version of that 

transaction. Because the prohibition forces the bank and the 

SSB to seek a compromise later, the prohibition temporarily 

increases the jurist‟s power within the institution during the 

latter advisory period.  

On the other hand, if the jurist outright approves of a 

transaction his work is complete in regards to that transaction 

and power within the institution is less relevant. Conclusively, 

a jurist may be motivated at times to prohibit transactions in 

order to gain power within the institution rather then power 

outside the institution. This type of power is desirable simply 

                                                           
35

 In this regard, Robbins cites [54]. 

for the reason that people may enjoy more authoritative 

positions in the workplace as it increases ones self-worth.  Yet 

because the desire for power is constrained by a jurists 

preference to be pious I believe the power element is limited 

in its influence. Finally a Posnerian argument against the idea 

that a jurist has motivation to prohibit a transaction in order to 

increase power within the institution may be that increased 

power would subsequently decrease the jurist‟s leisure time. 

 

4) Leisure 

 

Under the economic model of judicial decision-making 

leisure is a form of nonpecuniary income, and an increase in 

leisure would decrease pecuniary income [44]. According to 

Posner the leisure preference may be the reason federal judges 

place so much emphasis on judicial economy [45]. Likewise a 

jurist on SSB might also approve a transaction or contract for 

the leisure time it would create after because the approval 

process would end and there would be little or no need for any 

follow up meetings or review.  

Like the federal judges Posner analyzed, Islamic jurists 

may also like a bit of down time, therefore issuing shorter 

fatwas or deeming a product or transaction permissible may be 

motivated by the desire to increase judicial efficiency and 

possibly leisure time. Understandably, the more power the 

jurist is afforded the more responsibility he would have, and 

subsequently less leisure time would be available to him. 

Therefore we can also assume that the motivation for power 

and the motivation for leisure are normally at odds with one 

another in the judicial decision-making process. Thus one may 

contrast the motivation for power to prohibit a transaction, 

with the motivation for leisure time and the approval of a 

transaction or issue a shorter fatwa.  

Yet the hypothesis regarding leisure time and short fatwas 

may be more correlative than anything indicative as a leisure 

preference in the SSB. Rather issuing shorter fatwas may be 

an indicator of the legalist method as issuing shorter fatwas is 

recommended and has historically been practiced in Islamic 

jurisprudence [36]. Therefore a series of short fatwas may be 

more consistent with the legalist method.  However this does 

not rule out the motivation to approve a contract or transaction 

in order to increase leisure time afterwords. Conclusively a 

leisure preference may motivate a jurist to approve 

transactions but the leisure preference is constrained by the 

preference for money-income, power, and piety.  

 

5) Piety 

 

 Piety is the final and most valued element to be 

discussed. Although not addressed by Posner, I am positive of 

piety‟s role as both a motivator and constraint in religious 

jurisprudence. For purpose of this section piety will be defined 

the modification of acts according to one‟s conscious fear of 

God, the Day of Judgment, and the hereafter. Piety is likely to 

motivate the religious jurists behavior even if it is directly at 

odds with other pecuniary interests. Above all the other 

elements in the economic model, I believe piety has the 



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greatest influence in the Islamic jurist decision-making 

process.  

Like the other elements in Posner‟s theory, piety does 

have an economic value in this world, yet it is distinct because 

the full value of a piety preference is not recognized until after 

death. The value of piety in this world is the value of piety in 

one‟s reputation and ones intrinsic value of themselves. Thus a 

religious jurist is more likely to value himself and his work if 

his work is motivated by a piety preference. For this reason 

the element of piety encompasses Posner‟s elements of 

reputation, self-respect, and intrinsic pleasure of the work 

[45]. 

Piety also has extrinsic economic and commercial value. 

Ideally a jurist of religious law would like to be known for his 

piety above all other characteristics.  Piety is what makes the 

jurist credible to his questioner and motivates the questioner to 

ask that jurist in particular [12]. Piety is a necessary trait 

because it suggests that the jurist worthy of stating Divine law 

and that his opinion is worthy of being followed [12]. In this 

way, piety functions like reputation, yet contains the added 

benefit of increasing ones credibility and character for 

truthfulness.  

Furthermore, the ultimate goal of all Muslims is to attain 

paradise in the hereafter, the acts one commits have a value 

after death. Because a Muslim is judged by the totality of his 

deeds, any bad deed will have a lasting effect that will greatly 

outweigh any temporal economic gain achieved in this world 

[32].
36

 Therefore if a Muslim jurist strives to be pious, any 

ruling that is intentionally misleading presented under the 

guise of piety could have grave consequences in the next life 

where this world‟s money-income has no value.  

 Thus piety motivates the jurist to be honest, to uphold 

the Shari’ah, and to avoid hypocrisy, something viewed 

harshly in Islamic theology [32].
37

 Most importantly, piety 

constrains urges motivated by money-income, power, and 

prestige, so that they become sinful temptations rather then 

economic motivators. It is my belief that piety‟s presence as 

an element minimizes the value the jurist places on the other 

elements and motivates the jurist to adhere to the legalist 

method because legalism limits the jurist‟s spiritual liability 

and insulates the judicial decision-making process from 

impropriety. 

 

IV. CONCLUSION 

                                                           
36

 11:15-16 “Those who desire the life of the present and its 

glitter,- to them we shall pay (the price of) their deeds therein,- 

without diminution. They are those for whom there is nothing in 

the Hereafter but the Fire: vain are the designs they frame 

therein, and of no effect and the deeds that they do!” [32]. 
37

 4:142, 145 “The hypocrites - they think they are over-reaching 

Allah, but He will over- reach them: When they stand up to 

prayer, they stand without earnestness, to be seen of men, but 

little do they hold Allah in remembrance…The hypocrites will 

be in the lowest depths of the Fire: no helper wilt thou find for 

them…” [32]. 

Because of the influence of piety described in the prior 

section, I believe the legalist theory is the best method of 

understanding judicial decision-making of the jurists on an 

SSB. Although this conclusion may appear circular, it is not. It 

follows logically that if the jurist is motivated by piety he 

conforms to the legalist method in an attempt to limit his 

liability before God. If the jurist deviates from the legalist 

methods there is the possibility of transgression, and because 

legalism limits opportunities to deviate it provides the safest 

path of judicial decision-making. Thus the preference for piety 

makes legalism a more attractive means of decision-making. 

This conclusion is supported by research conducted on federal 

judges indicating that where the law is clear legalism is used 

and rulings are consistent [21]. Here I believe the Shari’ah and 

subsequent works of fiqh are generally clear such that the 

jurist is rightly guided by the texts. 

 Therefore, I fundamentally disagree with the idea that the 

formality of legalism is being misused for Capitalist purposes. 

Piety restricts the jurist to his texts and canons of 

interpretation; anything outside the Shari’ah sources would 

“taint” the opinion, an opinion that by its nature is intended to 

be an expression of God‟s law [12]. A pious jurist is aware of 

these temptations and adheres to the Shari’ah by avoiding 

them through legalism. The Shari’ah is not only the law 

dictated by the jurist, but the Shari’ah dictates the jurist‟s 

behavior including decision-making process. The Shari’ah is 

holistic, all acts, including judicial decision-making are 

subject to legal categorization, and often sorted by the intent 

of the actor. Because Allah is the ultimate enforcer of the 

Shari’ah any intentionally misleading opinions are subject to 

judgment on the final day. As the famous hadith states “The 

one who performs ijtihad and reaches the right answer will 

receive two rewards [from God], and the one who performs 

ijtihad and reaches the wrong answer will receive one reward 

[from God]” [46].
38

 The caveat is that the ijtihad must be 

performed sincerely. Again, it is the intent of the jurist that 

matters. Therefore one can assume that feigning the use of 

ijtihad in order to promote impermissible acts would be 

punished in the hereafter.  

Thus legalism and its formalistic nature provide a safe 

avenue of judicial decision-making that is the process most 

often used among the jurists of an SSB. Does the all-

encompassing nature of the Shari’ah protect itself from 

intentional misinterpretation motivated by economic or 

political gains? I believe ideally yes, it should. However this 

presumes private jurists and legal scholars have behaved in 

accordance with the Divine law when issuing rulings 

throughout history, and there is evidence to suggest that this 

was not always the case [12].
39

 

Therefore the question becomes whether or not modern 

Islamic jurisprudence should become subject to the same 

critiques of legal realism that is now prevalent in the U.S. 

                                                           
38

 In this regard, Quraishi cites [43]. 
39

 Ali Khan discusses the charges made by orientalist Joseph 

Schacht that Islamic law had fraudulently copied earlier Judeo-

Christian and Grecian legal traditions.  



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legal system. However unlike questions posed in the U.S. as to 

whether or not judges are or should be influenced by religious 

belief, the question here is whether or not Islamic judges are 

influenced by anything other than religious belief [19].  

Although other scholars have attacked the sincerity of the 

Islamic banking industry‟s attempt to uphold the Shari’ah, 

their claims are overly cynical and improper as they lack any 

empirical data to support them. Thus a solution to this 

disagreement necessarily calls for the type of empirical 

research used to probe the minds of federal judges [15]. 

Moreover, would such a critical analysis help or reshape 

our understanding of fiqh? Would it create a rise demand for 

the now dead school of literalism (Zahiri madhhab) as a 

means of insulating the Shari’ah from outside influence 

[46]?
40

 Would realism create the same cynicism and 

skepticism now confronting the U.S. judiciary? There are two 

short answers. First, if one thinks the psychological and social-

science based approaches to understanding judicial decision-

making have been successful or beneficial in promoting 

justice in the court system then perhaps it could be helpful to 

the Islamic legal realm. On the other hand if one thinks these 

forms of legal realism have subjected the judiciary to 

unwarranted criticism of being political actors then perhaps 

now is not the best time to critically analyze Islamic jurists. 

Essentially, the question is should the idea of an objective and 

pious Islamic jurist as described in this paper be forever 

tarnished by legal realism and critical legal studies, as the 

ideal of the objective U.S. judge was “slain” and “killed 

again” by legal realists and critically legal studies [19]?  

I leave the answers to these questions up to the jurists 

themselves and all those passionate about Islamic law and 

finance. After the most recent financial crisis it has become 

apparent that market integrity is needed. In many cases 

Islamic finance provides solutions that will help restore 

market integrity. In the Islamic financial institution integrity 

rests with the Shari‟ah board and its jurists. Therefore, in my 

opinion the study of their decision making process is needed 

to maintaining the integrity of Shari‟ah compliance. However, 

in the end the most sincere answer always is “Allah knows 

best.” 

ACKNOWLEDGMENT  

 I dedicate this piece to Dr. Jeremy Blumenthal. 

Without his guidance and scholarship this paper would not 

exist. He had a wonderful smile and a kind heart. We miss him 

dearly. Thank you Professor. 

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[55] B. Weiss, “Interpretation in Islamic law: The theory of Ijtihad,” 
Am. J. Comp. L., vol. 26, p. 199, 1977–1978. 

[56] D. Williams, “The Last Word,” Islamic Banking & Fin. Mag., 
March 19, 2009. 

 



EJIF – European Journal of Islamic Finance  Editorial Team 

 

 

 

Editor in Chief 

 

Prof. Paolo Pietro Biancone, University of Turin, Italy 

 

 

 

Editorial Board 

Prof. Dian Masyita, University of Padjadjaran, Indonesia 

Prof. Abdulazeem Abozaid, Qatar Faculty of Islamic Studies – Qatar 

Prof. Ahmad Aref Almazari, King Saud University, Saudi Arabia 

Prof. Nidal A. Alsayyed, Inayah Islamic Finance Research Institute, USA 

Prof. Roberta Aluffi, University of Turin - Italy 

Prof. Ghassen Bouslama, NEOMA Business School - Campus de Reims, France 

Prof. Nazam Dzolkarnaini, Salford University, UK 

Prof. Kabir Hassan, University of New Orleans, USA 

Prof. Khaled Hussainey, University of Plymouth, UK 

Prof. Rifki Ismal, University of Indonesia 

Prof. Tariqullah Khan, Hamad bin Khalifa University, Qatar 

Prof. Ali Khorshid, ICMA Centre Reading University - UK 

Prof. Amir Kia, Utah Valley University, USA 

Prof. Laurent Marliere, Université Paris-Dauphine France 

Prof. Federica Miglietta, University of Bari - Italy 

Prof. Hakim Ben Othman, University of Tunis - Tunisia 

Prof. Mohamed Ramady, King Fahd University of Petroleum and Minerals, Saudi Arabia 

Prof. Mamunur Rashid, Nottingham University, Malaysia 

Prof. Younes Soualhi, International Islamic University Malaysia 

Prof. Laurent Weill, University of Strasbourg, France