The Origins of Islamic Finance: A Response

This is a wonderful opportunity to bring Islamic law into the legal debate in the United States beyond the superficial level at which it usually takes place. This is the more welcome for someone who has written a book on Muhammad Baqer as-Sadr as the most creative Islamic thinker of the 20th century (The Renewal of Islamic Law, Cambridge 1993), and now sees a second generation of Sadr scholars, like Professor Hamoudi, engaging seriously his work in American legal academia.

In his article, Hamoudi uses Sadr’s work to show how a functionalist approach to Islamic law is combined with a real scholarly autonomy to provide a constructive criticism of the modern economic system. ‘Functionalist’ in this understanding is dual in Sadr’s work. On the one hand, Sadr breaks with ‘traditional’ scholarship in the constraining sense, which relegates scholars to boring and obscure discussions that have little or no use in modern society. On the other hand, functionalism means debate with the outside world on the highest possible plane, and engages the scholar of Islamic law in his society’s debate and pressing issues. Sadr’s seminal work, Iqtisaduna (1959-61), was responsive to a pervasive debate in Iraq at the time, indeed in the Middle East and elsewhere on the planet, when in the 1950s Soviet-style socialism was the central challenge to the dominant capitalist order. Prof. Hamoudi pushes the debate further, by showing that the ‘socialist’ contingency is only part of the picture in Sadr’s functionalism. He has now engaged the Sadr system in a planetary debate partly informed by the ascendancy of political Islam. In the course of this widening of the scope of Sadr’s worldview, Hamoudi places the debate opened by Sadr against the structure of law studying and teaching in ‘traditional’ scholars like Sadr. This is a welcome dimension of Sadr’s contributions, which I may have missed by discussing the Najaf schools too formally.

As for ‘scholarly autonomy’ in Sadr’s reinvigoration of Islamic law, Hamoudi operates on new terrain which comes from his engaging the legal debate in America, through the lens of what he calls ‘Langdellian formalism’. We agree, I think, that one of the important quality of Sadr’s work is a thorough scholarship that allows it to ‘form system’, in Hamoudi’s words ‘to show us the way’. I rested that conclusion in my early book on the sheer quality of Sadr’s scholarship, but Hamoudi adds a more interesting dimension. Building on Sadr’s discussion of objectivity and subjectivity (dhatiyya) in Iqtisaduna, he develops Sadr’s interpretation of Islamic law in a way that allows him to break away from formalism, while retaining a measure of objectivity which is defined by the autonomy of scholarship.

This then is applied to Islamic finance. I share Hamoudi’s criticism of the gimmickry that the modern-day practice of Islamic finance seems to relish. Since my first edited book on Islamic Law and Finance (London 1988) through to the work on Sadr’s interest-free Islamic bank (Sadr, al-bank al-la ribawi fil-Islam, Kuwait 1973, discussed in chapter 5 of my Renewal) and my more recent Introduction to Middle Eastern Law (Oxford 2007, chapter 9), I have been attentive to a field which has grown dramatically in terms of assets. I am not impressed by the gimmickry, and I join Mahmud al-Gamal and Haider Ala Hamoudi in their skepticism towards what Hamoudi rightly calls ‘hypocrisy.’ From a system which is informed by the moral unease in Islamic law toward speculative investment which is not underscored by labour, the current Islamic banks have engaged into a spate of dubious transactions with Arabic names that all but dupe the customer. Commercial contracts between investor and worker under the classic mudaraba, which had been already thoroughly examined by Abraham Udovitch (Partnership and Profit in Medieval Islam, Princeton 1970) are replaced with murabaha and tawarruq schemes that mean little other than contorted, allegedly Islamised schemes, which are in fact poor replicas of Western banking. This is unfortunate, and has been rightly exposed in the better literature which Hamoudi, Gamal and Ibrahim Warde represent.

In his Interest-Free Bank, Sadr offered an enticing scheme that never found its way to Islamic banks. Instead of conceiving of deposits and loans as ‘two-tier mudaraba’, he tried to think the contract between the bank’s borrower and the bank’s lender (the depositor) as one unit. Maybe this cannot work, but the effort exerted by Sadr deserves a better shot than all types of Western and Muslim legal advisors have been offering to Islamic capital invested in Islamic banking. Prof. Hamoudi and some of the more serious colleagues, in academia and in practice, will no doubt engage the field more seriously on this level.