Islamic Finance and the Shari'ah: The Dow Jones Fatwa and Permissible Variance as Studies in Letheanism and Legal Change

5 Pages Posted: 4 Jul 2014 Last revised: 17 Nov 2014

See all articles by Michael J. T. McMillen

Michael J. T. McMillen

Curtis, Mallet-Prevost, Colt & Mosle LLP; University of Pennsylvania Law School

Sheikh Yusuf Talal DeLorenzo


Date Written: June 23, 2014


ISLAMIC FINANCE AND THE SHARIʿAH: THE DOW JONES FATWA AND PERMISSIBLE VARIANCE AS STUDIES IN LETHEANISM AND LEGAL CHANGE considers change, and how change occurs, in two areas. The first area is change in a body of law, both generally and specifically with respect to Islamic shariʿah as law in the circumscribed areas of commerce and finance (the “Shariʿah”). The second area is change in two of the four primary categories of activities subsumed under the concept of “Islamic finance” (finance and investment; the other two categories are banking and insurance). Change in the Shariʿah and in Islamic finance are intimately and inextricably related as the Shariʿah in large part defines, and in all respects constrains, change in Islamic finance. Legal change necessarily involves consideration of the interpretive modalities that are employed in effecting that legal change.

This book has three primary objectives. One is to serve as a general introduction to contemporary Islamic finance. The second is to serve as an introduction, in part heuristic, to five specific areas of inquiry. And the third is to stimulate more comprehensive and rigorous treatments of those five specific areas of inquiry. The areas of inquiry are:

• the state and practice of modern Islamic finance, including changes that have occurred and are occurring in Islamic finance; • the interpretive modalities used in defining and applying the relevant principles of the Shariʿah in the Islamic finance context; • the nature of legal change (directions, methods and content); • the relationship of changes in the realm of Islamic finance to various legal theories (in particular, classical orthodoxy or formalism, as those concepts are discussed in connection with both the common law and the Shariʿah); and • the foci and data sets that are of relevance to further inquiry regarding the aforementioned matters.

In pursuing these objectives, the book focuses on two related lines of inquiry. The first pertains to issues that have been raised regarding, and criticisms directed at, Islamic finance. The second relates to the course of development of modern Islamic finance as it has occurred and as it is occurring.

For analytical purposes, two written works were chosen to frame the discussions. One is a scholarly paper (Haider Ala Hamoudi, Muhammad’s Social Justice or Muslim Cant?: Langdellianism and the Failures of Islamic Finance, 40 CORNELL INTERNATIONAL LAW JOURNAL 89 (2007); the “IF-Critique”) that summarizes many of the issues and criticisms;. The other is a modern fatwa, or juristic opinion, and its developmental sequelae (which are largely purposefully induced). The fatwa is The Dow Jones Islamic Market Index: Statement by the Shariʿah Supervisory Board (the “DJIMI Fatwa”), which was issued to Dow Jones & Company, Inc. in 1998 in connection with the establishment of the Dow Jones Islamic Market Index (the “DJIMI”). The DJIMI Fatwa institutionalized and gave global effect to a set of principles that have subsequently been applied and refined in an expanding set of transactional circumstances. Those principles pertain to the acceptability, on a temporary basis of undefined term, of some degree of impurity or variance from strict, literalist interpretations of the Shariʿah.

IF-Critique was chosen for numerous reasons. It is one of the few efforts — and a commendable and intellectually important effort — to rigorously address topics of profound, poignant and, in some cases, immediately relevant, if not pressing, legal, philosophical, epistemic, political, social, economic and financial interest and importance. IF-Critique raises issues of fundamental import to the Islamic finance industry in its incipiency, issues that go largely unaddressed in the literature: issues not to be ignored or inconsiderately treated. It presents criticisms of what are perceived to be current practices within, and of interpretive modalities as applied to the explication of the Shariʿah in, modern Islamic finance. It identifies a rare and ripe opportunity to study legal change as an ongoing process. It directs attention to an industry that is premised on and imperatively shaped by law (the Shariʿah) and its application, and that is in the throes, and immersed in the challenges, of rapid change in compelling circumstances.

IF-Critique asserts a comparability between the doctrinal formulations identified with Christopher Columbus Langdell, which are includable in “classical legal theory”, and those of Muhammad ibn Idrīs al-Shāfiʿī, a referential for Islamic finance. These are referred to as Langdellian and Shafiʿian modalities, respectively. They are said to be comparable modalities — mirror modalities — that have been applied rigidly in, and to the detriment of, Islamic finance in its formative period.

IF-Critique employs a data set from which extrapolations, judgments and conclusions regarding Islamic finance are taken. That data set is comprised of two transactional structures that are said to be current practice in, and representative of,¬ contemporary Islamic finance structures and transactions: a murabaha (cost-plus sale) transaction and an ijara (lease) transaction. These transactional structures, as depicted in IF-Critique, are referred to as the “Critic’s Data Set”. The conclusions regarding these structures and transactions using these structures seem to be that (a) neither is compliant with the Shariʿah, (b) they are “largely artificial” as being “substantively the same as their forbidden counterparts, albeit with semantic alterations and higher transaction costs associated with creating the appearance of difference”, and (c) they constitute “legalistic acrobatics” “to circumvent in a fundamentally disingenuous fashion, central prohibitions developed by the shariʾa.” The chosen examples are not notorious; they are an entirely fair and appropriate focus, each of the structures being widely used in and integral to the operation of Islamic finance.

The DJIMI Fatwa was chosen, first, because it was, and that it remains, critical to the continuing existence and viability of Islamic finance and the processes of change that are occurring in both the law applicable to, and the practice of, Islamic finance. Second, it was chosen because the development of the principles institutionalized in that fatwa has been compressed, rapid, profound, extensive, illustrative, and, both within and without the field of Islamic finance, controversial. Representative transactional examples illustrating the developmental processes subsequent to the DJIMI Fatwa (the sequelae) provide a quite different data set than IF-Critique, although there are areas of overlap. This different data set can be used to evaluate issues relating to and criticisms of Islamic finance and to begin examining theories of change generally. Much of the book is given over to presenting this data set as a series of developments flowing from the DJIMI Fatwa and the principles that were institutionalized in that fatawa and, separately, as an isolated transaction (murabaha).

Keywords: Islamic finance, Shari'ah, fatwa, Dow Jones, legal change, change of law, equity investing, leasing, ijara

JEL Classification: K33, K10, K11, K12, k34, k39, N25, E44, F00, F02, F23, G15, G20, G24, G32, P40

Suggested Citation

McMillen, Michael J. T. and Talal DeLorenzo, Sheikh Yusuf, Islamic Finance and the Shari'ah: The Dow Jones Fatwa and Permissible Variance as Studies in Letheanism and Legal Change (June 23, 2014). Available at SSRN: or

Michael J. T. McMillen (Contact Author)

Curtis, Mallet-Prevost, Colt & Mosle LLP ( email )

101 Park Avenue
35th Floor
New York, NY 10178-0016
United States
+1-212-696-6157 (Phone)

University of Pennsylvania Law School ( email )

3400 Chestnut Street
Philadelphia, PA 19104-6204
United States
1-610-865-1295 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics