A fatwa occupies a key strategic position in any Islamic finance transaction.
It is the only document that lends support to a transaction from a shariah-compliance perspective, and means more than simple compliance with discretionary or regulatory shariah governance requirements by an institution. A fatwa confirms the shariah permissibility of the underlying transaction and, as a result, provides much needed assurance to the investors for earning halal returns, besides determining the level of shariah compliance in an institution.
Given the importance of the fatwa, it should be a concise statement of facts in simple language and include details of shariah nominate contracts on which the transaction has been structured.
Also, the fatwa should clearly state the extent of deviation from any shariah principle that has been allowed by the shariah scholars signing the fatwa, besides the reasons for such exception.
Another important aspect of a fatwa is the reference to the school of jurisprudence relied upon by the relevant Shariah Board in order to ensure the certainty as to the underlying shariah principles governing the transactions.
This approach necessitates intensive review of all aspects of the transaction. However, an examination of pronouncements for several transactions reveals a disconnect between the fatwa and the facts of the underlying transaction.
Existing practices for issuance of a fatwa need a more focused approach and should at least adhere to fulfilling the Accounting and Auditing Organisation for Islamic Financial Institution's Shariah Standards in order to make it a meaningful document on which stakeholders can rely while making an investment decision.
To strengthen the importance and inviolability of the fatwa, and to enhance confidence in this crucial document, regulators may consider introducing clear rules for shariah review and issuance of fatwa in the relevant jurisdictions, including providing for minimum essential requirements that a fatwa must contain.
Mian Muhammad Nazir