Just last month, Iraqi President Jalal Talibani approved a law, No. 95 of 2012, that establishes a state-owned Islamic bank given the name "The Islamic Bank of Mesopotamia." The initial working capital of the bank is, under Article 3 of the law, 50 billion Iraqi dinars (roughly $43 million), and it can be raised from time to time from resources that the bank itself develops. The purpose of the bank, under Article 2 of the law, is to "provide financial and banking services consonant with the rulings of the Islamic shari'a and the development of the Iraqi economy." In a concluding paragraph offering reasons for enacting the legislation, it is said that it stems in part from a "desire of a broad slice of citizens in obtaining banking services that accord with the Islamic shari'a." The law is, thus, the first, major, public effort of the Iraqi government to enter into the rising field of Islamic finance.
On the surface, there is nothing particularly surprising about this. Article 2 of the Iraqi Constitution [PDF] does provide for a robust role for Islam in the legal order of the state after all, declaring it not only the religion of the state, but also "a foundational source of legislation." The same Article further obligates the state to guarantee the sustainment of the Islamic identity of Iraq's Muslim majority population. The creation of the Islamic bank is certainly very much in line with these commitments.
Yet, two interesting questions arise from the law that created the bank. The first of these becomes apparent when one compares the language of Article 2 of the new law with Article 2 of the constitution. The latter not only establishes Islam as foundational source of legislation, but it also prohibits the enactment of any law that violates the "settled rulings" of Islam. The former calls for the establishment of a bank whose services are "consonant with the rulings of the Islamic shari'a[.]" If the purpose of the new bank is to create an institution which operates in a manner that is consonant with shari'a, would that not mean that existing banks operate by rules that are not consonant with the rules of the Islamic shari'a? Indeed, this would be the conclusion of the majority of Iraq's authoritative juristic and scholarly authorities on Islam, given that conventional Iraqi banks routinely take and pay interest. Moreover, the only sensible reason to establish an Islamic bank would be if other, existing banks were not Islamic.
Yet if this is so, how can the laws within Iraq that specifically authorize the taking and paying of interest on the part of institutions and individuals alike be permitted to stand? If the state may enact the law establishing the Islamic Bank of Mesopotamia under the Islamizing provisions of Article 2, must the Federal Supreme Court of Iraq also strike down the laws authorizing any other non-Islamic banking institutions?
If the life of the law were driven by logic rather than experience, the answer would surely be "yes" there is no basis upon which to conclude that one part of Article 2 of the Constitution is somehow more effective than any other part of it. But it is hard to imagine that the Federal Supreme Court would, or could, ever take such a step given the almost certain disastrous effect on the Iraqi economy if it did. The major constitutional court in the region to have heard a claim on the Islamicity of interest the Supreme Constitutional Court of Egypt managed to avoid the problem of declaring interest void by an artful dodge, effectively indicating that any laws that were un-Islamic were immunized from the effect of a subsequent amendment requiring the law to conform to Islamic dictate. There is no indication from its current case law that suggests that the Iraqi Federal Supreme Court finds such strained reasoning particularly appealing. It is also apparent, as I have indicated in an earlier piece, that the Federal Supreme Court has always found ways to uphold older legislation as against an Islamicity test, often by avoiding the issue rather than actually evaluating the law on the basis of its consistency with Islam. It seems almost certain that the court would do the same in this instance, either not dealing with any case that sought to challenge interest or finding a way to dispose of the case without deciding that issue. Certainly it is rather noteworthy that none of Iraq's premier Islamist parties have made an interest ban a noticeable part of their legislative agenda, making it all the easier for the Court not to deal with the problem.
The second interesting point in the law is the tangential role that religious scholars and religious institutions play in the operation of the bank. Article 1(3) requires the director general of the bank to have a college degree and experience in banking, but not necessarily Islamic jurisprudence generally or Islamic finance specifically. The same is true for four of the six members of the board of directors. Even as to the other two members, where some experience in Islamic finance is necessary, the reference is remarkably ecumenical. These individuals do not need to be graduates of any particular seminary or have any particular level of religious knowledge, they merely need to have "experience and specialization in Islamic economics," broadly speaking. Moreover, they are appointed by the director general, who might know next to nothing about the shari'a.
One may contrast this against the recently enacted laws administering the waqfs, or Islamic charitable trusts. There are two such laws for Muslims one for the Shi'a and one for the Sunnis. The head of the bureaus administering Sunni and Shi'a waqfs respectively cannot even be appointed unless approved the relevant non-state religious authorities. In the case of the Shi'a Waqf Bureau, this gives Grand Ayatollah Ali al-Sistani formal veto power over the appointment of a state official. Each law moreover requires three other members of the board of the relevant Bureau to be jurists of sound reputation selected by the head of the Bureau, who is, as noted, already vetted by the highest relevant religious authorities.
The contrast between the operation of these Islamic institutions and the Islamic Bank of Mesopotamia is rather surprising. Indeed, the level of representation of Islamic experts on the Islamic bank is less than the level of representation of such experts that some Islamist parties seek on the Federal Supreme Court, despite the fact that the latter is not an Islamic institution at all.
Ultimately, the reasons have to do with legislative awareness of the manner in which Islamic finance operates, relative to the methods used to organize Islamic institutions and projects elsewhere in Iraqi society. Generally speaking, when Shi'a Islamists in particular are interested in rendering the shari'a more prominent in the lives of Iraqis, this is done through calling for more deference to the rulings of the authoritative jurists who preside over the Shi'a seminaries in Najaf. In the case of family law, such deference is achieved through a (as yet unimplemented) call to permit Iraqis to follow juristic rulings rather than state law in the area. In the case of the waqfs, it is achieved through formalizing a role for these non-state actors in state administration.
Yet Islamic finance does not in fact organize itself in this manner, and deference to the rules of any single jurist would simply not be in keeping with the practices of this now global autonomously functioning industry. Instead, the industry adopts a patchwork of rules and regulations derived from the rulings of medieval and modern jurists of various schools of thought. Indeed, it must do this to preserve the flexibility necessary to function in a modern economic setting. Even with such flexibility, derogation from some Islamic rules is almost inevitable. The Iraqi legislators were merely recognizing this reality by having ecumenical experts appointed, and rendering them a clear minority and therefore unable to impede the bank's activities even if they did find a particular practice un-Islamic.
As with the failure of the state to ban interest, there is very little that is logical, or coherent, in the state's sanctioned approach to operation of the Islamic Bank of Mesopotamia. It makes little sense for Shi'a Islamists to support the creation of a bank that operates through an amalgam of rules of different jurists from different schools of thought while describing as un-Islamic a Personal Status Code [PDF] organizing the law of the family and inheritance that does precisely the same thing in a different area of law. Yet this is precisely what has been done. It is another demonstration of the deep levels of nuance, complexity and, indeed, self-contradiction that color the issue of the role of Islam in the Iraq's legal and constitutional infrastructure.
Haider Ala Hamoudi is a Professor of Law at the University of Pittsburgh School of Law. His scholarship focuses on Middle Eastern and Islamic Law, particularly as it pertains to matters of commerce. Hamoudi spent most of 2009 in Baghdad advising the Constitutional Review Committee of the Iraqi Parliament, responsible for developing amendments to the Iraqi Constitution aimed at national reconciliation, on behalf of the US Embassy in Baghdad. He is currently preparing a book on the drafting and subsequent evolution of the Iraqi Constitution to be published with the University of Chicago Press. He maintains a blog on Islamic Law.
Suggested citation: Haider Ala Hamoudi, Iraq's Islamic Bank and the Islamicity of Interest, JURIST - Forum, Jan. 14, 2013, http://jurist.org/forum/2013/01/haider-hamoudi-islam-banking.php
This article was prepared for publication by Caleb Pittman, head of JURIST's academic commentary service. Please direct any questions or comments to him at email@example.com