Applicability of Church Autonomy and Religious Question

Doctrines to the Shari’ah Board in Islamic Financial

Institutions

Haroun Rahimi

Introduction

Shari’a is the divine law of Islam. The Islamic Finance

Industry provides financial products in accordance with

Shari’ah, i.e. Shari’ah-compliant products. In 2010,

financial experts estimated the worth of Shari’ah-compliant

assets at almost 1 trillion dollar globally.1Islamic finance

practice is not limited to Sharia-based legal systems. UK is

ranked as 9th country in holding Shari’ah-compliant assets2

while United States is home of at least nine financial

institutions that provide Shari’ah-compliant products.3 It

1 Soraya Permatasari & Suryani Omar, Shariah-Compliant Hedging Derivatives Start inMalaysia: Islamic Finance, BLOOMBERG (Dec. 22, 2010),http://www.bloomberg.com/news/2010-12-21/shariahcompliant-hedging-derivatives-start-in-malaysia-islamic-finance.html.2 Abdi Shayesteh, Islamic Banks in the U.S.: Breaking Through Barriers, NEW HORIZON,Apr.–Jun.2009, at 1, http://www.kslaw.com/Library/publication/6-09%20New%20Horizon%20Shayesteh.pdf.3 Shirley Chiu et al., Islamic Finance in the United States: A Small but Growing Industry,Chicago Fed Letter (May 2005), available at http://www.chicagofed.org/publications/fedletter/cflmay2005_214.pdf.

means that a large portion of Islamic finance transactions

is conducted in a non-Islamic legal environment. Hence,

Islamic financial institutions use a business model which is

based on reference to Islamic legal norms that are not

enforced as the law of the state.4 Under this model, a

Shari’ah board—consisting of Islamic scholars—verifies

compliance of the financial products with Shari’ah, and its

verification is a required condition prior to the contract.5

However, since Shari’ah is arguably a governing law of the

contract—along with a law of financial centers e.g. New York

or London6—the contract can be challenged on the ground that

it does not comply with Shari’ah before a court;7 a concept

referred to as “Sharia risk”.8 4 Kilian Balz, A Murabaha Transaction In An English Court - The LondonHigh Court of 13th February 2002 in Islamic Investment Company of the Gulf (Bahamas) Ltd. v.Symphony Gems N.V. & Ors., Islamic Law and Society, Vol. 11, No. 1, 118(2004).5 Aisha Nader, Islamic Finance and Dispute Resolution: Part 1, 23 ArabLaw Quarterly, 4 (2009).6 On choice of law in Islamic finance see Julio C. Colón, Choice Of Law AndIslamic Finance, 46 Tex. Int’l L.J. 411 (2011).7 For example see Islamic Investment Company of the Gulf (Bahamas) Ltd.v. Symphony Gems N.V. & Ors, 13th February 2002, 2001 Folio 1226 perJustice Tomlinson, 2002 West Law 346969, QBD (Comm Ct).8 Kilian Balz, Sharia Risk? How Islamic Finance Has Transformed Islamic ContractLaw, Islamic Legal Studies Program, Harvard Law School, 9 OccasionalPublications, 23 (2008).

This paper examines the interplay between the ex-ante

determination of compliance of an Islamic finance

transaction by Shari’ah board and its ex-post determination

by a court in the United States where the religious question

and church autonomy doctrine bar the court from adjudicating

a religious question.

In the United States, under First Amendment jurisprudence

“civil courts cannot adjudicate disputes turning on church

policy and administration or on religious doctrine and practice.” 9

This prohibition is referred to as the “religious question”

doctrine. “Religious question” doctrine is understood to be

driven from another doctrine called the “Church autonomy”

doctrine.10 Church autonomy doctrine requires deference to

religious institutions “whenever a question of discipline,

or of faith, or ecclesiastical rule, custom, or law have

been decided by … church judicatories.”11

9 Natal v. Christian & Missionary Alliance, 878 F.2d 1575, 1576 (1stCir. 1989) (emphasis added).10 Michael A. Helfand, Litigating Religion, 93 B.U. L. Rev. 493, 494 (2013).11 Ogle v. Hocker, 729 F. App’x 391, 395 (6th Cir. 2008) (quoting Watsonv. Jones, 80 U.S. (13 Wall.) 679, 727 (1871)).

In this paper, the author considers whether under religious

question and church autonomy doctrines US courts will

recognize the Shari’ah board determination of a religious

question, i.e. that a financial transaction complies with

Shari’ah, as final; thus, eliminating the Sharia risk. It is

a matter of first impression and the US courts have not

spoken on this question. Therefore, to answer this question,

this paper will use US courts religious question and church

autonomy jurisprudence to see if the decisions of Shari’ah

board of Islamic financial institutions will fall under

these doctrines. This paper using implied consent analysis

argues that the US courts should recognize the Shari’ah

board’s determination as final.

The topic of this paper is particularly important because

there has been no research on this question. It is important

for United States to provide, to the extent possible by the

law, a hospitable environment for Islamic finance.

Otherwise, on international level, the United States will

fall behind London as the premier hub for this one trillion

dollar industry with 15% annual growth.12 On national level

too, it is critical for US, economically, to support a

diverse financial market.13 Many financial institutions in

United States have established Islamic financing units that

offer Shari’ah-compliant services to their Muslim clients.14

University Bank even has established a subsidiary devoted

entirely to Islamic financial services (Islamic

University).15 Likewise, on cultural aspect, it is important

for US as a multicultural society to accommodate the

religionist the ability to practice business in accordance

with their beliefs.16 On the other hand, it might be argued

that the importance of this topic is diminished since the

12 For rate of growth in Islamic finance see Assif Shameen, Islamic Banks: ANovelty No Longer, Business Week Online, Aug. 8, 2005,http://www.businessweek.com/magazine/content/05_ 32/b3946141_mz03 5.htm.13 For economic importance of Islamic finance for US see Todd J. Schmid,The Real Shariah Risk: Why The United States Cannot Afford To Miss The Islamic FinanceMoment, University of Illinois La. Rev. (2013).14 Babback Sabahi, Islamic Financial Structures as Alternatives to International LoanAgreements: Challenges for American Financial Institutions 1 (Boston Univ. Sch. of L.,Working Paper No. 385, 2004) 17, available at http://law.bepress.com/cgi/viewcontent.cgi?article=2038&context=expresso.15 Ben Jackson, In Brief: Mich. Bank Forms an Islamic Lender, Am. Banker, Jan. 3,2006.16 See e.g. Michael A. Helfand, Religious Arbitration and the NewMulticulturalism: Negotiating Conflicting Legal Orders, 86 N.Y.U. L. REV. 1231,1249–52 (2011); Michael A. Helfand and Barak D. Richman, The Challenge ofCo-Religionist Commerce, 64 Duke L.J. (forthcoming May 2015).

Islamic finance industry can utilize arbitration doctrines

to achieve the same result. In US, arbitration doctrine

insulates an arbitration award from judicial review of the

merits of the case.17This assessment is not entirely true.

In US, an award can be set aside based on the grounds that

require the court to answer some questions regarding the

applicable law; for example, the doctrine of “manifest

disregard of the law”18, or the claim that the arbitrators

exceeded their authority by not applying the governing

law.19Hence, answering this paper’s question has real

implications.

This paper consists of four parts. Part one provides a brief

introduction to Islamic finance. Part two discusses the

Shari’ah board in the governance structure of Islamic17 See e.g. TC Contracting, Inc. v. 72-02 N. Blvd. Realty Corp., 833N.Y.S.2d 622, 623 (App. Div. 2007) (“[a] court cannot examine the meritsof an arbitration award and substitute its judgment for that of thearbitrator simply because it believes its interpretation would be thebetter one.”)18 See Jock v. Sterling Jewelers Inc., 646 F.3d 113, 121 (2d Cir. 2011)(stating that manifest disregard is a separate and independent groundfor vacatur of an award). Under the doctrine of manifest disregard ofthe law the party must show that the arbitrator knew and understood thelaw, but deliberately disregarded it, see Prudential-Bache Sec., Inc. v.Tanner, 72 F.3d 234, 239 (1st Cir. 1995). Manifest disregard of the lawis a contested doctrine.19 9 U.S.C.A. § 10(a)(4).

financial institutions. Part three introduces the religious

question and church autonomy doctrine in the US. Part four

discusses the application of religious question and church

autonomy doctrines to the decision of Shari’ah board.

Part 1: Introduction to Islamic Finance

Islamic finance is a financial system based on the Islamic

law, which is Shari’ah;20 Islamic financial institutions

(IFIs) are those which operate based on principles of

Shari’ah. 21 Shari’ah is a religion of laws in every

dimension. It addresses matters ranging from the daily

prayers, fasting, and prohibition against eating certain

foods to penalties for certain acts, marriage, inheritance

and commerce. Quran, which Muslims believe is the Words of

God in literal sense, and Sunnah, which is model of behavior

of Islam’s Prophet Muhammad, are the primary source of

Shari’ah.22 In addition, Muslim jurists have developed20 For understanding the concept of Shari’ah see LOMBARD, B. CLARK,STATE LAW AS ISLAMIC LAW IN MODERN EGYPT: THE INCORPORATION OF SHARI’AINTO EGYPTIAN CONSTITUTIONAL LAW, 12-18 (2006).21 IBRAHIM WARDE, ISLAMIC FINANCE IN THE GLOBAL ECONOMY, 1-2 (2000).22 Fazlur Rahman, The Messange and the Messenger, Islam, Edited by MarjorieKelly, published for Foreign Policy Association, Praiger, 42-43 (1984).

various forms of analogical reasoning to obtain legal rules

from these two sources. The juristic understanding of

Shari’ah is called Figh.23 However, Muslim jurists have long

agreed that the rules created by juristic reasoning can only

be presumptive (unless it is subject to the agreement of all

jurists at a point in time i.e. Ijma).24 Thus, Shari’ah—

apart from the rules expressed clearly in Quran and

trustworthy Sunnah—is a pluralistic body of rules developed

by Muslim jurists over roughly 15 centuries.25 The

pluralistic nature of Shari’ah has real consequences for a

financial institution that pledges to operate base on

principles of Shari’ah.26

“Islamic finance” is commonly understood as Muslim’s

financial operations and interest-free banking.27However,

23 Id. The more appropriate term for juristic understanding of Shari’ahas a set of rules that Muslims believe God wants them to follow is Figh.However, because of popularity of word Shari’ah among scholars in thispaper I will use Shari’ah and Figh in some instances interchangeably.24 Lombardi, supra note 20, 15-18.25 Id, at 12-18.26 Even the defining characteristic of Islamic finance namely is subjectto the disagreement among Muslim jurists; see Mohammad H. Fadel, Riba,Efficiency, and Prudential Regulation: Preliminary Thoughts, Wis. J. Int Law(forthcoming 2008)27 Id.

technically, the definition is broader.28It includes the

avoidance of usury, which in Islamic term is generally

referred to as riba or “unjustified increase”,29 and the

avoidance of uncertainty, which in Islamic term is referred

to as gharar,30 and avoidance of excessive risk, known as

maiser.31Islamic finance also entails earning in a

religiously permissible way (halal) and more generally doing

business consistent with ethical and religious goals.32

To avoid the violation of these doctrinal prohibitions, IFIs

have developed a range of diverse financial products, i.e.

Shari’ah-compliant products, to provide financial services

to their Muslim clients in a way that is consistent with

their religious beliefs.33

28 Id.29 Id, at 5.30 Id.31 Id.32 Id.33 For a brief description of popular Shari’ah-compliant product seeCLIFFORD CHANCE, Introduction to Islamic Finance, Briefing note (2013),available athttp://www.cliffordchance.com/briefings/2013/04/introduction_to_islamicfinance.html.

Part 2: Shari’ah Board in the Governance Structure of

Islamic Financial Institutions

The system that determines how the Shari’ah board34 is being

controlled and directed is referred to as Shari’ah

governance.35Since inception of modern Islamic finance, one

of the defining characteristics of an IFI has been the

existence of a Shari’ah board.36 The board is an independent

body of experts knowledgeable in Figh al-muamalat37 which is

tasked with directing, supervising and reviewing the

activities of IFIs to ensure Shari’ah

compliance.38International Association of Islamic Banks

(IAIB) has described the Shari’ah Board:

It is formed of a number of members chosen from among

Jurists and men of Islamic Jurisprudence and of

comparative law who have conviction and firm belief in34 This paper uses the name Shari’ah board, however, other terms havebeen used such as Shari’ah Committee, Shari’ah Advisory Body, Shari’ahAdvisory Council, Shari’ah Control Body; see Bashar H. Malkawi, Shari’ahBoard in the Governance Structure of Islamic Financial Institutions, 61 Am. J. Comp. L.539, 544 (2013). 35 Id. 36 ISLAMIC FINANCE IN GLOBAL ECONOMY, supra note 21, at 226.37 Figh ul-muamalat is jurisprudence of transactions.38 The Shari’ah Board, supra note 34, at 544.

the idea of Islamic Banks. To ensure freedom of

initiating their opinion the following are taken into

account: (a) they must not be working as personnel in

the bank. That means: They are not subject to the

authority of the board of directors. (b) They are

appointed by the general assembly, as it is the case of

the auditors of accounts. (c) The general assembly

fixes their remunerations. (d) The Legitimate Control

Body [i.e. Shari’ah Board] has the same means and

jurisdictions as the auditors of accounts.39

The role of the Shari’ah board varies from one institution

to another. The principle objective of the Shari’ah board,

however, is to guide IFIs in setting their policy and

regulations in conformation to Shari’ah.40 Particularly, the

Shari’ah board approves, in advance, the contracts,

financial products and transactions of IFIs in accordance

with Islamic law.41It does so by issuing an opinion called

39 AHMED ABDEL AZIZ EL-NAGAR, ONE HUNDRED QUESTIONS & ONE HUNDREDANSWERS CONCERNING ISLAMIC BANKS, Cairo: International Association ofIslamic Banks, 20 (1984).40 MUHAMMAD AYUB, UNDERSTANDING ISLAMIC FINANCE 467 (2007); 41 Id.

Fatwa.42 Such a religious supervision enhances the

credibility of the bank in the eyes of its customers, and

improves its Islamic credentials.43Thus, the Shari’ah board

plays a fundamental role in Islamic credibility of IFIs.

In principle, the opinions of the Shari’ah board are

authoritative meaning that their refusal to approve a

financial product should automatically result in the

scrapping of that product by IFIs.44 Strategic changes

caused by the decisions of the Shari’ah boards do happen. In

1987, the Faisal Islamic Bank of Egypt was forced to

terminate its forward contracts in foreign exchange

markets.45 The same year, after an Islamic Fiqh Academy

fatwa stated that fees should not be fixed arbitrarily, but

in accordance with the bank’s real costs, the Islamic

42 A fatwā in the Islamic faith is the term for the legal opinion orlearned interpretation that a qualified jurist or mufti can give onissues pertaining to the Islamic law. see Hallaq, Wael B. "Fatwa".Encyclopedia of the Modern Middle East and North Africa.Encyclopedia.com. Retrieved 22 April 2013.43 ISLAMIC FINANCE IN GLOBAL ECONOMY, supra note 21, at 226.44 Id, at 227 (The reality however is more complicated. Interviewsrevealed that in many cases the review is perfunctory, with boards‘rubber stamping’ decisions already made by the bank’s management orshunning controversial issues).45 Al-Ahram al-iqtissadi, 3 March 1987.

Development Bank changed its practice of charging a fixed

service fee of 2.5 to 3 per cent.46 Moreover, Shari’ah

boards have been pressuring banks to phase out certain mark-

up contracts and to increase profit-and-loss sharing

activities.47

The pluralistic nature of Shari’ah means that the fatwas

issued by the Shari’ah boards of IFIs vary.48 For example,

the Kuwait Finance House is known for its strict rulings

whereas the Shari’ah boards in South Asia are generally more

lenient .49 Therefore, a fatwa issued in the South Asia may

not be recognizable in Kuwait.

Part 3: The Religious Question and Church Autonomy

Doctrines

Under US Supreme Court First Amendment jurisprudence, courts

are prohibited from adjudicating religious question50, i.e.

46 Hamid Algabid, Les banques islamiques, Paris: Economica 1990, p. 126.47 ISLAMIC FINANCE IN GLOBAL ECONOMY, supra note 21, at 230.48 Id, at 228 (Business Competition too plays a role).49 Id.50 Natal, at 1576.

“religious question” doctrine, instead, they should accept

the resolution reached by the internal dispute resolution

established within the religious community51, i.e. “church

autonomy” doctrine. Courts can resolve controversies

pertaining to religious issues only if they can rely

“exclusively on objective, well-established concepts …

familiar to lawyers and judges” thereby avoiding

“entanglement in questions of religious doctrine, polity,

and practice[;]”52an exception referred to as neutral

principle law.

Under religious question doctrine, courts are prohibited

from adjudicating disputes turning on religious doctrine and

practice.53Courts cannot “interpret[] ambiguous religious

law and usage”54 or resolve “controversies over religious

doctrine and practice.”55 Under church autonomy doctrine,

the courts must accept the decision of “church judicatories”51 Watson v. Jones, 80 US 679, 727 (1871).52 Jones v. Wolf, 443 U.S. 595, 603 (1979).53 Natal, at 1576.54 Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696, 708(1976).55 Presbyterian Church in US v. Mary Elizabeth Blue Hall Mem’lPresbyterian Church, 393 US, 440, 449 (1969).

as binding on them, “whenever the questions of discipline,

or of faith, or ecclesiastical rule, custom, or law” is

presented before them.56

In 1871, Watson v. Jones, on nonconstitutional ground, the

Supreme Court held that it is not to be supposed that the

judges of civil courts are competent in ecclesiastical

law.57 In that case, a church was divided over the question

of slavery each claiming through representation of the

church and ownership of its property.58 Reversing the lower

court decision, which decided that one fraction violated the

Presbyterian constitution, the Supreme Court held that the

civil courts are not competent to answer religious

questions.59In the 1960s and 1970s the Supreme Court

constitutionalized the religious question doctrine basing it

56 Watson, at 727; At first, the courts only recognized such decisionsif they were not “arbitrary” until the Supreme Court decided thatrecognition of such an exception would undermine the general ruleholding that courts may not inquire as to whether the decision of areligious court was “arbitrary”, see Milivojevich, at 712-713.57 Watson, at 679.58 Id, at 681.59 Id, at 729.

on Establishment Clause and Free Exercise Clause of the

Constitution.60

The church autonomy doctrine too is rooted in Watson v.

Jones where the court held that an ecclesiastical question

should be resolved by the “highest of … church

judicatories.”61This approach was also confirmed in a

constitutionalized case, Serbian Eastern Orthodox Diocese v.

Milivojevich, which also involved division over control of

church property within a hierarchical church.62 In that case

a bishop was defrocked by decision of highest judicators of

the church for misconduct.63 The bishop sued. The Illinois

Supreme Court decided in favor of bishop holding that the

church violated its own rules and procedure.64 The Supreme

Court, reversing the decision of the Illinois court, ruled

that in cases where hierarchical religious organizations

60 Michael C. Grossman, Is This Arbitration?: Religious Tribunals, Judicial Review, and Due Process, 107 Colum. L. Rev. 169, 183 (2007).61 Watson, 679, 727.62 Milivojevich, at 698.63 Id.64 Id.

have their own internal rules, “the Constitution requires

that civil courts accept their decisions.”65

In 1979, in Jones v. Wolf, deciding similar facts as

Milivojevich, the Supreme Court established an alternative

approach: “neutral principle.”66 The case involved the

question of trust and property law decided within a

hierarchical church.67The Supreme Court decided that the

constitution does not require deferral to the church

judicatories where the civil court can solve the dispute

applying secular law without examining religious law.68

The view of scholars varies about the justification of

religious question and church autonomy doctrine. Lupu and

Robert Tuttle argued that Establishment Clause prohibits the

court from deciding cases implicating religious doctrine or

practice.69 They proposed the “adjudicative disability”

doctrine which means that state simply has “limited65 Id, at 725.66 Jones v. Wolf, 443 U.S. 595, 602 (1979).67 Id, at 603.68 Id.69 Ira C. Lupu & Robert W. Tuttle, Courts, Clergy, and Congregations: DisputeBetween Religious Institutions and Their Leaders, 7 GEO. J.L. & PUB POL’Y, 138(2007).

jurisprudential competence” to decide religious matters.70

For others the prohibition stems from concern that judicial

resolution of religious questions will be interpreted as an

endorsement of one religious view over another. Thus,

Laurence Tribe argued that prohibition against doctrinal

entanglement in religious issues is based on the conviction

that the government including the judiciary must never take

sides on a religious matter.71 Similarly, Christopher

Eisgruber and Lawrence Sager have argued that “[i]f

government were to endorse some interpretations of religious

doctrine at the expense of others, it would thereby favor

some religious persons, sects, and groups over others.”72

Supports of all these views can be found in the Supreme

Court jurisprudence.73 Recently, however, in its first

church autonomy decision after thirty years, Hosanna-Tabor

Evangelical Lutheran Church & School v. EEOC, the Supreme

70 Id.71 LAURENCE H. TRIBE, AMERICAN CONSTITUTIONAL LAW § 14-11, at 1231 (2ded, 1988).72 Christopher L. Eisgurber & Lawrence G. Sager, Does It Matter What Religionis?, 84 NORTE DAME L. REV. 807, 812 (2009).73 See Litigating Religion, Supra Note 7, 493-562.

Court highlighted Free Exercise Clauses in context of a

wrongful termination case. The Court stated, “Free Exercise

Clause … protects a religious group’s right to shape its own

faith and mission through its appointment.”74Thus, the court

rooted the church autonomy doctrine in the rights of

religious groups to shape their own faith and mission.

Helfand understands this decision, along with previous

Supreme Court jurisprudence on church autonomy doctrine, to

mean that implied consent is the basis of the church

autonomy.75 In his view, church autonomy is premised on the

idea that individuals have implicitly consented to be

subject to the church authority thus binding themselves to

accept that institution’s adjudication of religious

questions.76

74 Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC, 243 S.Ct. 694, 706 (2012).75 Michael A. Helfand, What is A “Church”? : Implied Consent and the ContraceptionMandate, 21 J. Contemp. Legal Issues, 415-419 (forthcoming 2015)76 Id.

Part 4: The Application of Religious Question and

Church Autonomy Doctrines to The Decision of Shari’ah

Board

The purpose of this paper is to answer this question:

whether under Religious Question and Church Autonomy

Doctrines, US courts will recognize the Shari’ah board ex-

ante determination of Shari’a-compliance as binding in

disputes involving Islamic financial transactions. In order

to answer this question, first, we have to establish that

the question of Shari’ah-compliance is a religious question.

Second, we need to analogize the decision of “church

judicatories” to the decision of the Shari’ah board to see

if they both can enjoy the same authority before a civil

court in the US.

Religious Question Doctrine

The question of Shari’ah compliance is clearly a religious

question, because to answer it will require a court to

resolve controversies over religious doctrine. As was

mentioned before, Shari’ah is a pluralistic body of rules.

Muslim jurists not only disagree about what Shari’ah

requires but they also disagree about how and from what

sources ruling of Shari’ah can be understood. Despite

efforts to harmonize the industry, even the Shari’ah boards

of IFIs, differ on their view about compliance of a

financial product with principles of Shari’ah issuing

contradictory Fatwas. Therefore, the question of Shari’ah

compliance does fall under religious doctrine prohibition.

Furthermore, the courts cannot turn to neutral principles of

law doctrine to answer a Shari’ah compliance question.

Shari’ah principles governing Islamic finance, e.g.

prohibition of riba, maysar, gharar and the requirement of

earning in a religiously permissible way, have moral and

religious meanings which cannot be resolved exclusively

based on objective, well-established concepts of law

familiar to lawyers and judges in the US.

Now it can be argued since, under religious question

doctrine, the question whether a contract is in compliance

with Shari’ah is not justiciable, the decision of board will

stand; therefore, there is no need for courts to accord the

Shari’ah board decision binding authority. However, this

argument may not be correct.

In Islamic financial contracts Sharia is arguably only a law

that along with law of a financial center (e.g. NY or

London) governs the contract. This means that if a court

does not recognize the approval of Shari’ah board as

binding, it will apply the co-governing law (NY or English

law) to the dispute. It is true that applying a secular law

(NY or English law) would most likely result in elimination

of Shari’ah risk–contract being considered valid since those

law do not share the religious value of Shari’ah based on

which an Islamic financial transaction can be challenged—

thus, achieving the same result. It is not, however, the

same result.

The whole purpose of using Shari’ah-compliant financial

products is for the Muslims to conduct their business in

accordance with their religious beliefs. Therefore, a

decision that a contract is Shari’ah-compliant as a Shari’ah

board verified it to be, can be very different, from a

decision that a contract is valid under NY or English law

because the clause that requires compliance with Shari’ah

does not have any legal implication. Granted, it is a

formalistic (or sentimental) difference rather than a legal

difference but for an industry, which is defined by its

adherence to religious values and beliefs, this difference

can be very important.

Finally, recognizing the authority of the Shari’ah board in

Islamic finance can help Shari’ah to evolve in a sustainable

manner whereas an approach that sees its role as legally

redundant can harm the natural development of Shari’ah.

Now we turn to the church autonomy doctrine.

Church Autonomy Doctrine

Application of church autonomy doctrine to the decision of

Shari’ah board poses two serious problems. First, the

doctrine applies to the decision of internal dispute

resolution tribunals established within hierarchical

religious institutions whereas the Shari’ah board is not a

dispute resolution tribunal. Second, the doctrine applies to

the institutions which are defined by their religious

purpose and IFIs are rather financial profit-making

institutions, sometimes incorporated within purely secular

financial institutions.

The first problem is premised on the assumption that church

autonomy doctrine is conditioned on existence of an

adjudicatory process within religious institutions. This

assumption is not well founded. Although the doctrine is

developed in context of church internal dispute resolution

tribunals and the court relied on the right of religious

institutions to establish such tribunals,77 it can be

understood from decision of the Supreme Court in area of

employment law that due process is not a firm requirement in

the context of church autonomy doctrine.78Therefore,

77 Watson, at 729 (“It is of the essence of these religious unions, and of their right to establish tribunals for the decision of questions arising among themselves, that those decisions should be binding in all cases of ecclesiastical cognizance, subject only to such appeals as the organism itself provides for.”)78 See, e.g., Combs v. Cent. Tex. Annual Conference of the UnitedMethodist Church, 173 F.3d 343, 349 (5th Cir. 1999) (relying on the FreeExercise Clause to reject a claim of employment discrimination against achurch); EEOC v. Catholic Univ. of Am., 83 F.3d 455, 461-62 (D.C. Cir.1996) (“[T]he Free Exercise Clause exempts the selection of clergy fromTitle VII and similar statutes and, as a consequence, precludes civilcourts from adjudicating employment discrimination suits by ministersagainst the church . . .”); Natal v. Christian & Missionary Alliance,878 F.2d 1575, 1578 (1st Cir. 1989) (“By its very nature, the inquirywhich Natal would have us undertake into the circumstances of hisdischarge plunges an inquisitor into a maelstrom of Church policy,administration, and governance. It is an inquiry barred by the FreeExercise Clause.”); Wisniewski, 943 N.E.2d at 76; Kathleen A. Brady,

arguably, an ex-ante determination of a religious question

can enjoy the same authority under the doctrine.

Moreover, implied consent and Free Exercise Clause, which

are more appropriate candidate for the basis of the church

autonomy doctrine, can support the extension of the doctrine

to the Shari’ah board.

Implied consent is even more prominent in case of Islamic

finance contract. A customer enters into an agreement with

an IFI knowing the Shari’ah board of that IFI has approved

the agreement. Thereby, it can be argued that customer

consented to be bound by the board interpretation of

Shari’ah.

In regard to the Free Exercise Clause, since under the

Supreme Court jurisprudence the Shari’ah board must be

considered a religious institution in order to be protected

under the Clause, I will address it in my answer to the

second problem.

Religious Organizations and Free Exercise: The Surprising Lessons ofSmith, 2004 B.Y.U. L. REV. 1633, 1636; Douglas Laycock, Towards aGeneral Theory of the Religion Clauses: The Case of Church LaborRelations and the Right to Church Autonomy, 81 COLUM. L. REV. 1373, 1378(1981).

The church autonomy doctrine applies to the institutions

which are defined by their religious purpose whereas IFIs

are rather financial institution. In fact, the Department of

Health and Human Service, in its current iteration regarding

“religious employer” qualified for “contraception mandate”

exception, requires the employer to satisfy the following

requirements to be qualified as a religious employer for the

purpose of exemption: (1) The inculcation of religious

values is the purpose of the organization; (2) The

organization primarily employs persons who share the

religious tenets of the organization; (3) The organization

serves primarily persons who share the religious tenets of

the organization; and (4) The organization is a nonprofit

organization as described in section 6033(a)(1) and section

6033(a)(3)(A)(i) or (iii) of the Internal Revenue Code of

1986, as amended.79In response to the critics from

religiously affiliated service providers—such as some

hospitals, universities, and social service organizations

which are not qualified under these requirements—the

79 45 C.F.R. § 147.130(a)(1)(iv)(B) (2012).

Department has proposed new criteria for the exemption.

While the proposed changes would allow an employer to

qualify for the exemption even if its “purposes extend

beyond the inculcation of religious values” or if it “serves

or hires people of different religious faiths,” the new

proposed rules still preclude for-profit employers from

qualifying for the “religious employer” exemption.80

As it was explained before, the Shari’ah board is

independent from management of IFIs, their primary purpose

is to ensure Shari’ah-compliance. Therefore, it can be

argued that the doctrine applies to the Board not the IFIs,

which has a primary religious purpose, i.e. ensuring

Shari’ah compliance. By the same token, the Board is not

for-profit body of the IFIs. In other word, their purpose is

not to make profit for the IFIs. They are not under control

of IFIs. In their fatwas, the Shari’ah board is supposed to

only take into account the requirement of Shari’ah with good

faith and their members shall decide on their conscience.81

80 Coverage of Certain Preventive Services Under the Affordable CareAct, 78 Fed. Reg. at 8,459 – 8,461.81 ISLAMIC FINANCE IN GLOBAL ECONOMY, supra note 21, at 226.

In alternative, even if considering the Board as a separate

entity for the purpose of the Church Autonomy Doctrine is

not acceptable, one can borrow the implied consent analysis

of Helfand used in the context of religious employer

exemption from contraception mandate. Helfand “rejects the

assumption that for profit organization cannot, as matter of

law, qualify as religious institutions.”82 Instead, he

proposes that church autonomy should be grounded in implied

consent therefore “we must first and foremost focus on

whether employees were able to recognize that they were

joining an institution with unique religious

objectives.”83Using his analysis, the customers of IFIs’

Shari’ah-compliant products enters into a contract knowing

that the contract is being approved to be Shari’ah-compliant

with a specific religious board. Therefore, under the church

autonomy doctrine, it would sustain that the fatwa of the

board shall be binding for the purpose of the contract

before a civil court.

82 What is church?, supra note 75, at 424.83 Id.

I do understand that as some courts pointed out religious

institutions do have special recognition under First

Amendment;84 hence, affording such recognition to the

Shari’ah board would seem unacceptable. However, if one

looks at the new changes in field of employment law, the US

courts, adapting to the changing religious practice, have

recognized wider definition of a religious. I see no reason

why that recognition cannot be accorded to the IFIs

Conclusion

Islamic finance is a fast growing industry globally. It has

been growing in the US, too. It is critical for the US

courts to provide a hospitable environment for the growth of

this economy. One of the main challenges for US court in

doing so would be to accommodate the religious

84 E.g. the D.C. Circuit has stated that “the burden on free exercisethat is addressed by the ministerial exception is of a fundamentallydifferent character from that at issue in Smith” because “[t]heministerial exception is not invoked to protect the freedom of anindividual to observe a particular *414 command or practice of hischurch. Rather, it is designed to protect the freedom of the church toselect those who will carry out its religious mission.” EEOC v. CatholicUniv. of Am., 83 F.3d 455, 462 (D.C. Cir. 1996); see also Petruska v.Gannon Univ., 462 F.3d 294, 306 (3d Cir. 2006) (noting that despiteSmith, the Free Exercise Clause still protects “a religiousinstitution's right to decide matters of faith, doctrine, and churchgovernance”).

characteristics of Islamic finance institutions. The US

courts have long developed two important doctrines in

context of church related disputes to accommodate religious

practice, eve in area of commerce, church autonomy and

religious question doctrines. In this paper I argued that

using implied consent analysis US court should recognize the

ex-ante determination of the Shari’ah board of Islamic

finance institutions on the question of Shari’ah compliance

as final. Building on work of Helfand, I too argued that

since a customer of Shari’ah compliant product knowingly

enters into a contract with an institution which is defined

by its religious pledges, she accepts the interpretation of

the Board of that institute as binding upon her before civil

courts in the US. I argued such recognition would have

meaningful affect on an industry which is defined by

adherence to sets of religious beliefs.