The Standardization Debate in Islamic Finance: A Case Study

This paper discusses the standardization debate in Islamic finance. ‘Islamic’ structured products particularly Wa’d-based total return swaps are used as a case study to discuss the importance of standardization. The growth of the Islamic finance industry has been hampered by the lack of consensus (ijma`) among the Sharī`ah scholars’ who belong to diverse sects or schools of thought (madahib). This diversity has resulted in disagreements about the acceptability of specific features of Islamic financial products. Standardization means establishing universal Shari’ah standards which would eliminate the shortage and the divergence of Shari’ah interpretation. The call for standardization has had proponents as well as opponents. Proponents of standardization claim that standardization would make the product development process more efficient, they argue that without standardization the industry is left exposed to ‘Shari’ah arbitrage’ as institutions, bankers, and consumers ‘shop around’ for