Product development and innovation is key to continuous growth and wider delivery of Islamic financial services. Often, creativity is impeded or restricted out of the fear of Shariah non-compliance. Further, the compliance filter – as important as it is – subconsciously pushes one to think in a particular way, and in preset structures and current products. This does not allow one to ponder on the various unexplored possibilities and opportunities that exist. Cutting-edge development and originality often require a blank canvas and space. To add, there are several new financial technologies emerging. Scholars take different approaches to address these technologies, where the end result is a spectrum of views. Whilst the research and spectrum of views are welcomed and add to the body of knowledge, it can lead to market confusion and weaken investor confidence. To synthesise and bring harmony in understanding, and to bring more experts together to discuss, review and advise, an incubator of some sort needs to be established. This is where, what I have labeller as, the ‘Shariah Sandbox’ comes in.
Introduction to Sandboxes
The first regulatory sandbox program was implemented in the UK by the Financial Conduct Authority (FCA) and opened for applications in 2016. Since then, a series of jurisdictions have also debuted sandbox-type programs, such as Malaysia, Bahrain, Australia, Canada, Singapore, Hong Kong, South Korea and others.
A regulatory sandbox is a framework set up by a regulator that allows FinTech start-ups and other innovators to conduct live experiments in a controlled environment under a regulator’s supervision.
A sandbox seeks to provide firms with:
- the ability to test products and services in a controlled environment
- reduced time-to-market at potentially lower cost
- support in identifying appropriate consumer protection safeguards to build into new products and services
- better access to finance
Islamic Regulatory Tools
There are various tools to regulate practice and products in Islam. The institutions of Qadha (Islamic judiciary), Hisbah (market inspection), Qarar (resolutions), Mi’yar (standards) and Fatwa (Islamic edicts) are tools with varying strength to regulate and oversee practice. Qadha by its essence requires a thorough investigation into a case before reaching any conclusive position. Hisbah is interrogative and seeks to understand the nature of matters before action. Qarar and Mi’yar go through several rounds of drafting, reviewing, consulting, and understanding before being resolved and concluded. However, Fatwa is more of an independent scholarly exercise which defers from place to place in terms of its rules and speed of issuance.
Conceptualising a ‘Shariah Sandbox’
An idea that can potentially assist with innovative product development and testing of new technologies with potentially less confusion and less discrepancy of views is what I call a ‘Shariah sandbox’. The goal of the Shariah Sandbox aims to incubate and shield innovative products and new technologies. These products and new technologies would be shielded from any premature Fatwa or view. Similar to regulatory sandboxes, Shariah Sandboxes could house all new tech and innovative start-ups which do not explicitly and clearly involve any prohibited element yet are unclear in their nature. The objective of a Shariah sandbox would be to allow firms to get Shariah advisory services and test their products in a live environment with the oversight and guidance of Shariah advisors before any Fatwa, view or official Shariah certification. A Shariah sandbox could incubate and shield any tech or start-up and give it room to grow and develop into a certified Shariah compliant offering.
The benefit of such a sandbox would be:
- to protect the new tech and novel start-ups from any premature Fatwa against it.
- To allow the growth and support of novel ideas.
- To assist Shariah regulators, scholars and practitioners in understanding the reality of the matter.
- To breed confidence in the Muslim consumer market.
- To encourage entrepreneurs to be more innovative and daring.
- To grant full disclosure and supervision to Shariah regulators and scholars.
- To give the ability to test the product with investors and real customers.
- To give hope of potential Shariah compliance certification.
The Operations of a Shariah sandbox
Similar to the regulatory sandbox journeys, a Shariah sandbox would have the following four phases:
The application process would involve a firm submitting an application setting out its entity details, business plan, testing plan, risk assessment and describing how it meets the sandbox’s eligibility criteria.
Once a firm is accepted, the scholars and practitioners would work alongside the firm to help them finalise their testing plans and basic frameworks. This would potentially involve discounted Shariah advisory fees and discounted legal fees. Being accepted in the sandbox and proving their business model in a live and regulated environment, would increase the firm’s credibility with both customers and investors.
This phase would allow them to test their product for a limited period of time in a live but controlled environment. Practitioners and Shariah advisors would be at hand to observe and continuously support the Shariah development of such a product.
Following the completion of testing, or the end of the agreed period, firms would have to transition out of the sandbox. This would involve a thorough report on their Shariah compliance risks as well as Shariah compliance potential. The industry would have a clearer picture if the product or novel technology is compliant with Shariah or if it harbours high Shariah non-compliance risks. If there is potential, the firm will then need to engage a Shariah advisory firm if it wishes to scale up their services and be certified.
During the entire sandbox journey, Shariah advisors would be publishing working papers and thoughts-in-progress for wider consultation and dialogue. These writings should explore Shariah reasonings and principles to provide potential valid explanations and frameworks to this tech or start-up. Such writings would not be a Fatwa, but purely an expression of an idea. Such writings should clearly be labelled as such to avoid confusion with a Fatwa. Working papers and thoughts-in-progress are extremely beneficial for the scholarly community. These papers would stimulate an exchange of ideas and facilitate further development of an idea.
What is the Fiqh basis of a Shariah Sandbox?
Any tech or start-up which enters the sandbox would be permitted to raise funds and test their product in a live and controlled environment without necessarily having a robust, end-to-end Shariah compliance certificate. This does not mean that any and every product would enter the sandbox, rather the application phase would filter out all those clearly engaged in non-compliant activities.
The classical jurists state a well-known maxim: “al-Asl fil bay’ al-Hil” (Permissibility is the original state of financial transactions). [Hashiyah al-Shilbi ala Tabyin al-Haqa’iq]
This principle means that the starting point of financial transactions is permissibility. Only when there is something explicitly impermissible or overwhelmingly doubtful should the transaction be abstained from. Thus, when there is nothing clearly impermissible, it is permissible to engage and transact whilst relying on this foundational principle. The above principle would allow the testing of all such tech and start-ups in a controlled environment which do not have any clear and explicit prohibited activity. Of course, this does not mean that Shariah certification is not necessary, governance and oversight is vital when selling products in the open market as the stakes of damages, harm to the public, systemic risk to the industry is high.
At the end of the Shariah Sandbox incubation, if the scholars’ reasoning and Ijtihad conclude that the novel technology or product are impermissible or non-compliant, then the famous principle of “al-Ijtihad la yunqadh bil Ijtihad” could apply. The meaning of this principle is that any action based on a prior reasoning and jurisprudence will not be invalidated retrospectively. For example, if a person faced a particular direction reasoning it was the Qibla and during the prayer realised that the Qibla is actually 180 degrees behind him, they should move to the new direction. However, the prayer whilst facing the wrong direction will not be nullified. This principle has much more detail and many exceptions; it is obviously not applicable everywhere.
This idea of a Shariah sandbox is itself a thought-in-progress. The idea may have flaws or holes, but it is vital to express ideas and stimulate thought if we wish to excel and proceed in developing the Islamic economy. I welcome the thoughts of others on the above sketch.