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Is Islamic Finance a failure?
More often than you think, people think Islamic finance is a sham, says Oliver Agha, founding partner of a shari'ah-compliant law firm. But Agha says it's all borne from ignorance.
January 28, 2012 2:16 by Reuters
Not surprisingly, the relevant authorities have little understanding of how to handle Islamic disputes — in some instances authorities have sent ijara disputes to rent committees to sort out. This completely misses the picture, as the underlying transaction requires careful consideration as an overall Islamic lease to purchase transaction with a fine understanding of the other elements that such a transaction contain, including complex (and sometimes tenuous) purchase undertakings and in some cases, deeply problematic “forward lease constructs” that are neither forward leases nor necessarily enforceable from a Shari’ah or a legal perspective. Nor is there much consideration of how courts will manage liquidations of Islamic banks — in particular the treatment allotted to unrestricted investors vs. shareholders.
Our experience in litigating complex Islamic transactions reveals that judges may be at a loss to properly adjudicate complex modern-day Islamic transactions. As a result, there is confusion among Islamic financiers, consumers and other stakeholders about exactly what they can expect in court when things turn sour. This in turn does not augur well for the development of the Islamic finance industry, if left unchecked.
Assuming there is a judicial system that is capable of dealing with Islamic disputes/arbitrations, there are a host of complex enforceability issues at play in Islamic transactions that seem to be lost on issuers and banks and more importantly not highlighted to consumers.
A case in point is a deal where parties elected to subject English law to “Shari’ah” in a contract as per their agreement. In other words, the Islamic instrument was to be enforced in accordance with English law, but always in accordance with applicable Islamic law precepts. However, English courts in such a situation have not applied Shari’ah because it was deemed not to be a governing body of law but a mere embodiment of Islamic religious principles. In the Shamil Bank case, the court noted that the Rome Convention 1980, scheduled to the Contracts (Applicable Law) Act 1990, only contemplated and sanctioned the choice of the law of a country, not a religious principle. Furthermore, the court held that “the reference to Shari’ah law was repugnant to the choice of English law and could not sensibly be given effect to.” One can surmise then that when extraneous law is clear and specified, it will still not be applicable if there is a conflict with English Law.
Given such pronouncements, Islamic jurists will invariably revisit English judgments on a “de novo” basis to determine whether there is genuine compliance with Shari’ah principles. Had this critical nuance regarding the impact of conflict of laws (in of itself a highly complex subject) been highlighted to the scholars when such deals were being approved, I am sure such structures would never have been sanctioned in the first place.
The lack of standardisation in Islamic finance creates confusion across the world over the dependability of structures and consistent application of principles. While AAOFI, IFSB and World Islamic Finance Institute are Islamic bodies that work on developing standards, uniformity and developing communications among stakeholders, there is much work to be done on a faster track and with a deeper involvement of the stakeholders from different realms of the industry. There is, unfortunately, a lack of an overall vision and such disparate endeavors lack a cohesive, cogent and comprehensive approach to tackle the key issues facing the industry. Closer coordination must occur between these bodies and a comprehensive approach developed.