OPEN ACCESS: Will Islamic finance dispute panels really work?

Author: Gemma Varriale | Published: 22 May 2012
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Despite the idea of platforms to resolve Islamic finance disputes gaining popularity, introducing the schemes could involve hidden risks that few have considered.

“This potential platform would work for day to day retail banking products such as shariah-compliant home or personal finance,” said Debashis Dey of Clifford Chance in Dubai. “But it might run into investor resistance if applied to bigger ticket transactions with global participants.”

The popularity of shariah products has grown rapidly over recent years, with Middle East sukuks often governed by English law.

Arbitration is an alternative way of resolving disputes outside of the courts. It involves an independent arbitrator, who makes a binding decision on the case.

Informal dispute resolution platforms are already operating. Some believe that they are a real alternative to litigating cases through courts in the Middle East.

“English court judgments won’t necessarily be enforced in Qatar or other countries in the region, so going to court isn’t always the answer in cross border transactions,” said Ahmad Anani of Latham & Watkins in Qatar.

Lack of experience among judges means litigants often spend a lot of time explaining shariah principles to the court.

In contrast, arbitrators with a background in Islamic finance would be better equipped to make quick judgments.

But there are practical difficulties with how such platforms would work in reality.

International sukuk investors may be concerned because they don’t know what it means for their investment to be subject to the opinion of a panel basing their decisions on something other than English law.

“These investors would have to accept the uncertainty that this panel has not previously published decisions on similar investments and the process of how such investors can make their concerns heard is unknown” added Dey. “There is no precedent at the moment.”

There are also open questions around how enforceable opinions of a panel would be.

According to Dey, the most common route at the moment is to sue under English law for the amount owed, rather than question whether the product is shariah compliant.

The Malaysian example

Malaysia and Pakistan already have established sets of rules on shariah compliant products. Bahrain and Qatar are among the other countries rumoured to be considering ways to create their own shariah advisory councils.

As a major Islamic finance hub, Malaysia had a strong impetus to build the legal and regulatory infrastructure needed to support its thriving sukuk market.

The first rule of Malaysia’s 2007 rules for Islamic business and finance arbitration is that the arbitrator must have a background in Islamic finance.

Although there was some discussion around whether the arbitrators themselves had to be Muslim, Malaysia’s jurisprudence has settled that this is not a requirement.

The second principle of the Malaysian system is that the tribunal of arbitrators must be guided by the principles of the shariah advisory council in Malaysia when making their decision.

According to Anani, the movement to introduce these specialist platforms has now gained enough critical mass to justify it being rolled out globally, with a single set of principles governing all disputes.

But, said Dey, principles and rules developed on a country-specific basis are not the same as an overriding set of global guidelines.

There are multiple schools of thought under Islam, each with subtle regional variations.

Multiple schools of thought and regional practices mean that the rules applied to product development have developed with a regional bias with different tolerances for different countries, notwithstanding compliance with the overriding sharia principles.

“Conforming to the global principles will have to be voluntary because you can’t mandatorily tell an industry in a country that it has to sign up,” added Dey.