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
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 wont necessarily be
enforced in Qatar or other countries in the region, so going to
court isnt always the answer in cross border
transactions, said Ahmad Anani of Latham & Watkins in
Lack of experience among judges means litigants often spend
a lot of time explaining shariah principles to the
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 dont 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 Malaysias 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, Malaysias
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
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
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
Conforming to the global principles will have to be
voluntary because you cant mandatorily tell an industry
in a country that it has to sign up, added Dey.