This content is from: Local Insights

The compatibility of UAE laws with Shariah principles

Mian Muhammad Nazir
Transfer of ownership and possession under certain Shariah nominate contracts and structures are the cornerstone for the validity of the sale and purchase transactions. Principles of Shariah provide for specific requirements that must be satisfied to ensure validity and enforceability of the underlying sale contract. It has been observed that there may be certain instances where a sale, which is perfectly valid and enforceable under the principles of Shariah, may need to comply with additional requirements under the local laws of the relevant jurisdiction in order to qualify as a valid and enforceable transaction. The question is whether a sale transaction strictly entered into in accordance with the principles of Shariah will still be required to comply with the local laws for its validity under Shariah principles. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) seems to suggest that compliance with local laws in relation to transfer of ownership and possession is an integral part of a Shariah sale in respect of certain Shariah-compliant contracts and structures.

To this extent, it is encouraging to note that for the modern application of Shariah nominate contracts and structures, compliance with local laws, in relation to transfer of ownership, possession and legal effects of the sale and purchase contract, is well recognised by Shariah scholars and the AAOIFI (which is a standard setting organisation). However, the more important question is what are the effects of non-compliance with the local law requirements on the Shariah compliance of underlying transactions in view of the AAOIFI's resolution, which obligates transfer of ownership in the sukuk assets to be in accordance with local law requirements.

Compliance with the AAOIFI's resolution appears to entail certain legal and commercial consequences for the entities that wish to use their immovable assets to raise Islamic liquidity. In view of the difficulties involved in complying with the AAOIFI's resolution, the AAOIFI and Shariah scholars should consider an alternative instrument, which should be capable of ensuring a transfer of ownership and possession in the respect of the underlying assets under the principles of Shariah and compliance with local laws from enforceability perspective. It should not only be the responsibility of Shariah scholars but other stakeholders (lawmakers, regulators and the Islamic finance industry) should also contribute towards effective resolution of this important issue as it seems to affect the growth of the industry.

Mian Nazar

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