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Insolvency legislation and Islamic finance in the UAE

Mian Muhammad Nazir
The compatibility of contemporary insolvency legislation in the context of Islamic financial institutions and Islamic capital markets instruments is an important subject which regulators, courts and other stakeholders must address sooner rather than later to ensure the sustainable and continuous growth of the industry. This issue deserves more serious consideration from the legislatures and regulators as lack of an appropriate and legal and regulatory regime on insolvency in respect of Islamic financial institutions would certainly affect insolvency proceedings and the remedies sought or granted pursuant to such proceedings.

Some of the most commonly used Islamic contracts and instruments result in automatic preference for investors and, in some cases, particularly when the competing obligations of an obligor are not shariah compliant, even a contractual waiver (either for a pari passu arrangement or sub-ordination) may not be effective. Considering the unique business model of Islamic financial institutions (IFIs) and the nature of the shariah nominate contracts and instruments, many of the well-drafted laws and regulations on insolvency may not be relevant to IFIs in the event of any insolvency or restructuring proceedings.

With the current pace of growth of the Islamic finance industry and IFIs' capability to embark on complex financial instruments, it is necessary that appropriate insolvency legislation and regulations are enacted to remove uncertainties surrounding the fate of IFIs and Islamic investment instruments in the event of insolvency of the relevant institutions. The recent trend of raising tier I and tier II capital by some conventional institutions, through sukuk issuance using certain shariah nominate contracts, in the Middle East has once again necessitated the intervention of the regulators to arrange enactment and promulgation of suitable insolvency laws and regulations.

Post financial crisis, the Islamic banking and finance industry was hoping to see a much more proactive and noticeable approach on this subject, but it appears that this important and very urgent matter has not received the level of attention it should have in the larger interest of the industry and to protect the interest of consumers and investors.

Mian Muhammad Nazir

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