Choice of law in shariah-compliant transactions

Mian Muhammad Nazir

From a shariah perspective, it is necessary that any dispute under a shariah-compliant contract must be resolved in accordance with the principles of shariah which govern the relevant shariah-nominate contract. This principle has been reiterated by International Fiqh Academy in its resolution on the subject of governing law for shariah-compliant transactions. Despite the resolution and the importance of the governing law for shariah-compliant transactions, the matter has not received any significant attention from stakeholders. The main reason why the parties are reluctant to choose the principles of shariah as governing law is uncertainty surrounding the recognition of principles of shariah as a system of law by judicial and quasi-judicial authorities and tribunals.

Apparently, this indifference accorded to shariah is largely attributable to lack of understanding of the Islamic jurisprudence and its principles. It is often said – indeed it has become a cliché among the legal fraternity – that the principles of shariah are mostly a set of discretionary rules laid down or inferred by a scholar or a school of Islamic jurisprudence based on his or its understanding of Qur'an and Sunnah (the two main sources of Islamic jurisprudence). Surprisingly, this notion has received considerable strength from judgments in a few cases and arbitration proceedings in some jurisdictions. Unfortunately, the Islamic banking industry, which owes its genesis to Islamic jurisprudence, has not made any effort to dispel this misconception.

It is important to mention that, contrary to the common perception about shariah, its principles are clearer and more logical than any legal system on the globe. They are indisputably set out in the original resources or have been inferred or based on the original sources in a highly scientific manner and as a result each school of jurisprudence has a very clear shariah ruling on almost every subject that they may come across in their daily lives.

With the current pace of growth of the Islamic banking and finance industry, the issue of governing law for shariah-compliant transactions needs sincere attention of the industry as the uncertainty around this important issue could affect the overall business model of the industry. The Islamic banking and finance industry stakeholders must make practical efforts to increase the awareness of shariah among the legal fraternity, judiciary and whoever is associated with the industry. This will minimise the consequences of shariah illiteracy on the Islamic banking and finance industry.

Mian Muhammad Nazir

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