RESOLVING DISPUTES IN ISLAMIC FINANCIAL CONTRACTS.[80]
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RESOLVING DISPUTES IN ISLAMIC FINANCIAL
CONTRACTS: AN IN-DEPTH ANALYSIS OF PRACTICAL
IMPLEMENTATION AND REAL-WORLD CHALLENGES
Being a thesis submitted for the degree of Doctor
of Philosophy
In the University of Hull By
August/2023
2
TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION
1.1 Background and Context
........................................................................................................
4
1.1.2 Islamic Finance and Shariah Principles
..............................................................................
6
1.1.2.1 Risk-Sharing and Ethical Foundations
.........................................................................
7
1.1.2.2 Financial Instruments in Islamic Finance
.....................................................................
7
1.1.2.3 Challenges in Implementation
......................................................................................
8
1.1.2.4 Enhancing Legal Clarity and Foreign Investment
........................................................
8
1.2 The Evolution of Islamic Banking: Historical Foundations and Institutional Development
...................................................................................................................................
9
1.2.1 Historical Trade Roots and Islamic Civilization
.................................................................
9
1.2.2 Pioneering Institutions in Islamic Banking
.......................................................................
10
1.2.3 Global Dissemination of Islamic Finance
.........................................................................
11
1.3 Legal Frameworks and Regulations for Islamic Banks and Financial Institutions
........
11
1.3.1 Shariah Compliance and Central Bank Regulations
.........................................................
11
1.3.2 Accounting Standards by AAOIFI
....................................................................................
12
1.3.3 Shariah Supervisory Boards: Guardians of Ethical Finance
.............................................
12
1.4 Transactional Sources of Islamic Banking and Finance: An Overview of the Legislation and Statutes Covering Islamic Financial Transactions in Kuwait, the UAE and the UK
....
13
1.4.1 The State of Kuwait
..........................................................................................................
13
3
1.4.2 The United Arab Emirates
.................................................................................................
14
1.4.3 The United Kingdom
.........................................................................................................
16
1.5 Dispute Settlement in Islamic Finance
.................................................................................
17
1.5.1 Dispute Settlement Approaches in Kuwait, the UAE and the UK
....................................
19
Kuwait:
...................................................................................................................................
19
UAE:
.......................................................................................................................................
19
UK:
.........................................................................................................................................
20
1.5.2 Dispute Resolution Choice
................................................................................................
20
1.5.3 Regulatory Challenges
......................................................................................................
23
1.6 Research Problem
..................................................................................................................
24
1.7 Research Questions and Objectives
.........................................................................................
26
1.7.1 Research Questions
...........................................................................................................
26
1.7.2 Research Objectives
..........................................................................................................
27
1.8 Methodology
...........................................................................................................................
28
Primary Sources
.........................................................................................................................
28
Secondary Sources
.....................................................................................................................
29
Comparative Approach
..............................................................................................................
29
Data Analysis
.............................................................................................................................
30
1.9 Research Significance
............................................................................................................
30
1.10 Dissertation Structure
.........................................................................................................
33
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CHAPTER 1: INTRODUCTION
..............................................................................................
33
CHAPTER 2: LITERATURE REVIEW
...................................................................................
33
CHAPTER 3: THE LEGAL FRAMEWORK OF ISLAMIC FINANCIAL TRANSACTIONS
........................................................................................................................
34
CHAPTER 4: LEGAL AND REGULATORY ISSUES IN ISLAMIC FINANCE TRANSACTIONS
........................................................................................................................
34
CHAPTER 5: IMPLICATIONS FOR THE PRACTICE OF ISLAMIC FINANCIAL CONTRACT DISPUTES
............................................................................................................
34
CHAPTER 6: CONSIDERATION OF THE RECEIVED FINDINGS, EXAMINING THE SIMILARITIES AND DIFFERENCES IN ISLAMIC FINANCE REGULATION AND LAWS
............................................................................................................................................
35
CHAPTER 7: SETTLEMENT OF DISPUTES IN ISLAMIC FINANCIAL CONTRACTS BETWEEN REALITY AND IMPLEMENTATION
................................................................
35
CHAPTER 8: RECOMMENDATIONS AND CONCLUSION
..............................................
35
BIBLIOGRAPHY
........................................................................................................................
36
5
CHAPTER 1: INTRODUCTION
1.1 Background and Context
The global expansion of the Islamic financial market in recent years has led to the participation of financial entities from diverse jurisdictions, forming alliances to engage in global business ventures. At the core of Islamic finance transactions lies the application of Shariah principles.
1
These principles, as noted by Budiharto
2
, have not only been integrated into international commercial agreements but have also found their place in non-Islamic legal frameworks. This has prompted numerous countries worldwide to undertake Islamic finance transactions, often within civil law or common law systems that lack an integrated legal structure to fully support Shariah principles within Islamic financial contracts. Despite efforts to use contracts in line with Shariah principles, the majority of legal systems and courts lack the necessary legal foundation, resources, infrastructure, and expertise to effectively interpret and enforce Islamic financial transaction documents.
This scenario has led to potential discrepancies in interpreting and implementing clauses within financial transactions. This paper seeks to meticulously examine the legal systems of Kuwait, the
UAE, and the UK, with a particular focus on the execution of Islamic banking laws and regulations. Over the last decade, Islamic finance has experienced substantial growth, offering resilient investment products appealing to a broad audience, including both Muslims and non-
Muslims. Jurisdictions such as Kuwait and the UAE have actively worked to attract Islamic finance investments by adapting their banking structures and promoting themselves as hubs for 1
R Setyowati, I Purbasari, and EM Fauzan, 'Consumers spiritual rights in the Islamic bankcing dispute out of
court settlement in Indonesia’ [2018] 9(4) Journal of Social Studies Education Research
, 334–351
2
ES Budiharto, ‘Freedom of contract and dispute settlement between conventional banking and Sahria banking’ [2020] VII(1) International Journal of Economics and Business Administration
, 285–291
6
regional or global Islamic finance activities.
3
In contrast, Western jurisdictions like the UK and the US have extended their existing influence as preferred choices for resolving conventional banking disputes to encompass disputes related to Islamic finance products.
While English law often serves as the governing law for international finance and banking contracts, disputes and disagreements do not necessarily reflect ill intent by either party. The wording of contract clauses can be multifaceted, allowing for multiple interpretations. While precise contract clauses may reduce the incidence of disputes, they cannot eliminate them entirely. Even though Shariah supervisory bodies endorse contracts for Islamic financial institutions (IFIs), ensuring their compliance with Shariah principles, disparities can still arise between the formal legal opinion (fatwa) and practical implementation. Various mechanisms for dispute resolution exist within Islamic financial transactions, some within the judicial system and
others outside of it. Arbitration stands out as one such mechanism operating outside the realm of the judiciary.
In contemporary times, the growing acceptance of arbitration and its broadening scope mark significant legal developments. Arbitration has gained recognition across different legal systems and economic contexts, extending to areas not previously subject to arbitration. This study focuses on the importance of including arbitration clauses in Islamic banking and finance contracts, referred to as Islamic transactions, with Kuwait, the UAE, and the UK serving as case studies. This topic is chosen due to the absence of a dedicated court for settling disputes arising from Islamic transaction contracts, the divergent opinions among scholars of different Islamic law schools, and the expeditious nature of arbitration. Furthermore, analyzing the prevailing 3
S Koleilat-Aranjo, ‘Why resolving Ismail finance dispute through international arbitration makes sense’ (
Al Tamimi&Co, 2018) <
https://www.tamimi.com/law-update-articles/why-resolving-islamic-finance-disputes-
throu gh-international-arbitration-makes-sense/
> accessed 5 April 2021
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7
challenges in implementing Islamic finance and examining legislation promoting compliance with Islamic banking laws in the aforementioned countries will contribute to dispute resolution. Opting for arbitration as a dispute resolution mechanism offers numerous opportunities, both aligned with Islamic principles and secular norms. This choice creates a platform conducive to resolving Islamic finance disputes effectively.
1.1.2 Islamic Finance and Shariah Principles
Islamic finance is a distinct sector within the economy that operates in alignment with the principles of Islamic law, known as Shariah. These principles emphasize ethical conduct, fairness, and risk-sharing in economic transactions. Unlike conventional finance, where the burden of risk often falls solely on the lender, Islamic finance distributes risk between investors and entrepreneurs. Additionally, Shariah Law prohibits transactions that involve interest, as they are seen as exploitative and unjust. Instead, Islamic finance employs a range of financial instruments that comply with Shariah principles, including Mudarabah, Musharakah, and Murabaha.
4
Islamic finance can be described as the provision of financial services that comply with sharia.
In
more detail, it describes the financial approaches that comply with the rules and principles of Islamic commercial jurisprudence (
Fiqh al-Muamalat
). This is the most important feature that distinguishes Islamic finance in comparison with conventional banks. one of the differences is that Islamic banks do not accept the receipt or the payment of interest or usury on any of their related operations, which are referred to as Riba
. Islamic banks do not charge interest for all the financial services they offer their clients. In Islam, the charging of interest is referred to as riba, which is strictly prohibited in Islamic finance. However, to 4
NK Dahlan and MR Palil, ‘The Challenges of Alternative Dispute Resolution for Islamic Finance in Malaysia’
[2018] 22 Jurnal Undang-Undang dan Masyarakat 11–19 <https://doi.org./10.17576/juum-2018-22-02>
8
compensate for the loss of revenue from interest, Islamic banks use alternative finance techniques which are based on profit and loss sharing, asset-backed transactions, and risk-sharing arrangements.
5
Sources of Islamic Finance Law
Islamic finance is always governed by sources which can be categorized as primary and secondary sources. Primary sources
The primary sources can be described as the most authoritative and of direct reference while the secondary sources are obtained from scholarly interpretations. The primary sources of the principles used in Islamic finance are the Quran and Sunnah.
6
The Quran is the holy book which is used in Islam which contains different teachings touching on different ethical and moral aspects of life. Thus, the Quran does not contain direct financial principles but it contains teachings which form the basis for Islamic finance. On the other hand, Sunnah contains the words and actions which existed before Islam but are approved by Prophet Muhammad. Hadith is a type of Sunnah which refers to the sayings, actions and approvals which were made by the prophet Muhammad.
7
Different Hadiths contain teachings on economic and financial matters which is used in Islamic finance. One of the most widely known is the concept of Usury which is known as the charging or paying of interest. In Islamic Finance the paying and charging of interest is forbidden because of the concept of Usury where the Hadith states that "The Prophet (peace be upon him) cursed the one who consumes Riba (usury), the one who gives it to others, the one who writes it down, and the two who witness it, saying, 'They are all alike'" (Sahih Muslim).
8
Based on this it is clear
that the charging of interest is highly discouraged as it is deemed to be more corrosive in nature.
Secondary Sources Ijma and Qiyas
Secondary sources of Islamic law are known as Fiqh. The secondary sources are used to help Islamic jurists derive legal rulings in cases where the primary sources of Islamic law, namely the Quran and the Hadith (Prophet's traditions), do not provide clear guidance.
9
The secondary sources include; Ijma which refers to a consensus where Islamic scholars agree on a specific ruling and the decision, they arrive upon becomes a valid source of law. 10
Qiyas refers to analogical reasoning which involves applying the legal 5
Elsiddig Ahmed, Ibrahim. "The qualitative characteristics of accounting information, earnings quality, and Islamic banking performance: Evidence from the gulf banking sector."
International Journal of Financial Studies
8, no. 2 (2020): 30.
6 Dewar, John R., and Munib Hussain, eds.
The Islamic finance and markets law review
. Law Business Research Limited, 2021.
7 Ibid.
8
Ibid.
9 “Sources of Islamic Law.” Centre for Labour research, 2022. https://islamiclabourcode.org/sources-of-islamic-law/#:~:text=The%20primary%20sources
%20of%20Shari,and%20Ijtihad%20(Critical%20Thinking)
. 10 Ibid.
9
ruling of an established case to a new case that is not explicitly covered in the Quran or Hadith. This reasoning relies on finding similarities between the two cases to derive a legal ruling. Istihsan allows jurists to depart from the strict analogical application of the Quran or Hadith if it leads to an unjust or unreasonable outcome depending on the circumstance.
11
In this case, the jurists may use their discretion to choose a more equitable ruling based on the broader objectives of Islamic law.
1.1.2.1 Risk-Sharing and Ethical Foundations
Underpinning Islamic finance is a fundamental shift in risk-sharing and ethical considerations. In
contrast to the traditional lending model, Islamic finance encourages a partnership approach. In transactions, both the investor and the entrepreneur share the risks and rewards. This promotes a more equitable distribution of benefits and aligns with the principles of justice and fairness inherent in Shariah.
1.1.2.2 Financial Instruments in Islamic Finance
Three notable financial instruments in Islamic finance are Mudarabah, Musharakah, and Murabaha. Each instrument serves a specific purpose in accordance with Shariah principles:
Mudarabah: This is a profit-sharing agreement where an investor provides capital, and an entrepreneur contributes labor and expertise. Profits are distributed based on an agreed-
upon ratio, while losses are absorbed by the investor. According to Archer et al.
12
Mudarabah encourages collaboration and incentivizes both parties to actively contribute to the success of the venture.
Musharakah: In this partnership agreement, two or more parties come together to jointly invest in a project. Both profits and losses are shared proportionally among the partners. 11
Ibid.
12
Archer, Simon, Rifaat Ahmed Abdel Karim, and Venkataraman Sundararajan. "Supervisory, regulatory, and capital adequacy implications of profit
sharing investment accounts in Islamic finance."
‐
Journal of Islamic Accounting and Business Research
1, no. 1 (2010): 10-31.
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Musharakah promotes cooperation, collective decision-making, and mutual accountability.
13
Murabaha: This involves a sales contract where the seller acquires a commodity and then sells it to the buyer at an agreed markup. The pricing terms are determined upfront, providing transparency and avoiding interest-based transactions.
14
1.1.2.3 Challenges in Implementation
While the principles of Islamic finance offer a unique approach that resonates with ethical considerations and risk-sharing, their implementation poses challenges. The adoption of these principles demands a deep understanding of both Islamic laws and cultural nuances. Furthermore, the construction of contracts and regulations often features broad or ambiguous provisions, leading to complexities in interpretation. Such uncertainties can lead to prolonged legal proceedings and, from a broader perspective, hinder transparency and discourage foreign investment.
15
1.1.2.4 Enhancing Legal Clarity and Foreign Investment
Efforts to improve the legal frameworks surrounding Islamic finance are essential for attracting foreign investment and fostering economic growth. Clearer and more precise provisions in contracts and regulations would empower courts to make accurate interpretations, expedite legal processes, and mitigate uncertainty. This, in turn, would enhance the attractiveness of a jurisdiction to foreign investors seeking stability and well-defined legal structures. In essence, Islamic finance encompasses principles that extend beyond mere financial transactions. It reflects
13
Yustiardhi, Aulia Fitria, Aulia Arifatu Diniyya, Farihah Amirah Ahmad Faiz, Nur Shazni Subri, and Zahra Nabila Kurnia. "Issues and challenges of the application of Mudarabah and Musharakah in Islamic bank financing products."
Journal of Islamic Finance
9, no. 2 (2020): 26-41.
14
Almohana, Mohammad.
Legal Risks Faced By Investors in Dealing with Islamic Financial Transactions and Mitigation Actions/Strategies to Keep Off Legal Risks: The Case of Murabaha Transaction
. University of Exeter (United Kingdom), 2018.
15
Kapetanovic, Harun. "ISLAMIC FINANCE AND ECONOMIC DEVELOPMENT."
11
a commitment to ethical conduct, risk-sharing, and responsible economic practices. As the global
financial landscape continues to evolve, harmonizing these principles with robust legal frameworks becomes imperative for fostering economic development and ensuring fairness in financial interactions.
16
1.2 The Evolution of Islamic Banking: Historical Foundations and Institutional Development
The genesis of Islamic banking can be traced back to the trade practices ingrained in the fabric of
Islamic civilization since its inception. This commerce unfolded within a financial framework that diverged from conventional models by eschewing predetermined interest-based returns. Arabs inhabiting the Arabian Peninsula have historically relied on trade as a cornerstone of their livelihood. Islamic principles, while affirming the majority of prevailing contract norms, rejected
those deemed inequitable or exploitative.
17
1.2.1 Historical Trade Roots and Islamic Civilization
The origins of Islamic banking are deeply entwined with the historical trade undertakings that have been integral to Islamic societies since their inception. The Arabian Peninsula, the birthplace of Islam, has a centuries-old legacy of trade as a vital means of subsistence. Islamic principles endorsed many established contract practices of the time, with a notable exception for those perceived as unjust or exploitative.
16
Damjanovic, Ivana.
The European Union and International Investment Law Reform: Between Aspirations and Reality
. Cambridge University Press, 2023.
17
Muhammad Shaukat Malik, Ali Malik and Waqas Mustafa, ‘Controversies that Make Islamic Banking Controversial: Analysis of Issues and Challenges’ [2011] 2(1) American Journal of Social and Management Sciences 41, 43
12
1.2.2 Pioneering Institutions in Islamic Banking
Noteworthy landmarks in the development of Islamic banking underscore its progression from concept to practical realization:
Mitt Ghamr Investment Bank: In 1963, Egypt witnessed the establishment of the Mitt Ghamr Investment Bank, representing the first triumphant endeavor in applying theoretical tenets of Islamic banking and finance in practice. However, the bank's independent journey was short-lived, as it amalgamated with Egypt's National Bank in 1966.
18
Islamic Development Bank (IDB): Jeddah, Saudi Arabia, became the epicenter of Islamic
financial initiatives with the establishment of the Islamic Development Bank in 1975. This institution's primary objective was to rejuvenate economic and social development across the Organization of the Islamic Conference member states, fostering collaborative commerce among these nations.
19
Dubai Islamic Bank (DIB): The same pivotal year of 1975 saw the inception of the Dubai
Islamic Bank, pioneering the concept of a modern Islamic commercial bank.
20
This trailblazing institution laid the groundwork for Islamic banking's expansion into the global financial arena.
1.2.3 Global Dissemination of Islamic Finance
The journey of Islamic finance transcended geographical borders, leaving an indelible impact:
18
Kepel, Gilles.
Jihad: The trail of political Islam
. Harvard University Press, 2002.
19
Sheikh, Naveed S.
The new politics of Islam: Pan-Islamic foreign policy in a world of states
. Routledge, 2003.
20
Mohsen, Rim Jamal. "Financial Performance Assessment of Islamic Banking: The Case Study of Dubai Islamic & Emirates Islamic Banks."
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Global Outreach: Islamic banking institutions surpassed regional confines to venture into international territories, eventually spanning across Europe and the United States. The global embrace of Islamic financial principles underscored its relevance beyond cultural and geographical boundaries.
21
This historical trajectory, from the trade practices of the Arabian Peninsula to the establishment of formal institutions dedicated to applying Shariah-compliant financial principles, has catapulted Islamic banking onto the global stage. The evolution from theoretical concepts to tangible financial institutions has played a pivotal role in propagating the principles of Islamic finance, nurturing economic growth and cross-cultural financial cooperation.
1.3 Legal Frameworks and Regulations for Islamic Banks and Financial Institutions
Islamic banks and financial institutions operate within a comprehensive framework of legal regulations to uphold compliance with Islamic principles, foster transparency, and ensure ethical and responsible conduct. The foundation of this framework lies in Shariah, drawn predominantly from the Quran and the Sunnah, encompassing principles that prohibit interest, gambling, and uncertainty in financial dealings.
22
1.3.1 Shariah Compliance and Central Bank Regulations
The cornerstone of Islamic banking operations is adherence to Shariah principles, underpinning ethical and responsible practices. Additionally, legal entities engaging in Islamic finance must align with regulations set forth by the Central Bank. These regulations encompass critical aspects
21
Choueiri, Youssef M.
Islamic Fundamentalism 3rd Edition: The Story of Islamist Movements
. A&C Black, 2010.
22
NK Dahlan and MR Palil, ‘The Challenges of Alternative Dispute Resolution for Islamic Finance in Malaysia’
[2018] 22 Jurnal Undang-Undang dan Masyarakat 11–19 <
https://doi.org./10.17576/juum-2018-22-02
>
14
including capital adequacy, risk management, liquidity management, and stringent reporting requisites.
23
1.3.2 Accounting Standards by AAOIFI
Transparency and accuracy in financial operations are further bolstered by adherence to accounting standards established by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
24
These standards serve as a vital framework, ensuring that all transactions and activities remain in alignment with Shariah principles and are subject to comprehensive scrutiny.
1.3.3 Shariah Supervisory Boards: Guardians of Ethical Finance
Operating entities within the purview of Islamic laws are subject to the directives of Shariah Supervisory Boards. These boards wield significant influence, overseeing and authorizing financial services, products, and transactions.
25
Their oversight extends to providing guidance to the bank's management and staff, steering the institution's activities in congruence with Shariah principles.
In essence, the legal ecosystem that envelops Islamic banks and financial institutions is multifaceted, encompassing Shariah compliance, regulatory provisions set by central banks, internationally recognized accounting standards, and the guidance of Shariah Supervisory Boards. This comprehensive amalgamation of legal principles ensures that the operations of 23
Di Mauro, Filippo, Pierluigi Caristi, Stéphane Couderc, Angela Di Maria, Lauren Ho, Baljeet Kaur Grewal, Sergio Masciantonio, Steven Ongena, and Sajjad Zaheer. "Islamic finance in Europe."
ECB Occasional Paper
146 (2013).
24
AAOIFI issues three new financial accounting standards. (n.d.). https://www.iasplus.com/en/news/2022/01/aaoifi
25
Nadwi, M. A. (2012). Analysing the role of Shariah supervisory boards in Islamic financial institutions. Social Science Research Network. https://doi.org/10.2139/ssrn.2217926
15
Islamic banks and financial entities remain rooted in ethical conduct, transparency, and the principles of Islamic finance.
1.4 Transactional Sources of Islamic Banking and Finance: An Overview of the Legislation
and Statutes Covering Islamic Financial Transactions in Kuwait, the UAE and the UK
1.4.1 The State of Kuwait
The core of Kuwait's legal framework revolves around a blend of French and Egyptian models, The Latin School (the civil law system) represents the legal and legislative direction of the State of Kuwait, with its Constitution's Article 2 underscoring that Shariah serves as the foundation for
legislation and that Islam stands as the nation's official religion.
26
This constitutional stance emphasizes the country's religious and legal identity. The enforcement of commercial law is primarily overseen by the Ministry of Commerce and Industry, while the pivotal role of regulating and controlling the monetary financial system is held exclusively by the central bank. The Central Bank of Kuwait (CBK) bears the dual responsibility of supervising financial institutions and addressing matters pertinent to banking enterprises.
Kuwait was among the pioneers in embracing the concept of establishing Islamic banks, which
are based on the highest authority in the country. As a result, The Amir of Kuwait, Sheikh Jaber
Al-Ahmad Al-Sabah, advocated for issuing the Amiri decree to set up the Kuwait Finance House.
This is the first Islamic bank established in Kuwait and the second globally. Since then, until
2003, there was no legal framework allowing to establish Islamic banks or Islamic finance
institutions, and the Kuwait Finance House was the only Islamic bank that includes compliance
with the provisions of Islamic Shariah.
After the remarkable development that accompanied that experience, degree law no 30 of 2003
was issued, adding a special section for Islamic banks to Law No. 32 of 1986 in the Monetary
Law, the Central Bank of Kuwait, and the banking profession's regulation. After that leatest
26
Z Hasan, ‘Regulatory framework of Shari’ah governance system in Malaysia, GCC Countries and the UK’ [2010] 3-2 Kyoto Bulletin of Islamic Area Studies
82–115
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amendment in the Islamic finance regulation, The number of Kuwaiti Islamic banks has now
reached five, with only a branch of a foreign Islamic bank.
According to the latest published statistics of the Kuwait central bank, the assets of Islamic
banks constitute more than 40% of the total assets of local banks. Once again, this regulation has
a positive impact on the growth and development of Islamic banks in the State of Kuwait.
However, this development and growth in the Islamic banking industry need to push lawmakers
and the local authorities to prepare a clear formula that can enact a legal framework with regard
to Islamic finance transactions. Hence leading to promoting and codifying the Islamic financial
system in Kuwait to the next level. Islamic banking entities, in accordance with Shariah principles, are referred to as business entities under the CBK law. The adherence to these principles is essential for these entities, aligning their practices with Islamic teachings. Article 93 of the CBK Law takes charge of governing Shariah governance practices, laying out the legal foundation for Shariah board regulations.
27
A notable observation is that Kuwait lacks a CBK Shariah board functioning as the highest authority in matters of Shariah within Islamic banking and finance. This absence potentially contributes to challenges in settling disputes when disagreements arise among Shariah board members. To bridge this gap, the CBK law designates the Fatwa Board within the Ministry of Awqaf and Islamic Affairs as the ultimate authority for resolving Shariah disputes specific to Islamic banking and business. This provision aims to ensure consistency and reliability in Shariah interpretations.
28
Furthermore, the CBK law mandates that the Shariah report encompass the Shariah perspective on the bank's operations with regard to Shariah compliance. This requirement enhances 27
Ibid
28
Ibid
17
transparency and accountability, facilitating a clear assessment of the bank's adherence to Islamic
principles. In summary, Kuwait's legal landscape is characterized by a fusion of influences, with Shariah principles at the heart of its financial and legal systems, supported by mechanisms to address potential conflicts and ensure Islamic banking practices are upheld.
29
1.4.2 The United Arab Emirates
The provisional constitution of 1971 is structured from the constitution of Kuwait that was originally based on the constitution of Eygpt. The UAE utilizes the civil legal system by the codification of the constitution and legislation impacts their legal practice. Shariah is ranked as a high source of legislation in the UAE. Even though, Shariah has a high position under the constitution of the UAE. Based on Federal Law No. (5) of 1985 On the Civil Transactions Law of the United Arab Emirates, according to the first article
“
there is no room for personal interpretation. In the absence of a text in this Law, the judge shall adjudicate according to the Islamic Shariah” that means Shariah is placed as one of the Sources of legislation when the absence of any written legislation, Islamic Shariaah can be referred by the courts to fill up the gaps.
The UAE has been at the forefront of the leading countries in Islamic finance, as stated earlier in
the background the first commercial bank in the world was established in the UAE, to provide
the UAE community with a financial solution that is compatible with the provisions of Islamic
Shariah. The UAE also is considered one of the most developed countries in Islamic finance,
with a rich banking sector consisting of Islamic banks, There are six complete local Islamic
banks, and two foreign Islamic banks to operate in the country. In addition, fifteen conventional
banks have established Islamic banking windows, contributing to the diversification and
expansion of the financing sector. There are also nine Islamic finance companies and twelve
Islamic insurance companies (Takaful) in the country.
The supreme Shariah board In 2018, The establishment of the Supreme Sharia Authority was confirmed by Federal Decree-
Law No. (14) of 2018 regarding the Central Bank and the regulation of financial facilities and activities and its amendments.
The members of the Supreme Shariah board were appointed in accordance with the decisions issued by the United Arab Emirates Council of Ministers.
The decree outlined in greater detail its duties and responsibilities.
The Federal Decree-Law No. (14) of 2018 charged the Supreme Shariah Board with establishing regulations, standards and general principles for licenced financial enterprises and activities that are compatible with Islamic Sharia, and also to supervise and manage the internal Sharia supervision committees of licenced Islamic financial institutions.
29
Ibid
18
Notably, the Supreme Shariah Board adopted Sharia standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), which constitute the minimum requirements for Islamic financial institutions to comply with the provisions of Sharia law. Furthermore, the board has implemented certain Sharia governance initiatives to strengthen the guarantee of Sharia compliance in authorised financial institutions.
In 1970, a significant milestone took place as seven Emirates joined together to establish a federal union, comprising Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Quwain, Al Fujairah, and Ras Al-Khaima. The UAE Constitution, Article 7, firmly asserts the recognition of Shariah as a fundamental source of legislation and Islam as the state's religion. Within the realm of banking and finance, the principal governing law is Union Law No. (10) of 1980, which addresses the Central Bank, the Monetary System, and the Organization of Banking. This legislation is instrumental in overseeing financial matters across the UAE, giving the Central Bank of the UAE the authority to create regulations and supervise financial institutions.
30
The legal jurisdiction concerning banking and financial transactions involving banks is assigned to the Civil Court. As such, it holds authority over matters related to the legality of interest and other financial intricacies. Notably, Dubai holds a unique status within the UAE due to its pivotal
role as a leading hub for Islamic finance. Corporate entities and institutions operating within the Dubai International Financial Centre (DIFC) fall under the governance of DIFC Law, along with 30
The United Arab Emirates (UAE) was established in 1971 and is a. . . | CliffsNotes. (2023, January 19). https://www.cliffsnotes.com/tutors-problems/Management/48010763-The-United-Arab-Emirates-UAE-
was-established-in-1971-and-is-a/
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the DIFC Arbitration Centre and its court. Despite Dubai's exceptional position, the UAE as a whole is committed to advancing Islamic finance within the nation.
31
In the broader UAE, excluding Dubai, the Shariah governance framework is regulated by Federal
Law No. 6 of 1985. According to Article 6 of this law, international financial institutions (IFIs) are mandated to outline the establishment of a Shariah board in their articles and memorandums of association. The Higher Shariah Authority advisors are appointed by the government, and it's important to note that IFIs are not responsible for directly appointing their Shariah board members. Instead, they are required to propose names to the Higher Shariah Authority for approval.
32
Furthermore, the Dubai Financial Services Authority (DFSA) underscores the necessity for Islamic financial institutions (IFIs) to adopt the Governance Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). This approach ensures uniformity and adherence to Shariah principles. Additionally, IFIs must guarantee that their internal Shariah review is conducted by an independent and proficient body to ensure compliance with Shariah standards. This multifaceted regulatory landscape underscores the UAE's dedication to upholding Islamic finance principles while providing a robust legal framework for financial operations and institutions.
1.4.3 The United Kingdom
The journey of introducing Islamic financial services in the United Kingdom (UK) dates back to the 1980s. However, this initial endeavor faced setbacks, notably when the Bank of England compelled the closure of Al Barakah Bank in 1993 due to its inability to meet certain regulatory 31
Colon, Julio C. "Choice of law and Islamic finance."
Tex. Int'l LJ
46 (2010): 411.
32
Ibid
20
obligations.
33
This incident prompted UK authorities to adopt a cautious and meticulous approach towards the integration of Islamic finance. While Islamic banking is a relatively recent addition to the UK's financial landscape, the nation has made substantial progress in establishing a robust framework for Islamic finance operations and governance.
Recent research underscores the UK's commitment to providing equal legal treatment to both Islamic finance and conventional banking sectors. This approach aligns with the country's emphasis on financial inclusivity and diversity. However, a notable distinction arises in the domain of Shariah governance. Unlike certain jurisdictions that mandate the presence of a Shariah board for Islamic Financial Institutions (IFIs), there is currently no legally prescribed requirement in the UK for IFIs to establish a Shariah board.
Currently, the UK hosts five operational Islamic banks, each of which independently manages its
own Shariah governance processes. It's worth noting that the Ministry of Treasury (M Treasury) has indicated that the UK government does not intend to adopt the Shariah governance model observed in other international contexts.
34
This stance is rooted in the nature of UK authorities, which function as secular bodies rather than religious regulators. This distinction reflects the UK's unique approach to financial regulation, which seeks to strike a balance between financial innovation, legal compliance, and the country's secular governance structure.
Despite not following the same path as some other jurisdictions in terms of Shariah governance, the UK's commitment to accommodating Islamic finance within its financial landscape remains evident. The evolution of Islamic banking within the UK demonstrates the nation's adaptability 33
R Markom and NI Yaakub, ‘Litigation as dispute resolution mechanism in Islamic finance: Malaysian experience’ [2015] 40 European Journal of Law and Economics
, 565–584
34
Staff, R. (2010, March 31). UK banks, govt bodies launch Sharia finance lobby. U.S. https://www.reuters.com/article/lobby-uk-sharia-idUKLDE62U1I720100331
21
and openness to financial innovation, all while maintaining a strong adherence to its secular governance principles.
1.5 Dispute Settlement in Islamic Finance
Dispute settlement plays a pivotal role within the realm of financial sectors, ensuring the smooth operation of transactions and cultivating confidence in both financial and legal systems.
35
However, when it comes to the Islamic finance industry, which is fundamentally rooted in Islamic law principles, the process of resolving legal conflicts becomes notably intricate due to the distinctive nature of Islamic financial contracts. One noteworthy characteristic of Islamic financial contracts is their propensity for lacking the uniformity and standardization commonly found in conventional financial contracts. Unlike their conventional counterparts, which often adhere to established norms and structures, Islamic financial contracts are frequently tailored to suit the specific requirements of each individual agreement. This customization adds a layer of complexity to the dispute resolution process, as the absence of established approaches, precedents, or clear guidelines necessitates a more nuanced and case-specific approach to conflict resolution.
Moreover, the multifaceted nature of dispute resolution within Islamic finance is compounded by
the varying interpretations and applications of Shariah principles. The diversity of perspectives and approaches to understanding Islamic law can lead to discrepancies in how financial matters are addressed. This variation further accentuates the challenge of devising effective dispute resolution mechanisms.
35
Setyawati, I., Suroso, S., Suryanto, T. and Nurjannah, S. D., ‘Does Financial Performance of Islamic Banking is Better? Panel Data Estimation’, European Research Studies Journal,
vol. 20, no. 2A, 2017, pp. 592-606.
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To overcome these challenges, the Islamic finance industry requires comprehensive and well-
defined legal frameworks and procedures that are tailored to the intricacies of Islamic financial contracts. These frameworks should aim to strike a balance between the flexibility needed to accommodate individual contract nuances and the establishment of general principles to guide resolution processes.
36
Furthermore, fostering a shared understanding of key Shariah principles and their application across the industry can contribute to reducing disparities in interpretation. Efforts to standardize certain aspects of Islamic financial contracts, where feasible, could also provide more structure to the dispute resolution process. Creating a repository of case studies and
successful resolutions could aid in building a body of knowledge that practitioners and stakeholders can draw upon when facing similar challenges.
1.5.1 Dispute Settlement Approaches in Kuwait, the UAE and the UK
Within the scope of this paper, a meticulous examination of dispute resolution approaches across three countries – Kuwait, the UK, and the UAE – is imperative to comprehend their distinct strategies.
Kuwait:
In Kuwait, The Kuwaiti court system
consists of multiple courts, including a trial court, a court of appeal,
and the Court of Cassation.
These tribunals separate civil, commercial, personal statutes, and
criminal matters. Additionally, the civil court has the original jurisdiction to settle and resolve
different kinds of disputes between individuals or entities. It is worth mentioning that there is no actual legal framework with regard to Islamic financial
transactions and that makes the mission of settling disputes in Kuwait more complex and
complicated; for instance, Kuwait civil law no (67) in the year 1980 in article number (1): The
legal articles apply to the issued dealt with in these context in terms of their text or meaning. If
there is no legislative context, then the judge’s decision regarding the provision of Islamic
Shariah law is most likely suitable and practical with the higher interest of the Kuwait
government. Then if there is no context the judge’s decision will be with regard to custom.
36
Markom, R. and Yaakub, N., ‘Litigation as Dispute Resolution Mechanism in Islamic Finance: Malaysian Experience’, European Journal of Law and Economics
, vol. 40, 2015, pp. 565–584.
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the resolution of disputes in the realm of Islamic finance often involves arbitration. The Kuwaiti Arbitration Law lays out a structured framework for settling conflicts through arbitration, a method frequently employed in Islamic finance transactions. This aligns well with Shariah principles, which advocate for dispute resolution through mediation and conciliation.
37
To facilitate Shariah-compliant dispute resolution, the Kuwaiti Ministry of Justice established the International Islamic Centre for Reconciliation and Arbitration (IICRA). This center offers a platform for parties engaged in Islamic finance transactions to navigate disputes within the bounds of Shariah. The current financial system requires moving to an advanced stage of completing the
independence and non-duplication between Islamic banks and their traditional counterparts,
especially when it comes to settling banking disputes. Recently, there has been an essential
development in the Islamic banking industry, as the latest update was issued on Law No. 32 of
1986 in the Monetary Law, the Central Bank of Kuwait and the regulation of the banking
profession. The code included the amendment of Article 93 to allow the establishment of the
Supreme Sharia Supervisory Board of the Central Bank, thus authorising the Board of Directors
of the Central Bank of Kuwait to lay down the foundations and the provisions of Islamic Shariah
related to the formation of the committee, the method of its appointment, rewarding its members,
organising its condition and defining its terms of reference, in a way that provides the necessary
flexibility in this field.
The new amendment also includes that the authority, by its terms of reference with regard to
Islamic financial transactions, expresses a legal opinion on matters referred to by courts or
arbitration centres concerning issues of Islamic financial transactions. The amendment also
included assigning the decision on the dispute between the members of the Sharia Supervisory
Board regarding the Sharia principles to the Supreme Authority of the Central Bank of Kuwait
instead of the Fatwa Committee of the Ministry of Awqaf and Islamic Affairs, as happened
before.
37
Lukonga, Ms Inutu.
Islamic finance, consumer protection, and financial stability
. International Monetary Fund, 2015.
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Kuwait's Central Bank has also established a dedicated Islamic banking dispute resolution committee responsible for addressing conflicts between Islamic banks and their customers. This committee reviews disputes, makes recommendations for resolution, and ensures adherence to Shariah principles.
38
UAE:
In the UAE, financial disputes are typically addressed through litigation, although arbitration is also a prevalent approach. The Dubai International Financial Centre (DIFC) Courts are a specialized judicial body designated for resolving financial disputes, including those related
to Islamic finance. This court system comprises judges well-versed in Islamic finance and Shariah law, guaranteeing compliance with Shariah principles during the resolution process.
39
Furthermore, the UAE has embraced the Abu Dhabi Global Market (ADGM) Arbitration Centre, a platform that facilitates legal conflict resolution via arbitration. This center boasts a comprehensive array of dispute resolution services and assembles a panel of experts in Islamic finance and Shariah law to provide insights into resolving disputes in accordance with Shariah principles.
Dubai,
being recognised as a prominent worldwide financial hub, is progressively becoming as a preferred choice for the resolution of Islamic finance disputes. Dubai, due to its well-developed infrastructure and robust legal framework, is strategically positioned to offer pioneering and economically efficient dispute resolution services in this particular domain.
The Dubai international financial centre (DIFC) was established in 2004. Additionally, the Abu Dhabi Global Market (ADGM) was introduced in 2013, these two offshore financial free zones have their independent jurisdictions within the UAE, and with establish of (DIFC) and (ADGM) the UAE has introduced the practice of common law to the public while maintaining the civil legal system. In parallel, Shariah is maintained as the main primary source of legislation. Notably, both DIFC and ADGM are based on the Federal Decree No. 35 of 2004. 38
Ibid
39
Koster, Harold, and Mark Beer Obe. "The Dubai International Financial Centre (DIFC) Courts: A Specialised Commercial Court in the Middle East."
Available at SSRN 3237126
(2018).
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In relation to the settlement of Islamic finance dispute resolution mechanism that can be referred to within the mixed legal system of the UAE. The first method is litigation. The second method is Arbitration, and the third method is reconciliation.
The International Islamic Centre for Reconciliation and Arbitration (IICRA) was founded in 2005 but initiated operation in 2007. The (IICRA) is established as a non-profit international organisation with a legal and independent personality. Additionally, the (IICRA) stands out in comparison to other centres of dispute resolution with an aim to reach a shariah. Compliance resolution between Islamic banks and their clients or other third party. It also offers certificates and pieces of training for Arbitrators specialising in dispute resolution in Islamic finance. The centre practices locally, across GCC and internationally. Agreement of the parties is required for IICRA's jurisdiction.
Another organization that offers dispute resolution services is (DIAC) which DIAC was established in 1994 as the Dubai Chamber of Commerce & Industry’s Commercial Conciliation and Arbitration Centre. A decade later, it evolved as the Dubai International Arbitration Centre (DIAC) under Decree No. (10) of 2004.
Additionally,
DIAC
is the region’s largest alternative dispute resolution centre. As a non-profit organisation, it also allows parties from all nationalities
and jurisdictions to settle commercial disputes outside judicial courts.
In September 2021,
the Decree No. (34) of 2021 on the Dubai International Arbitration Centre (DIAC). rendered DIAC an independent entity, modernised its corporate governance framework, and reinforced its position as the leading arbitration centre in Dubai.
On 2 March 2022, the Dubai International Arbitration Centre (
DIAC
) published its highly anticipated new arbitration rules (the “
2022 Rules
”). These rules came into effect on 21 March 2022 and apply to arbitrations commenced on or after that date. The 2022 Rules were published approximately six months following Decree No. 34 of 2021 (the Decree
) which abolished the Emirates Maritime Arbitration Centre and the DIFC Arbitration Institute, the legal entity which had operated the DIFC-LCIA Arbitration Centre, and transferred the caseloads of the two institutions to a revamped DIAC.
The New Rules adopt several of the procedural mechanisms found in the rules of other leading institutions, bringing DIAC into line with the likes of SIAC, the LCIA, and the ICC. This modernisation can be observed in the following new features of the DIAC New Rules. Moreover,
the new rules introduce a range of procedural innovations aimed at redressing time, cost and environmental concerns. Where the 2007 DIAC Rules required paper copies of documents to be filed with the Arbitration Centre and the tribunal, the 2022 DIAC Rules provide that Requests for
Arbitration, Answers, and pleadings can be filed and exchanged electronically.
To end this, There is a similar treatment traceable both in the (DIFC) arbitration centre and the (ADGM) Arbitration centre for Islamic finance disputes. It seems that as long as the position of Shariah is clearly provided in the stipulated contract, the disputing parties are obliged to follow their own concluded contract, unless for any contradictory evidence. Moreover, shariah is not foreign before the (ADGM), similar to the (DIFC). Even though ADGM stands to its own
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legislation. It is still bound to follow the constitution of the UAE that regards shariah as one of the sources of legislation in the UAE, thus, the judges have significant roles in determining the approaches that they want to adopt in dealing with Islamic finance disputes.
UK:
In the UK, both litigation and arbitration serve as the predominant methods for dispute resolution. A specialized court system, the Financial List, was established in 2015 to manage intricate financial cases, including those pertaining to Islamic finance. This specialized list is staffed with judges possessing expertise in financial law and complex financial products, including those of Islamic finance nature. Moreover, several arbitration centers in the UK offer diverse avenues for dispute resolution. Among these, the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC) stand out. These entities house panels of experts in Islamic finance and Shariah law, equipped to guide the resolution of disputes while ensuring adherence to Shariah principles.
Ultimately, these three countries exhibit diverse strategies for dispute resolution in the realm of Islamic finance. While arbitration and litigation hold prominence across all three, the unique structures and mechanisms established by each country underscore their commitment to maintaining Shariah compliance and promoting trust within their respective financial and legal systems.
1.5.2 Dispute Resolution Choice An in-depth analysis of relevant literature sources underscores the challenges and complexities surrounding the litigation and enforcement of Islamic finance documents within various judicial systems. It becomes evident that secular courts, despite their legal expertise, often lack the ability
to accurately interpret and enforce Shariah-compliant financial contracts. This challenge stems from the intricate nature of Islamic law and the differing interpretations thereof, as noted by
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Koster et al.
40
. Disputes arising within the Islamic finance context are often addressed through litigation, which is a conventional method of resolving conflicts and making legally binding decisions.
Despite its legal grounding, litigation has demonstrated limitations in its ability to comprehensively interpret Shariah principles. This has led some experts in the Islamic finance field to express skepticism about alternative dispute resolution methods, such as mediation and international arbitration. However, arbitration, recognized within the framework of Shariah, offers a range of advantages. Notably, it allows parties to actively participate in the resolution process, fostering collaboration in decision-making, relationship restoration, and cost and time savings. This alternative approach aligns with the efficient and flexible nature of arbitration, which emphasizes resolving disputes according to Shariah principles, while also considering commercial, financial, and legal dimensions.
41
It's important to note that arbitration awards, although based on Shariah principles, still require enforcement within secular courts. This step necessitates determining the enforceability of the arbitration award within the relevant jurisdiction. Arbitration serves as a bridge between Islamic values and the practicalities of dispute resolution, allowing for the incorporation of both Islamic and secular laws.
42
This becomes particularly important in the context of Islamic finance, which operates within a dual regulatory framework.
40
Ibid (32)
41
Akhtar, Rajnaara C. "British muslims and transformative processes of the Islamic legal traditions: Negotiating law, culture and religion with specific reference to Islamic family law and faith based alternative dispute resolution." PhD diss., University of Warwick, 2013.
42
ACCORD. (2020, February 10). Where does Islamic Arbitration fit into the Judicially Recognised Ingredients
of Customary Arbitration in the Nigerian Jurisprudence? – ACCORD. https://www.accord.org.za/ajcr-
issues/where-does-islamic-arbitration-fit-into-the-judicially-recognised-ingredients-of-customary-
arbitration-in-the-nigerian-jurisprudence/
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Two main types of arbitration exist: administered and non-administered/ad hoc. Administered arbitration is guided by arbitral institutions, while non-administered arbitration relies on the parties themselves to decide which rules apply. Various features characterize arbitration, including arbitral rules and institutions, the arbitration's location, neutrality, finality of decisions, procedural adaptability, and the emphasis on privacy and confidentiality.
Islamic principles, as outlined by Hanafi et al.
43
, have historically supported various methods of dispute resolution, including arbitration. Incorporating arbitration into Islamic conflict resolution mechanisms offers several benefits. Notably, arbitration allows parties to select judges who are experts in Islamic law, ensuring efficient proceedings. Party autonomy is another key advantage, granting the disputing parties greater control in shaping the arbitration process, particularly in adhering to Shariah principles while considering secular laws. This autonomy is crucial in the complex regulatory landscape of Islamic finance, which must adhere to both Islamic and secular norms. Lastly, enforceability remains a vital aspect of arbitration, effectively addressing disputes arising from Islamic finance transactions.
Ultimately, the literature highlights the challenges in using conventional litigation for Islamic finance disputes, primarily due to the intricate nature of Shariah and varying interpretations. Arbitration, recognized in Shariah, offers a flexible, efficient, and Shariah-compliant alternative that respects party autonomy and ensures enforceability. This approach aligns with the values of fairness and justice in Islamic law and presents a comprehensive framework for resolving disputes within the realm of Islamic finance.
43
Hanafi, Yusuf, and Titis Thoriquttyas. "The Resolution Of Social Conflict In The National Constitution And Islamic Perspectives: Integrating Formal and Non-Formal Approaches."
Al-Tahrir: Jurnal Pemikiran Islam
18, no. 2 (2019): 283-394.
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1.5.3 Regulatory Challenges While there has been positive progress in the Shariah governance frameworks of the examined countries, several substantial regulatory challenges inherent to the Shariah governance system persist. These challenges encompass conflict of laws, the legal status of Shariah pronouncements,
and the jurisdiction of courts. These complexities often arise when addressing disparities between Shariah rulings and the dual executive and advisory roles of Shariah boards. Given the diverse array of Shariah governance approaches adopted by Islamic Financial Institutions (IFIs), it is imperative to cultivate a high standard of Shariah governance practices.
44
This step is pivotal
in ensuring that Shariah board institutions can effectively execute their roles to the utmost potential. It has been observed that the operational landscape of most IFIs is marked by a fusion of legislative frameworks encompassing mixed jurisdictions and legal systems.
45
Consequently, every transaction, operation, document, and product must align not only with Shariah principles but also with other applicable laws. This interplay can lead to potential conflicts, necessitating a careful balancing act to ensure compliance.
In cases where Shariah law holds the ultimate legal authority, as seen in certain GCC countries, issues stemming from conflicts between laws may be mitigated. Nevertheless, the absence of a comprehensive regulatory framework for Shariah governance can exacerbate challenges in the development of Islamic finance.
46
The divergence in fatwa rulings among different Shariah boards also holds the potential to tarnish the image of Islamic finance, especially when international entities establish Islamic banks across varying jurisdictions. Consequently, the 44
Hassan, M. Kabir, and Sirajo Aliyu. "A contemporary survey of Islamic banking literature."
Journal of Financial Stability
34 (2018): 12-43.
45
Ibid 46
Mohieldin, Mahmoud, Ahmed Rostom, Mahmoud Mohieldin, Xiaochen Fu, and Zamir Iqbal.
The role of Islamic finance in enhancing financial inclusion in Organization of Islamic Cooperation (OIC) countries
. Washington, DC: World Bank, 2011.
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pivotal role of the Shariah board in ensuring Shariah compliance across IFI transactions, operations, and products becomes paramount. Moreover, the question of the executive authority of Shariah boards takes on pronounced significance within non-Islamic legal environments, as exemplified by the UK.
47
In such contexts, the role of Shariah boards in wielding power and authority assumes an added layer of complexity due to the different legal foundations. These challenges underscore the need for thoughtful adaptation and clear delineation of the roles of Shariah boards within various legal systems.
Ultimately, despite the advancements in Shariah governance frameworks, challenges arising from the conflict of laws, the legal status of Shariah pronouncements, and jurisdictional considerations persist. The diversity of Shariah governance practices within IFIs emphasizes the importance of establishing robust governance standards. This serves to uphold Shariah principles, navigate conflicts of laws, and ensure a cohesive approach to Islamic finance that maintains its integrity across various legal contexts.
1.6 Research Problem
The research problem at hand revolves around the inadequacy of legislation within the laws and regulations governing transactions of Islamic banks. This insufficiency has led to instances where the principles of Islamic law are either declined in implementation or struggle to be effectively applied. Within the framework of Islamic banking, Shariah law stands as the exclusive and paramount source of legitimacy for transactions. Consequently, it is imperative for both the transactions of Islamic banks and the judgments of regular courts to adhere to the tenets of Shariah law. Nevertheless, the absence of codified Shariah provisions has led to a 47
Ainley, Michael, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, and Ali Ravalia. "Islamic finance in the UK: Regulation and challenges."
The Financial Services Authority (FSA), London
(2007).
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discretionary approach, where the court holds the choice of excluding Shariah implementation. Furthermore, courts have at times treated Islamic bank transactions similarly to those of conventional banks, indicating a lack of distinction in interpretation. For instance, the Federal Supreme Court of the United Arab Emirates opted to treat the "Tawaroq" transaction as a "Qard Hassan" or interest-free loan, showcasing such differences in interpretation.
These challenges manifest in the absence of a comprehensive legal framework governing Islamic
bank transactions. This dearth is further compounded by deficiencies in the design of Islamic bank contracts, often leading to ambiguities that hinder the proper application of Islamic law. Several real-life scenarios exemplify instances where secular law is sought to supersede the implementation of Islamic law. This includes instances where secular law is chosen outright as an alternative to the provisions of Islamic law. It's worth noting that enforcing Islamic law in international contracts isn't an obligatory condition but rather a dynamic choice. The shift from the formerly unified condition that ensured the implementation of Islamic law to the mixed condition, which combines the enforcement of both secular and Islamic laws, highlights the complexities faced in this realm.
A common challenge arises from the inclusion of clauses like "This agreement is subject to British law in a manner that does not contradict the provisions of Islamic Sharia" or "This agreement is subject to British law unless it contradicts the provisions of Islamic Sharia, in which
case the provisions of Islamic Shariah take priority." Such clauses, although theoretically promising, are arduous to put into practice. Precedents, at least within British courts, have shown
an inclination towards excluding the application of Islamic law, thereby demonstrating a degree of unfairness to Islamic law.
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Ultimately, the research identifies a pressing issue arising from the insufficient legislative framework governing Islamic bank transactions. This deficiency is compounded by the challenges in designing contracts and the application of Islamic law within a secular legal context. The consequences of these challenges have led to the discretionary exclusion of Shariah law implementation, and the clauses meant to bridge this gap have faced obstacles in implementation. Efforts to develop comprehensive legal frameworks and refine contract designs are essential to ensuring the harmonious implementation of Shariah principles within the realm of Islamic banking.
1.7 Research Questions and Objectives
The central thesis of this research is to examine the regulatory challenges in Sharia law finance contracts and the implementation of arbitration as an adaptive mechanism for resolving disputes in the Islamic finance industry. This investigation involves a comparative analysis between Kuwait, the United Arab Emirates (UAE), and the United Kingdom (UK), focusing on their respective regulatory frameworks and the integration of arbitration in addressing disputes arising from Shariah-compliant financial transactions.
1.7.1 Research Questions
i.
How do the regulatory frameworks in Kuwait, the UAE, and the UK address the challenges in Sharia law finance contracts?
ii.
What are the primary regulatory challenges in ensuring consistency and coherence in Sharia law finance contracts across different jurisdictions?
iii.
To what extent has arbitration been adopted and integrated as a mechanism for resolving disputes in Islamic finance, and how effective is this approach?
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iv.
How do the case law examples, primarily from the UK, reflect the successful adaptation of arbitration for resolving disputes in the Islamic finance sector?
v.
How can regulatory frameworks be enhanced to ensure consistency, legal clarity, and investor confidence in Sharia law finance contracts, while accommodating diverse cultural and legal contexts?
vi.
What implications do the findings have for policymakers, practitioners, and scholars in advancing the Islamic finance industry's regulatory and dispute-resolution landscape?
1.7.2 Research Objectives
In light of the above questions, this study will aim to achieve the following objectives to answer the research questions:
i.
To analyze and compare how Kuwait, the UAE, and the UK address challenges in Sharia law finance contracts through their regulatory frameworks.
ii.
To identify and examine the main obstacles to achieving consistency and coherence in Sharia law finance contracts across different jurisdictions.
iii.
To evaluate the extent of arbitration's adoption and integration as a dispute resolution method in Islamic finance, while assessing its effectiveness.
iv.
To study case law examples, particularly from the UK, to understand how arbitration has successfully resolved disputes within the Islamic finance sector.
v.
To propose recommendations to enhance regulatory frameworks in Kuwait, the UAE, and
the UK, ensuring clarity, legal conformity, and investor confidence while considering diverse contexts.
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vi.
To assess the broader implications of findings for policymakers, practitioners, and scholars, providing insights for advancing the regulatory and dispute resolution landscape
in Islamic finance.
1.8 Methodology
This research employs qualitative research methods to comprehensively explore the regulatory challenges in Sharia law finance contracts and the implementation of arbitration in resolving disputes within the Islamic finance sector. According to Simons
48
, the qualitative approach allows for an in-depth understanding of complex legal and regulatory issues, as well as insights into the practical implications of these challenges. The study relies on both primary and secondary sources to gather comprehensive and reliable data.
Primary Sources
Legislation: The primary source of information for the regulatory frameworks in Kuwait, the UAE, and the UK will be relevant legislation, regulations, and official documents. These legal texts will be analyzed to understand how each jurisdiction addresses challenges in Sharia law finance contracts within their regulatory frameworks.
Interviews: Interviews will be conducted with key stakeholders, including legal experts, scholars, practitioners, and policymakers in the Islamic finance industry. These interviews
will provide valuable insights into the practical application of regulatory frameworks and the effectiveness of arbitration as a dispute resolution mechanism. The qualitative data collected through interviews will be analyzed to enrich the understanding of the research topics.
48
Simons, Helen. "Case study research: In-depth understanding in context."
The Oxford handbook of qualitative research
(2014): 455-470.
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Secondary Sources
Academic Literature: Secondary sources, including scholarly articles, books, and research
papers, will be extensively reviewed to establish a theoretical foundation for the research.
This literature will provide insights into the challenges faced by Islamic finance, the theoretical underpinnings of Sharia law finance contracts, and existing discussions on arbitration in Islamic finance.
Case Law: Secondary sources will also include case law from various jurisdictions, with a particular focus on the UK. Analyzing relevant cases will offer practical examples of how arbitration has been successfully adapted for resolving disputes within the Islamic finance sector. These cases will be valuable in understanding the challenges, outcomes, and lessons learned from the integration of arbitration.
Comparative Approach
As noted by Ellis
49
, the comparative approach is justified in this research due to the global nature
of Islamic finance and the presence of diverse legal systems and cultural contexts. By comparing the regulatory frameworks of Kuwait, the UAE, and the UK, this approach allows for the identification of strengths, weaknesses, and innovative practices within different jurisdictions. The comparison enhances the understanding of regulatory challenges and potential solutions, contributing to a more holistic analysis. Moreover, the examination of case law, particularly from
the UK, provides practical insights into the effectiveness of arbitration in resolving disputes within the Islamic finance sector. The comparison of these cases with other jurisdictions' experiences can provide a broader perspective on the applicability and adaptability of arbitration mechanisms.
49
Ellis, Jaye. "General principles and comparative law."
European Journal of International Law
22, no. 4 (2011): 949-971.
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Data Analysis
The collected data, both from primary sources (legislation and interviews) and secondary sources
(academic literature and case law), will be qualitatively analyzed. Thematic analysis will be employed to identify recurring themes, patterns, and insights. The analysis will involve categorizing data to extract meaningful findings that address the research questions and objectives.
Ultimately, this research will employ qualitative methods, utilizing primary sources such as legislation and interviews, as well as secondary sources like academic literature and case law. The comparative approach is justified to address the global nature of Islamic finance, allowing for a comprehensive analysis of regulatory challenges and the integration of arbitration mechanisms. The resulting analysis will provide valuable insights into the regulatory and dispute
resolution landscape of the Islamic finance industry.
1.9 Research Significance
This paper holds profound significance for multiple stakeholders within the Islamic finance sector and the broader financial and legal communities. Through its comprehensive analysis of the regulatory challenges in Sharia law finance contracts and the integration of arbitration in dispute resolution, the research offers invaluable contributions to both theoretical understanding and practical advancements in Islamic finance.
i.
Advancing Regulatory Clarity:
The research's significance lies in its potential to enhance
regulatory clarity and coherence within the Islamic finance industry. By critically examining the regulatory frameworks in Kuwait, the UAE, and the UK, the dissertation sheds light on best practices and innovative approaches that can contribute to the
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establishment of more robust and standardized regulatory systems. These findings can assist policymakers and regulatory authorities in refining their existing frameworks and developing new guidelines that align with international standards. As Islamic finance continues to expand globally, regulatory harmonization becomes imperative for cross-
border transactions and investor confidence.
ii.
Strengthening Dispute Resolution Mechanisms:
The exploration of arbitration as a mechanism for resolving disputes in Islamic finance holds paramount importance. The research delves into the effectiveness of arbitration methods, offering insights into their strengths, limitations, and practical outcomes. By analyzing case law examples, particularly from the UK, the study provides practical lessons that can guide legal practitioners, scholars, and policymakers in optimizing arbitration processes within the Islamic finance context. The enhanced utilization of arbitration can expedite dispute resolution, minimize legal complexities, and boost investor trust by ensuring fair and efficient outcomes.
iii.
Contributing to Legal Scholarship
: This paper contributes significantly to the academic discourse surrounding Islamic finance. It deepens the understanding of the unique challenges posed by Sharia law finance contracts and the intricacies of adapting international arbitration mechanisms to align with Islamic financial principles. As an original contribution to legal scholarship, the research fills a critical gap in the literature by offering a comprehensive analysis of the regulatory and dispute resolution dimensions of Islamic finance. Scholars and researchers in fields such as Islamic law, finance, and international arbitration will benefit from the insights and findings presented in this paper.
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iv.
Enhancing Investor Confidence:
The research outcomes have direct implications for the
confidence of investors and stakeholders in the Islamic finance industry. By addressing regulatory challenges and exploring effective dispute resolution mechanisms, the study provides insights that can mitigate risks associated with legal uncertainties and unresolved disputes. As investor confidence is pivotal for the growth and sustainability of
Islamic finance, the research's recommendations and best practices contribute to creating an environment that fosters investments and partnerships.
v.
Informing Policy and Practice:
Policymakers, legal practitioners, and financial professionals will find substantial value in the research findings and recommendations. The insights derived from the analysis of regulatory frameworks and arbitration practices offer practical guidance for refining existing policies and crafting new ones that align with evolving industry dynamics. The research's implications extend to the design of contractual terms, dispute resolution clauses, and risk management strategies within Islamic finance contracts. This alignment between research and practice ensures that the industry evolves in tandem with legal advancements.
vi.
Supporting Global Collaboration:
Given the global nature of Islamic finance, the paper's
comparative approach encourages collaboration among jurisdictions. By examining the experiences of Kuwait, the UAE, and the UK, the research identifies common challenges and potential solutions that can facilitate international dialogue. The paper's insights can be utilized as a foundation for international organizations, industry associations, and regulatory bodies to collaborate in the development of harmonized standards and guidelines for Islamic finance practices.
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Ultimately, the research's significance is multifaceted and far-reaching. Through its examination of regulatory challenges and dispute resolution mechanisms in the Islamic finance sector, the dissertation contributes to regulatory harmonization, dispute resolution efficiency, academic scholarship, investor confidence, policy formulation, and global collaboration. The findings and recommendations presented within this paper are poised to shape the trajectory of the Islamic finance industry, offering transformative insights for years to come.
1.10 Dissertation Structure
The goal of this study is to provide a comprehensive legal analysis of the current Islamic financial, legal and regulatory framework and the degree to which it is suitable for spreading the idea of dispute resolution through arbitration. This section provides an overview of the dissertation's structure, outlining the content and key themes covered in each chapter. As such, it is divided into seven chapters. the outline of each is as follows: CHAPTER 1: INTRODUCTION
In this foundational chapter, the context and rationale for the study are established. The chapter emphasizes the importance of investigating regulatory challenges in Sharia law finance contracts and the integration of arbitration in the Islamic finance sector. The research objectives, questions,
scope, and overall significance are outlined, showcasing how the study contributes to both theoretical understanding and practical advancements in Islamic finance.
CHAPTER 2: LITERATURE REVIEW
This chapter presents a comprehensive review of existing literature pertinent to Islamic finance, regulatory frameworks, and dispute-resolution mechanisms. It highlights the evolution of the Islamic finance industry, regulatory challenges, and the theoretical underpinnings of Shariah law
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finance contracts. The literature review contextualizes the research within the broader scholarly discourse and identifies gaps that this study aims to address.
CHAPTER 3: THE LEGAL FRAMEWORK OF ISLAMIC FINANCIAL TRANSACTIONS Chapter 3 delves into the core legal framework of Islamic financial transactions. It explores the foundational principles of Islamic finance, providing an understanding of the contractual arrangements and transactional sources that govern Sharia law finance contracts. This chapter establishes the basis for analyzing legal and regulatory challenges in subsequent chapters.
CHAPTER 4: LEGAL AND REGULATORY ISSUES IN ISLAMIC FINANCE TRANSACTIONS Building on the understanding of the legal framework, Chapter 4 delves into specific legal and regulatory challenges faced within Islamic finance transactions. It examines areas such as contract design, compliance with Shariah principles, and legal complexities arising from the unique nature of Islamic finance contracts. This chapter explores the intricacies of adapting conventional legal structures to Islamic financial practices.
CHAPTER 5: IMPLICATIONS FOR THE PRACTICE OF ISLAMIC FINANCIAL CONTRACT DISPUTES Chapter 5 investigates the practical implications of regulatory challenges and legal issues on the resolution of disputes within Islamic financial contracts. It explores how regulatory ambiguities and legal complexities impact the dispute resolution process. The chapter draws on real-world examples to illustrate the practical consequences of these challenges.
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CHAPTER 6: CONSIDERATION OF THE RECEIVED FINDINGS, EXAMINING THE SIMILARITIES AND DIFFERENCES IN ISLAMIC FINANCE REGULATION AND LAWS In this chapter, the findings from the previous chapters are synthesized and analyzed. The chapter
examines the similarities and differences in Islamic finance regulations and laws among Kuwait, the UAE, and the UK. It provides a comparative analysis of how each jurisdiction addresses regulatory challenges and legal issues within the Islamic finance sector.
CHAPTER 7: SETTLEMENT OF DISPUTES IN ISLAMIC FINANCIAL CONTRACTS BETWEEN REALITY AND IMPLEMENTATION
Chapter 7 focuses on the settlement of disputes in Islamic financial contracts. It explores the implementation of arbitration as a mechanism for resolving disputes, addressing challenges related to cultural adaptation, legal conformity, and effective execution. The chapter also considers practical strategies for bridging the gap between regulatory ideals and real-world implementation.
CHAPTER 8: RECOMMENDATIONS AND CONCLUSION The concluding chapter summarizes the key findings of the research, emphasizing their contributions to both academic understanding and practical implications. It revisits the research objectives and questions, highlighting their alignment with the initial aims of the study. The chapter reflects on the significance of the research in shaping regulatory frameworks, advancing dispute resolution mechanisms, and fostering a more robust Islamic finance industry. Practical recommendations are offered, and avenues for future research are proposed.
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QUESTION 26
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