A Slippery Slope: the legal enforceability of Islamic finance judgments and awards in foreign jurisdictions

The phenomenal growth in the Sharī'ah-compliant assets has tremendously spurred better interactions among financial systems of the East and the West. Islamic finance is gradually becoming a bridge between these two worldviews. In order to further this global integration of Islamic finance products, this paper examines the legal enforceability of Islamic finance judgments and awards in foreign jurisdictions, be it in the Muslim world or western countries, broadly defined. Based on the reciprocity requirement in international law, which is often premised on bilateral or multilateral treatise, and in some cases conventions, there is a wide scope for the enforcement of foreign judgments and awards involving Islamic finance matters. However, draftsmen of sukuk transactions, and other Islamic finance contracts, often express their concerns on the non-enforceability of foreign judgments and awards in some GCC countries especially when the governing law of such sukuk transactions is the English law. Given the fact that this trend places the global Islamic finance industry on a slippery slope, this study however sets out to examine the dynamics of this challenge faced by draftsperson of Islamic finance contracts vis-à-vis two major conventions – Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (1971) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Though the current trends seem like a continuum fallacy within the Islamic finance industry, concerted efforts by the stakeholders to introduce reforms are expected to yield sustainable results

The Regulation of Islamic Capital Markets: Revisiting the Governing Law Clause in Sukuk Transactions

The crystallization of the Islamic capital markets in the last decade has led to increased acceptance of Islamic finance products in the global market. However, a fundamental question that lies on the intersection of law and Islamic capital market that has far-reaching impact on market practices is the extent to which the governing law clause in a typical Sukuk prospectus protects the interest of the parties and meets the ends of justice. An analogous clause within the governing law provision is the dispute resolution clause, which either makes or mars the whole transaction depending on how it is structured. The paper argues that as part of Islamic finance documentation involved in the process of structuring a Sukuk transaction, one important thing the parties must get right from the beginning is the governing law clause. With the increasing provision of English law as the governing law, a question that readily comes to one’s mind is whether it is possible to have an alternative governing law while retaining the choice of jurisdiction clause. In order to create a regulatory environment that is conducive to the prevailing trends in the modern world, this studycritically ploughs through the governing law clauses of 10 selected Sukuk prospectuses and makes interesting findings regarding the attitude of draftsmen and their clients. A preliminary finding of this study is the paradigm shift to arbitration as an alternative or precondition to litigation in some of the Sukuk prospectuses reviewed. Since there are regional and international arbitral institutions set up exclusively for Islamic finance disputes, it may be more appropriate to resolve any dispute arising from a Sukuk transaction under Sharī'ah-compliant rules and supervised by experts in Islamic law. The interviews conducted for this research with 10 prominent Sharī'ah scholars who have been involved in the certification of Sukuk structures proves this hypothesis and the qualitative data are consistent with it, albeit with some dissenting views

The legal and beneficial ownership conundrum in sovereign sukuk structuring

The past decade has witnessed the dynamics of ṣukūk structuring amidst legal complexities in cases involving enforcement of the rights of investors or ṣukūk holders in the event of default. This paper examines the legal and beneficial ownership in a typical sovereign ṣukūk structure and the specific rights of the parties under the existing practice and the classical Islamic legal framework. Specifically, the issue of public property often used in sovereign ṣukūk as the underlying asset of the transaction leaves much to be desired. Through a systematic content analysis, this study uses the qualitative legal research method to analyse a number of sovereign ṣukūk structures gathered from available ṣukūk prospectuses. The study finds that the nature of legal and beneficial ownership in ṣukūk transplanted from the conventional bonds structuring is different from the type of ownership envisaged in Islamic commercial law. It is found that the modern structure of ṣukūk products only allows for beneficial ownership to be conferred on the ṣukūk holders, and this does not contradict any principle of Islamic law when one considers the true nature of beneficial ownership under the common law. Though it literally falls short of a true sale in Islamic law in the event of default, a closer look of the legal structure reveals the true nature of beneficial ownership. The mere fact that the ṣukūk holders can have recourse against the underlying asset justifies the conferment of true ownership. Nevertheless, the stakeholders may still need to consider the use of a public property as the underlying asset of a sovereign ṣukūk. With the increasing interest of emerging economies in ṣukūk to meet their long-term financing needs, this study is expected to guide the global Islamic finance industry on Sharī‘ah and legal issues relating to sovereign ṣukūk

Sharī‘ah Court-annexed ADR: The Need for Effective Dispute Management in Waqf, Hibah and Wasiyyah Cases in Malaysia

Being one of the most progressive Muslim countries in the 21st century, Malaysia has remained the cynosure of all eyes in the Muslim world. One of the major institutions in governance is the administration of justice system, which generally promotes access to justice as the last hope for the less privileged. To this end, this paper attempts to reconstruct the need to build on existing initiatives in the administration of justice mechanism of the Sharī‘ah judiciary in Malaysia with special reference to disputes involving waqf, hibah and wasiyyah issues. It is therefore argued that rather than waiting for emerging issues such as cases involving waqf survey to emerge before coming with up with sustainable mechanisms, which are fundamentally Sharī'ah-based, it is always more fitting to be proactive in a fast-growing economy such as Malaysia

Dispute management in Islamic financial institutions: a case study of near sukuk defaults

Purpose – The purpose of this paper is to examine the vital importance of dispute management in cases of both near and outright sukuk defaults. With the case studies, this study examines the vital importance of dispute management in cases of both near and outright sukuk defaults. With a number of case studies, the study shows how debt restructuring can play a significant role as a dispute management procedure recognized in Islamic law. Design/methodology/approach – The study uses the case study methodology to determine the impact of debt restructuring in instances of near and outright sukuk default and the process taken to reach a win-win settlement among the parties. Due to some sensitive financial information, the study has fully anonymized the sukuk companies examined. Findings – The paper finds that for a more sustainable and stable and resilient Islamic finance industry, the role of law through dispute management cannot be ruled out, as appropriate dispute management mechanism facilitates the underlying contracts. Research limitations/implications – This study limits its focus to near and outright sukuk defaults and the need to come up with Shari’ah-based mechanisms for dispute management when things seem to have fallen apart. Practical implications – The study proposes an integrated regulatory-cum-remedial framework which may serve as sustainable mechanism for handling circumstances involving near and outright sukuk defaults with a view to protecting the rights of all the stakeholders. Originality/value – Though few studies have been conducted on sukuk defaults in cross-border transactions, there has not been much focus on dispute management of cases involving such defaults. This study seeks to fill such an important gap, which has the potential of streamlining dispute management practices in the sukuk industry

Dispute management in Islamic financial services and products: a maqāṣid-based analysis

The increasing expansion of the Islamic financial services industry beyond its original frontiers has not only come with success stories but has also been affected by the growing preference for litigation as the mode of dispute resolution. Exorbitant legal fees and cost of sustaining protracted litigation are two major challenges that require the attention of major stakeholders in the industry. This paper examines these challenges through a Maqāṣid alSharī‘ah focused prism considering the importance of the sustainable dispute management framework in Islamic financial services and products. While singling out the important higher objective (maqṣad) of ḥifẓ al-māl, this study argues that preservation of wealth and financial resources requires effective means of resolving increasingly diverse disputes in the Islamic financial services industry. It is further argued that an effective dispute management framework will consider the original value proposition of Islamic financial intermediation which promotes maṣlaḥah (benefits) and prevents mafsadah (hardship) and ḍarar (financial harm). This makes a case for the affirmative relevance, potential adoption, and systemic modernisation of Islamic dispute management mechanisms such as ṣulḥ, taḥkīm, and muḥtasib in order to fulfil the overarching objective of protection and preservation of wealth and financial resources as one of the core objectives of Sharī‘ah

Blazing the trail: the institutional framework for dispute resolution in Malaysia’s Islamic finance industry

The dispute resolution framework in Islamic finance as practiced in most countries has proven to be inadequate, particularly in its application and interpretation of the Sharīah. Malaysia has consistently proven its prime position in blazing the trail in most legal and regulatory issues in the Islamic finance industry. It has recognised the increasing importance of the architectural aspects of the industry such as the need to establish the dispute resolution framework

Banking on ICT: The relevance of online dispute resolution in the islamic banking industry in Malaysia

In order to keep the cost of settling disputes low and standards for grievance remedial methods high, access to justice is paramount in today’s fast pace commercial transactions in the digital world. In Malaysia, the successes recorded in the Islamic banking industry do not just flourish without some consequential challenges such as the increasing rate of disputes involving Islamic financial products and services. Though the number of widely reported cases heard and determined by the courts between 1985 and 2010 are about 20, the Financial Mediation Bureau seems to be more active in dispute resolution in the industry. This study seeks to explore the relevance of such mechanism that would use five distinct but connected modules for dispute settlement. This pioneering research introduces a new dimension in the sustainability of the economy by leveraging the state-of-the-art information and communication technology (ICT) in resolving banking disputes in the Islamic finance industry in Malaysia. Exploring the relevance of such online dispute resolution platform for Islamic finance disputes will serve as a launch pad for further studies that will involve the design and application of such technology in the Islamic finance industry

Towards the effective legal regulation of Waqf in Nigeria: problems and prospects

The importance and need to utilize the economic benefits of waqf cannot be overemphasized in the current global economic conditions. In order to become part of the global move towards the revival of awqaf, Nigeria, a country predominantly dominated by Muslims, needs to enact laws to regulate the management of awqaf properties. This paper examines the current state of waqf in Nigeria, issues affecting the institution of waqf and the extent of its regulation with an appraisal of the existing laws. It is argued that the provision of the Constitution of Nigeria 1999 subjecting waqf to the jurisdiction of the Shari'ah Court of Appeal without any further regulation in the form of an Act does not augur well for the needs of Nigerian Muslims and the economy of the country. In fact, the so-called Muslim States in the country are still groping in the darkness of colonial laws of trusts. The paper concludes that the economic benefits of awqaf can only be harnessed when there is effective legal regulation in the country, and by that, the economic benefits of the institution will be felt by all

The application of third party guarantee in structuring sukuk in the Islamic capital market: a preliminary literature survey

In the Islamic capital market, the Sukuk (Islamic investment certificates) segment is considered by key stakeholders in the Islamic financial services industry as the most vibrant segment in the global Islamic financial system. This paper provides a preliminary literature survey on the application of third party guarantee in Islamic capital market with specific reference to Sukuk transactions. The methodology adopted in this study leverages on the dynamics of comparative jurisprudential analysis of the different schools of thought in Islamic law from the classical to the modern jurists. Though this aspect of Islamic capital market is relatively in its infancy stage of development, the Islamic financial services industry is fraught with diverse practices where a perceptible disconnect is noticed between juristic ideals and practical application of third party guarantee in Sukuk structuring. Therefore, the paper finds that though the use of third party guarantee is permissible in Islamic capital market, there is however a proviso which must be adhered to – the voluntary nature of the guarantee. The guarantee should be provided without charging any fee, and this is applicable in commonly used sukuk products such as Sukuk al-ijarah, Sukuk al-mudarabah, and Sukuk al-istisna‘. It is however permissible to impose a compensatory fee in Sukuk al-istisna‘ in the case of failure to deliver the subject matter of the contract on the due date and the contractee has suffered a damage