University Of East Anglia Norwich Law School

LAW- M605

LEGAL ASPECT OF ISLAMIC FINANCING

PG COURSEWORK 2009-2010

STUDENT REGISTRATION NUMBER [4230531]

Word count 3996

T !"# O$ C%&'#&'(

1 !ntroduction " Nature of !sla#ic $inancing " 1 &efinition of !sla#ic $inancing " " $eatures of !sla#ic $inancing " 3 'a(or )rohi*itions of !sla#ic $inancing Syste# " 3 1 $irst, -rohi*ition of .!/A " 3 " Second, -rohi*ition of 0harar 1e2tre#e uncertainty3 " 3 3 4hird, -rohi*ition of 'aysir 10a#*ling3 3 4he 0eneral 5onditions of 4he Sale 5ontract in !sla#ic $inancing Syste# % !(arah 1leasing3 as !sla#ic $inancing 4echni7ue 1#ethod3 % 1 !ntroduction % " !(arah as a financing techni7ue % 3 !(9arah wa :i7tin9a 1lease ending with ownershi)3 % % 4he 0eneral !sla#ic rules of Leasing % + 4he A))roaches of 4he Entailed .is;s in !(arah 4ransactions + 4he Structure of !(arah Wa<!7tina in the !sla#ic $inancing Syste# 6 4he !#)act of the 5hoice of Law on !(arah 4ransaction 6 5onclusion 8 /i*liogra)hy 9 A))endi2 A 6

3 % % % + + 6 6 8 8 8 8 9 9 1= 11 1" 13 1%

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1) I&'*%+,-'.%& !t has to *e conceded that !sla#ic financing is one of the #ost accelerated growing industries in the field of glo*al *an;ing and financial syste#s during the last three decades 1 /eginning with &u*ai !sla#ic /an; which was founded in 196+, nowadays there are #ore than 3== glo*al institutions s)eciali>ing in !sla#ic financing across the world 4he assets of these institutions are a))ro2i#ately ?"+= *illion with esti#ated growth at 1=<1+ )ercent )er annu# " 4his un)aralleled growth was no coincidence 4here are #any factors contri*uting to this soaring growth, such as the continued )ros)erity in the #iddle east states in res)ect of oil wealth, an increased desire a#ong 'usli#s to elicit financial services that #eet the Sharia 1!sla#ic law3 re7uire#ents, and the attractiveness of the !sla#ic financing )roducts which are a))ealing to *oth 'usli# and non<'usli# investors 3 !t is worth #entioning that !sla#ic financing is not #erely confined to the 'iddle East or to !sla#ic countries only, *ut also, it is sought after, wherever there is a reasona*le 'usli# co##unity worldwide
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The aim of this essay is to advise 4he !sla#ic /an; of 4ransylvania 1!/43, which has recently founded

an !sla#ic *an; in the U@, regarding its intent to ta;e a )art in !(arah 1one of the !sla#ic financing techni7ues3 transaction with East Airlines 1EA3 for the )ur)ose of )urchasing four aircrafts which currently are owned *y Universal Airways 1UA3 4his advice will draw attention to the )ertaining issues of !(arah transaction including the intrinsic ele#ents which !(arah contract contain for the sa;e of eliciting the a))roval of Sharia 1!sla#ic law3 Su)ervisory /oard Also, it will shed light on the nu#*er of legal ris;s that !/4 #ay encounter during the !(arah transaction, and to what e2tent such ris;s could *e diluted

$aisal Attia,A&o the distinctive features of conte#)orary !sla#ic finance lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inance Law +99 " Buan SolC,A !sla#ic /an;ing 'a;es DeadwayA 1"==83 !'$ Survey 'aga>ine 3 ' El<Eorchi, F!sla#ic finance gears u): 1"==+3 %" finance and develo)#ent %6 % Alsade; D 0ait and Andrew 5 Worthington, A)ri#er on !sla#ic financeG &efinitions, sources, )rinci)les and #ethodsA1"==93 Islamic Finance H htt)GIIwww *usiness u7 edu auIdownloadIattach#entsI31"93+%6I1+=J0aitJ)a)er )dfK accessed % Banuary "=1= 3

2) N ',*# %$ '/# I(" 0.- $.& &-.&1 $or the sa;e of )roviding a co#)rehensive advise for !/4, it would *e reco##ended to )resent at the *eginning a *rief overview of the nature of !sla#ic financing

2)1) D#$.&.'.%& 4he ter# A!sla#ic $inancial syste#A could *e defined as Aa financial service )rinci)ally i#)le#ented to co#)ly with the #ain tenets of ShariaA + Sharia in turn is derived )ri#arily fro# four sources $irst, Euran 1the sacred *oo; of !sla#3 which is consisted of 0od revelations to -ro)het 'uha##ad 4he *ul; of Euran legal verses are none detailed Second, Sunna which is co#)rised of the sayings, )ractices and a))rovals of -ro)het 'uha##ad 1'ay )eace *e u)on hi#3 during his lifeti#e 4he third source is !(#a 1consensus3 which refers to the consensus of the whole religion scholars on a )articular su*(ect in the era of the ages 4he last #ain source of sharia is Eiyas 1analogical reasoning3 Eiyas is the )rocess of analogical reasoning that ai# to )rovide a legal o)inion u)on a new case, which is not referred to in )revious sources, *y co#)aring it to other refereed cases which have the sa#e effective reason 6 4hese authentic sources draw the *ig )icture of the !sla#ic law 2)2) T/# F# ',*#( %$ I(" 0.- F.& &-.&1 4he !sla#ic financing fra#ewor;, at )resent, has several nu#*ers of characteristics which #ay *e uni7ue in its field 4hese 7ualities could *e su##ed u) in three )ri#e attri*utes $irst, 'oney is e2clusively a #ediu# of e2change 4he conce)t of #oney, within !sla#ic financing syste# is #erely a #ean of e2change 4herefore, it is for*idden, in general, under !sla#ic law to use #oney as a su*(ect #atter of trade !n other words, #a;ing )rofit through trading in #oney is not allowed in sharia, *ecause #oney in essence is lac;ing of genuine value 6 Second, asset<*ac;ed financing One of the intrinsic 7ualities which characteri>es the !sla#ic financing syste# is that, it is an asset *ac;ed financing On the contrary of the conventional syste# which is dealing #erely in #oney and #onetary )a)ers, !sla#ic financing fra#ewor; is often grounded on non<li7uid assets 4he core of any !sla#ic financing transactions #ust *e so#ething that has a genuine utility 8 4hird, !sla#ic financing is concerned with ethical invest#ent 4he !sla#ic financing lays a )articular stress on the
+

Alsade; D 0ait and Andrew 5 Worthington, A)ri#er on !sla#ic financeG &efinitions, sources, )rinci)les and #ethodsA1"==93 !sla#ic $inance htt)GIIwww *usiness u7 edu auIdownloadIattach#entsI31"93+%6I1+=J0aitJ)a)er )dfK accessed % Banuary "=1= 6 $aisal Attia, !ntroduction to !sla#ic $inance 1University of East Anglia, Norwich "==93 also, Alsade; D 0ait and Andrew 5 Worthington, A)ri#er on !sla#ic financeG &efinitions, sources, )rinci)les and #ethodsA1"==93 !sla#ic $inance 6 $aisal Attia,A&o the distinctive features of conte#)orary !sla#ic finance lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inance Law +99 8 ' 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 ) 2iv %

fairness of trade 4hus, any transactions containing unethical criteria such as dece)tion, circu#venting and #ono)oly are invalid and not co#)liant with !sla#ic law *ecause of the contradiction of such criteria with the overall tendency of !sla#ic law to achieve social (ustice and fair econo#ic )ros)erity !n addition, in s)ite of the induce#ent of !sla# to achieve the econo#ic well*eing, sharia differentiates clearly *etween the acce)ta*le co##ercial activities and those that are, unacce)ta*le fro# the !sla#ic )oint of view $or e2a#)le, co##ercial activities involving alcohol, )or; and its )roducts, ar#a#ents, ga#*ling etc are certain to *e void within !sla#ic financing syste# *ecause it is *asically for*idden under sharia
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2)3) T/# M 2%* 3*%/.!.'.%&( %$ I(" 0.- $.& &-. " (4('#0 !t is advisa*le for international co#)anies that are loo;ing forward to ta;e a )art in transactions under !sla#ic financing syste#, as is the case with the !sla#ic /an; of 4ransylvania, to *e ;eenly aware of the #a(or financial )rohi*itions lying within the !sla#ic law $unda#entally, there are three overarching )rohi*itions in !sla#ic law which directly affect !sla#ic financing industry 2)3)1) F.*('5 P*%/.!.'.%& %$ R.! 6 & #7-#((8 4he ter# A.i*aA, in the strict sense of the word, is AAan e2cessAA which could *e construed in the conte2t of !sla#ic financing syste# as A any un(ustifia*le increase of ca)ital whether in the for# of loans or salesA 4he )rohi*ition of .i*a, which is derived #ainly fro# Euran, Sunna and !(#a, constitutes a #ilestone in !sla#ic financing syste# !n fact, Sharia has incontroverti*ly for*idden the charging of interest on #oral grounds $ro# the !sla#ic )oint of view the loan contract is a Fcharita*le: contract 1good deed3 4he shortfall that would arise on the value of #oney lent, during the )eriod of the loan is considered !sla#ically as a charity or a gift fro# the de*tor 4herefore, any loan contracts that would *ring any for# of *enefits for the interest of the lender are unacce)ta*le under sharia
1=

Let, it

is certainly incorrect that !sla#ic law is ignoring the ti#e value of #oney !n an interesting #anner, this value could *e o*served in #any !sla#ic financing techni7ues such as /ayF'u:a((al 1sale with deferred )ay#ent3 techni7ue 2)3)2) S#-%&+5 P*%/.!.'.%& %$ G/ * * 6#7'*#0# ,&-#*' .&'48

'ichael Ainley and others,A !sla#ic $inance in the U@G .egulation and 5hallengesA M"==6N 4he $inancial Services Authority 1= Dussa# 'usa, Saleh ' and O*adi, A!sla#ic financial syste#sA1199633% $inance and &evelo)#ent %",%+ also, $aisal Attia, A&o the distinctive features of conte#)rary isla#ic finance lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inance Law +99 +

4he )rohi*ition of 0harar 1e2tre#e uncertainty3 sales could *e seen clearly through considera*le nu#*er of Sunna 4he conce)t of 0harar refers to Othe sale of )ro*a*le ite#s whose e2istence or characteristics are not certain, due to their ris;y nature, which #a;es the trade si#ilar to ga#*lingP 11 4his uncertainty could *e arisen as a result of lac;ing of vital infor#ation in a contract1" for e2a#)le, it was #entioned in the following Sunna *y Ah#ad and !*n 'aa(ah narrated on the authority of A*o SaFeed Al:;udry #A*)wh G 4he -ro)het -*uh has for*idden the )urchase of the un*orn ani#al in its #otherAs wo#*, the sale of the #il; in the udder without #easure#ent, the )urchase of s)oils of war )rior to their distri*ution, the )urchase of charities )rior to their recei)t, and the )urchase of the catch of a diver
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4he #ain reason for )rohi*iting these sales, #entioned a*ove, is the high level of a#*iguity or uncertainty which is inherent in such sales $urther#ore, in so#e of these sales the )urchaser does not have the slightest idea what he would o*tain Dowever, in contrast to .i*a, a considera*le nu#*er of !sla#ic scholars have )er#itted so#e of the contracts which include 0harar, )rovided that this 0harar is #inor 1%4hey #aintain that there is no contract that is totally detached of any level of 0harar 4hus, they have differentiated *etween #a(or 0harar and #inor 0harar in the validity of the contract or not /ased on this distinction, the $atwa 1a legal o)inion *y an !sla#ic scholar3 in this field #ay vary fro# one scholar to another, in a certain issue1+ 2)3)3) T/.*+5 P*%/.!.'.%& %$ M 4(.* 6G 0!".&18 Q'aysirQ has *een e2)licitly for*idden in the Doly Euran and the Sunna 0iven the ris;y nature of ga#*ling which #ay result adverse conse7uences for one of the )arties at the e2)ense of the other, !sla#ic law )erceives 'aysir as an unacce)ta*le vanity attitude and way to #a;e #oney Dence, !sla#ic financing syste# considers any conte#)orary transactions that highly de)ending on chance, not effort or crafts as une7uivocally contrary to Sharia16 /ut, li;ewise 0harar, the fatwa a*out a s)ecific transaction is li;ely to *e different fro# one scholar to another

11 1"

' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inance: 1"===3 .ice University, Douston $aisal Attia, A&o the distinctive features of conte#)rary isla#ic finance lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inance Law +99 13 ' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inance: 1"===3 .ice University, Douston 1% A Al<Saati, F4he -er#issi*le 0harar 1.is;3 in 5lassical !sla#ic Buris)rudence: 1"==33 16 !sla#ic Econo#ics 3 1+ $aisal Attia, Sharia $inancial -rohi*itions,1University of East Anglia, Norwich "==93 16 ' !7*al and - 'olyneu2, 4hirty Lears of !sla#ic /an;ingG Distory, -erfor#ance, and -ros)ects 1New Lor;, -algrave 'ac#illan, "==+3 also, $aisal Attia, Sharia $inancial -rohi*itions,1University of East Anglia, Norwich "==93 6

3) T/# G#&#* " C%&+.'.%&( %$ T/# S "# C%&'* -' .& '/# I(" 0.- F.& &-.&1 S4('#0) !t is a #atter of i#)ortance to the !sla#ic /an; of 4ransylvania to *e fa#iliar with the )rinci)les of the !sla#ic sale contract as it will ta;e a )art in sale agree#ent with UA Unli;e conventional sale contract, !sla#ic law lays great e#)hasis on several nu#*ers of conditions which #ust *e fulfilled in any sale contract to co#)ly with sharia 4hese conditions could *e su##arised in si2 )ri#e conditions $irst, the #erchandise #ust *e owned *y the seller at the ti#e of the contract 1with so#e e2ce)tions3 Second, the contract of sale #ust *e i##ediate and final 4hird, the #erchandises #ust *e )recisely identified Otherwise, the contract will *e considered as #a(or 0harar, which is for*idden under !sla#ic law $ourth, the sale )rice #ust *e certain $urther#ore, the )rice of the sale *eco#e i##uta*le once it is fi2ed $ifth, the co##odity of sale #ust have a value fro# an !sla#ic )ers)ective 'erchandises such as alcohol, )or; related )roducts etc are Dara# 1for*idden *y !sla#ic law3 and have no value under sharia 4he si2th condition, the co##odity should not *e used for for*idden )ur)oses such as ar#a#ents
16

!f any contract of sale fails to #eet one of these conditions, it is then al#ost certain to *e void under !sla#ic law !t is, therefore, should *e reco##ended that !/4 should #a;e sure, in advance, that its contract with UA has a*ided the conditions of the sale contract according to !sla#ic financing syste#

4) I2 * / 6"# (.&18 ( & I(" 0.- F.& &-.&1 T#-/&.9,#) 4)1) I&'*%+,-'.%&)

16

' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inance: 1"===3 .ice University, Douston Also, $aisal Attia, A&o the distinctive features of conte#)rary isla#ic finance lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inance Law +99

!(arah occu)ies a )ro#inent )lace in !sla#ic financing industry !nterestingly, it would serves as a techni7ue of financing as well as a for# of invest#ent in !sla#ic financing syste# !n essence, the !(arah, which le2ically #eans Agive so#ething on rentA, is a nor#al co##ercial activity e7uivalent to sale /ut, in the contract of !(arah what is in sale is not the assetR it is the usufruct 1the te#)orary right to use and )rofit fro# the o*(ect3 of the asset for a definite )eriod
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!sla#ic law has a))roved

the sale of usufruct as evidenced in a nu#*er of the verses of the holy Euran and Sunna 4)2) I2 * / ( $.& &-.&1 '#-/&.9,#)

4he conte#)orary evolution of the conce)t of the !(arah contract as a #eans of invest#ent, into a #eans of financing occurred due to certain reasons !n fact, this evolution has e#erged discerni*ly in the western countries through the tendency of so#e financial institutions to devise an !sla#ic alternative of giving an interest<*earing loan 4hey leased so#e ty)es of o*(ect to their custo#er for a fi2ed a#ount, )aya*le #onthly, for a definite )eriod 4his a#ount, in effect, enco#)asses the actual cost of this o*(ect )lus the sti)ulated interest At the end of the leasing )eriod, the ownershi) of the o*(ect transferred directly to the lessee 1the custo#er3 19 4his innovative techni7ue so<called A i(9arah wa :i7tin9a A 1lease ending with ownershi)3 in !sla#ic financing industry

4)3) I2: * / ; <.9'.&: 6"# (# #&+.&1 ;.'/ %;&#*(/.38) !(9arah wa :i7tin9a is a nor#al lease contract with an additional WaAd 1one<sided )ro#ise3 #ade *y the owner of the leased o*(ect that he will gift the o*(ect to the lessee at the end of the lease contract, )rovided that the lessee has )aid the full rent to the owner 4his one<sided )ro#ise is legally *inding the owner, whereas the lessee has the o)tion of acce)ting the o*(ect or not Significantly, WaAd #ust *e detached fro# !(arah contract "=Dowever, using the !(9arah wa :i7tin9a in the conte2t of !sla#ic financing, as is the case with the !sla#ic /an; of 4ransylvania, is su*(ect to several nu#*ers of !sla#ic rules

18

' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inance: 1"===3 .ice University, Douston also, ' 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 19 ' 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 "= $aisal Attia, !(arah1lease3,1University of East Anglia, Norwich "==93 8

4)4) T/# G#&#* " I(" 0.- *,"#( %$ L# (.&1 ) As !/4 is considering entering into an Q!(arahQ transaction with EA, firstly !/4 #ust *e assured that its !(arah transaction has satisfied all !sla#ic rules of leasing 4hese rules could *e su##ed u) in eight *asic rules $irst, the su*(ect #atter of !(arah #ust *e used in ways )er#itted under !sla#ic law Otherwise, it could not *e leased under sharia Second, li;ewise sale conditions, the su*(ect #atter of lease #ust *e s)ecified, as well as the a#ount of the rent in order to avoid the #a(or 0harar 4hird, the )eriod of the lease #ust *e definite $ourth, the usufruct of the leased o*(ect #ust *e agreed u)on in the !(arah contract $ifth, the su*(ect #atter of lease #ust *e non<consu#a*le 4herefore, #atters li;e fuel, #oney, eata*les etc is certain to *e unrenta*le under !sla#ic law Si2th, the lessor, in this case is !/4, #ust own the asset during the )eriod of the lease Seventh, under !sla#ic law the leaser *ears the ris; of any har# or loss arising fro# factors out of the control of the lessee 4he eighth general rule of leasing is that the lia*ilities related to the ownershi) of the asset are *orn *y lessor 1such as ta2es3 , whereas the lia*ilities related to usage, is the res)onsi*ility of the lessee
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4)5) T/# A33*% -/#( %$ T/# E&' ."#+ R.(=( .& I2 * / T* &( -'.%&( ) According to these rules, there are several issues that should *e ta;en into account *y !/4 during its !(arah transaction with EA $irst, under !sla#ic law, the !/4 #ust *e owned the four aircrafts *efore they are leased to East Airlines 4his #eans that after !/4 has )urchased the aircrafts, it will *ear the ris; of any )ossi*le withdrawal of the EA fro# the !(arah transaction for any reason 4his high level of ris; is not acce)ta*le in the traditions of *an;ing syste#s !n order to avoid such ris;, it could *e advisa*le if !/4 re7uests, in advance, WaAd 1one<sided *inding )ro#ise3 fro# EA through which the EA )ro#ises to lease the aircrafts fro# !/4 once it is owned *y the# 0iven the *inding nature of WaAd in !sla#ic law, the EA would not *e legally a*le to withdraw fro# this transaction in the future !#)ortantly, this WaAd #ust *e unilateral and detached fro# the lease contract in order to elicit the su))ort of Sharia Su)ervisory /oard
""

"1

' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inance: 1"===3 .ice University, Douston , ' 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 and $aisal Attia, !(arah1lease3,1University of East Anglia, Norwich "==93 "" $aisal Attia, !(arah1lease3,1University of East Anglia, Norwich "==93 9

Second, unli;e conventional financial leasing, under !sla#ic law, !/4 would endure the ris;s and conse7uences of any loss or da#age that #ight occur for the aircrafts during the )eriod of !(arah 4his ris; could *e #itigated and contained co#)rehensively *y arranging 4a;aful 1!sla#ic insurance3 )rotection for the aircrafts 4he cost of this insurance could *e added to the #onthly rent 4hird, according to !sla#ic rules of Leasing, any lia*ilities related to the ownershi) of the aircrafts are *orn *y !/4 1as it is the lessor3 4hus, !/4 will *e incurred to )ay for the lia*ilities of the aircrafts, such as the aircrafts ta2es, during the leasing )eriod Once again the cost of these lia*ilities could *e calculated and added to the #onthly rent $orth, in order to avoid any inadvertent default in characterisation *y which !/4 #ay fail in )urchasing the e2act aircrafts which have *een s)ecified *y EA, !/4 should )urchase the aircrafts through EA !n other word, EA will *uy the aircrafts on *ehalf of !/4 who )ays its )rice 1+= #illion US?3 to Universal Airways 1the su))lier3 4his a))roach -%,"+ !# -%03". &' ;.'/ (/ *. 3*%>.+#+ '/ '5 '/# 3#*.%+ %$ '/# "# (# (' *'( $'#* '/# EA / ( ' =#& +#".>#*4 %$ '/# .*-* $'(5 &+ &%' $*%0 '/# + 4 %$ 3,*-/ (# %$ .*-* $'( !4 '/# IBT) "3 Dowever, to elicit the su))ort of S/ *. S,3#*>.(%*4 B% *+5 .' .( %$ '/# ,'0%(' .03%*' &-# '/ ' IBT $%""%;( 3*#-.(#"4 '/# I2 * / ; -.9'.& ('*,-',*# ( (#' %,' !#"%;) 5) T/# S'*,-',*# %$ I2 * / W -I9'.& .& I(" 0.- F.& &-.&1 S4('#0) 4he Structure of !(arah Wa<!7tina in !sla#ic $inancing Syste# could *e divided into three *asic stages "% $irst stage, 4he EA will offer WaAd 1one<sided *inding )ro#ise3 through which the EA )ro#ises to lease the aircrafts fro# !/4 for a definite )eriod and a s)ecific rent, once the aircrafts are owned *y !/4 Second stage, !n the light of the EA WaAd, 4he !sla#ic *an; 1the *ranch of !/4 in London3 will arrange for an agency agree#ent *y which the EA will draft a nor#al sale agree#ent with universal Airways 1the su))lier3 on *ehalf of !/4 who will )ay its )rice 1+= #illion US?3 Nota*ly, this sale agree#ent #ust satisfy the general conditions of the sale contract in !sla#ic financing syste# 4hird stage, after the !/4 have co#)letely owned the four aircrafts, it can draft an !(arah Wa<!7tina agree#ent with EA of !sla#ic leasing
"+

Significantly, this lease agree#ent #ust a*ide with the rules

"3

' 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 also, $aisal Attia, !(arah1lease3,1University of East Anglia, Norwich "==93 "% -lease see $igure 1 in A))endi2 A "+ 4a7i Us#ani, An !ntroduction to !sla#ic $inance 14he Netherlands, @luwer Law !nternational, "=="3 and $aisal Attia, !(arah1lease3,1University of East Anglia, Norwich "==93 1=

6) T/# I03 -' %$ '/# C/%.-# %$ L ; %& I2 * / T* &( -'.%&) !n s)ite of this !(arah transaction has *een agreed u)on to *e governed and construed in accordance with English law )rovided that, it is not in conflict with the !sla#ic law, this agree#ent is high li;ely to *e unlawful under English law According to article nu#*er one of the .o#e 5onvention "6 which )rovides that A4he rules of this 5onvention shall a))ly to contractual o*ligations in any situation involving a choice *etween the laws of different countriesA Since the Sharia, in effect, is non< national syste# of law 5onvention Let, two )ossi*le a))roaches to this issue can *e concluded 4he first a))roach is *y adding choice of a foreign tri*unal in the !(arah contract Dowever, this a))roach #ay have a wea;ness due to article nu#*er three of the sa#e 5onvention which has )rovided that G 4he fact that the )arties have chosen a foreign law, whether or not acco#)anied *y the choice of a foreign tri*unal, shall not, where all the other ele#ents relevant to the situation at the ti#e of the choice are connected with one country only, )re(udice the a))lication of rules of the law of that country which cannot *e derogated fro# *y contract, hereinafter called O#andatory rulesP !n the light of this article the choice of a foreign tri*unal will have no value when all the factors of the contract are related #erely to one country 4he second a))roach is to satisfy article nu#*er one of the .o#e 5onvention, *y addingG the Saudi law instead of Sharia law !t is generally recognised that the *asic law of Saudi Ara*ia is *ased on Sharia and does not override !sla#ic laws "8 So *y changing the wording of agree#ent fro# Asu*(ect to the )rinci)les of the 0lorious ShariaA to Asu*(ect to the )rinci)les of the Saudi lawA we are, in effect, changing the na#es and ter#inology without changing the su*stance
"6

4hus, !/4 #ust *e realised that the words Asu*(ect to glorious ShariaA will

constitute no intrinsic value in !ts !(arah agree#ent with EA at least in the #e#*er states of this

"6

4he .o#e 5onvention is the 5onvention on the Law A))lica*le to 5ontractual O*ligations and it o)ened for signature in .o#e on 19th Bune 198= "6 -lease see Sha#il /an; of /ahrain E5 v /e2i#co -har#aceuticals Ltd and others M"==%N % All E. 1=6" "8 Sogel $ , Islamic law and legal system: studies of Saudi Arabia 1/rill Acade#ic -u*,"===3 ) 2i

11

?) C%&-",(.%&) 4his assay has *riefly e2)lored the nature of the !sla#ic financing syste# in order to )rovide a co#)rehensive advice to 4he !sla#ic /an; of 4ranslavia on its intention to engage in !(arah transaction with East Airlines Also, it has ;noc;ed on all relevant issues of the conce)t of !(arah as an !sla#ic financing techni7ue, including its definitions, conditions, Structures and ris;s which are inherent in !(arah transaction $urther#ore, !t has shed so#e light on the a))ro)riate wording of the choice of law on !(arah 4ransaction, which is corres)onding with English law

1"

/!/L!O0.A-DL G $aisal Attia,A&o the distinctive features of conte#)rary isla#ic financing lie in its for# or su*stanceA 1"==83 /utterworths Bournal of !nternational /an;ing and $inancing Law ' El<Eorchi, F!sla#ic financing gears u): 1"==+3 %" financing and develo)#ent Alsade; D 0ait and Andrew 5 Worthington, A)ri#er on !sla#ic financingG &efinitions, sources, )rinci)les and #ethodsA1"==93 Islamic Financing Hhtt)GIIwww *usiness u7 edu auIdownloadIattach#entsI31"93+%6I1+=J0aitJ)a)er )dfK accessed % Banuary "=1= 4a7i Us#ani, An !ntroduction to !sla#ic $inancing 14he Netherlands, @luwer Law !nternational, "=="3 'ichael Ainley and others,A !sla#ic $inancing in the U@G .egulations and 5hallengesA M"==6N 4he $inancial Services Authority Dussa# 'usa, Saleh ' and O*adi, A!sla#ic financial syste#sA1199633% $inancing and &evelo)#ent ' El<0a#al, FA /asic 0uide to 5onte#)orary !sla#ic /an;ing and $inancing: 1"===3 .ice University, Douston ' !7*al and - 'olyneu2, 4hirty Lears of !sla#ic /an;ingG Distory, -erfor#ance, and -ros)ects 1New Lor;, -algrave 'ac#illan, "==+3 also, $aisal Attia, Sharia $inancial -rohi*itions,1University of East Anglia, Norwich "==93 Buan SolC,A !sla#ic /an;ing 'a;es DeadwayA 1"==83 !'$ Survey 'aga>ine A Al<Saati, F4he -er#issi*le 0harar 1.is;3 in 5lassical !sla#ic Buris)rudence: 1"==33 16 !sla#ic Econo#ics Sha#il /an; of /ahrain E5 v /e2i#co -har#aceuticals Ltd and others M"==%N % All E. 1=6"

13

A33#&+.7 A

< $igure 1

4he /AN@ !/4As *ranch in London

1 WaAd to Lease !(arah Wa<!7tina contract %

4he 5usto#er 1!/43 East Airlines 5o#)any

" Agency Agree#ent

3 Sale Agree#ent

4he Su))lier 1!/43 Universal Airways 5o#)any

1%