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Resolu,on in Islamic Finance: Current Trends and Future Perspec,ves

The Second Lecture of the 2011-2012 ILSP Lecture Series

By Dr. Umar Oseni

Islamic Legal Studies Program

at Harvard Law School

Outline of Presenta/on
Re-emergence of Islamic Finance Current Trends in Islamic Finance Li/ga/on Amicable Dispute Resolu/on in Islamic Law Major Dispute Resolu/on Bodies for Islamic Finance Disputes Toward an Interna/onal Legal Framework for Dispute Resolu/on


Middle Eastern Tradesmen

Quran and Sunnah


Modern Prac/ce

Nature of Islamic Finance Disputes

Banking Takaful Islamic Capital Market

Islamic Finance

Nature of Islamic Finance Disputes

Insurable interest, misrepresenta/on on the insurance policy and claim, policy claims, breach of insurance terms Sharah compliance of a Product, Sharah fund, Islamic nancing rebates (ibra), non-performing loans, breach of facili/es, inter-bank disputes, and other common banker- customer disputes Securi/es, sukuk default, commercial disputes, monetary claims, fund management, futures contract, etc.



Islamic Capital Market


Inadequacies & Limita,ons

Credit policy in Islamic banks Li/ga/on Non-existence of substan/ve law on Islamic nance Qualica/ons of Judges vs. court referral to Sharah Board Sharah Resolu/ons on SAC vs. Expert Opinion Sharah Courts Can they hear & determine Islamic nance cases?

Inadequacies & Limita,ons Redeni/on of contractual terms by the court future of Islamic nance Emerging area of interna/onal legal prac/ce
Foster (2007): a rapidly developing transna/onal legal system.

Over 95% of cases are decided by civil court judges

Intl Commercial Li,ga,on & Islamic Finance Cross-border commercial transac/ons Conven/ons Banking and nancial transac/ons are part of interna/onal trade import & export Why Sharah as the governing law while jurisdic/on is English court? Reliance on forum rather than
substan/ve law.

Islamic Finance Li,ga,on in English Courts

Bahamas & Symphony case

English law applied to Murabahah

Beximco case
Court not bound by Shariah

Dar & Blom case

Wakalah No mention of Sharah compliance

More cases

Islamic Finance Li,ga,on in Malaysia Most advanced country in the prac/ce of Islamic nance increase in li/gated disputes Dierent interpreta/ons by the court to juris/c issues Sharah Advisory Council in Central Bank of Malaysia Act 2009 Sec/on 56. Reference to Shar'ah Advisory Council for ruling from court or arbitrator

AMICABLE DISPUTE RESOLUTION IN ISLAMIC LAW Paradigm shif in dispute resolu/on win-win strategy ADR Alterna/ve to what? Segling disputes in Islam origin Sulh as the bedrock of dispute resolu/on in Islam

ADR Proesses in Islamic Law 1. Qada (Adjudica/on) 2. Nasihah (Counseling) 3. Sulh (nego/a/on, media/on) 4. Tahkim (Arbitra/on) 5. Med-Arb (Media/on and Arbitra/on) 6. Muhtasib (Ombudsman) 7. Mazalim (Special Tribunals for redress) 8. Fatwa of MuDi (Expert Determina/on)

AAOIFI Standard on Arbitra,on A leading interna/onal standard-sehng body since 1991 Issues Accoun/ng, Audi/ng, Governance and Sharah Standards Adopted by over 180 nancial ins/tu/ons worldwide

AAOIFI Standard on Arbitra,on Call for Sharah-based dispute resolu/on processes AAOIFI Sharah Standard on Arbitra/on No. 32 All nancial disputes (Art. 1) Binding Islamic arbitra/on (Art. 2) Though non-Muslims may act as arbitrators, award must comply with Sharah.


Growing interest in Islamic nance cases it is lucra/ve
Kuala Lumpur Regional Center for Arbitra/on Financial Media/on Bureau (Malaysia) Interna/onal Center for Reconcilia/on and Arbitra/on Dubai Interna/onal Arbitra/on Center Interna/onal Islamic Media/on and Arbitra/on Center (Hong Kong) Singapore Interna/onal Arbitra/on Center

Dispute Resolu,on Bodies Amendment of Arbitra/on Rules to accommodate Islamic nance disputes Ahtude of Islamic nancial ins/tu/ons Frequency of the use of arbitra/on for Islamic nance disputes

Kuala Lumpur Regional Centre for Arbitra,on (KLRCA) Established in 1978 under the auspices of AALCO Introduced Rules for Arbitra/on (Islamic Banking and Financial Services) 2007 About 2 cases under the old rules Comprehensive rules to cover wide variety of Islamic commercial law disputes. New Islamic Arbitra/on Rules 2012.

Interna,onal Center for Reconcilia,on and Arbitra,on (IICRA)Dubai Established in 2005 through joint eorts of IDB, GCIBFI & UAE Resolves all kinds of Islamic nancial disputes Adopts the AAOIFI Arbitra/on Standard Up to 120 arbitrators in its panel though only 3 are needed for a case Since 2007 when it began opera/ons, 3 cases have been resolved through arbitra/on, 1 through media/on, and 1 is pending.

Hong Kong Interna,onal Islamic Media,on and Arbitra,on Centre (IMAC) Established by the Arab Chamber of Commerce in 2008. No reference to AAOIFI Standard of Arbitra/on in its rules Just like any other interna/onal or regional body for arbitra/on and media/on Abuse of the term Islamic in the nance industry and arbitra/on prac/ce.

Prac,ce Direc,on on Media,on and Muamalat Bench in Malaysia Prac/ce Direc/on No. 5 of 2010 on Media/on Judge-led or court-referred media/on Kuala Lumpur Court Media/on Center (KLCMC) established on August 25, 2011 Media/on is free, fast, and friendly win-win seglement

Islamic nance Disputes in Saudi Arabia Unique process for dispute resolu/on for Islamic nancial disputes Commigee for the Seglement of Banking Disputes (CSBD) Jurisdic/on of court on commercial banking disputes completely ousted. An amalgam of muhtasib and mazalim tribunals

Islamic nance Disputes in Saudi Arabia Commigee for the Resolu/on of Securi/es Disputes (CRSD) for Islamic Capital Market Two-/er process CRSDappeals to the Appeal Commigee Administra/ve, Civil and Penal Suits

CRSD Decisions 2010

6 Administrative

28 Penal

97 Civil

INTERNATIONAL LEGAL FRAMEWORK FOR DISPUTE RESOLUTION Establishment of regional Sulh centers for Islamic nance disputes U/liza/on of ICT videoconferencing and conference calls. Formal accredita/on of prac//oners and ins/tu/ons oering dispute resolu/on services

Interna,onal Legal Framework for Dispute Resolu,on Med-Ex-Arb A hybrid system of Media/on, Expert Determina/on and Arbitra/on Med-Muh A hybrid mechanism of Media/on and Muhtasib

Dispute Avoidance in Islamic nance Future of ADR dispute avoidance Example of the construc/on industry Dispute avoidance starts with legal documenta/on Some cardinal rules in Islamic law nemo dat quo non habet, gharar, riba. Ins/tu/on of hisbah Nasihah Role of Sharah Advisory Firms and Sharah Supervisory Boards

Need for a Convention on Dispute Resolution for Cross-border Disputes Conven/on on dispute resolu/on for cross- border transac/ons in Islamic nance. Problem of choice of law Islamic law is a non- na/onal legal system Uncertain/es in the interpreta/on of Islamic law Mandatory-mul/-teir system for dispute resolu/on OIC should adopt AAOIFI & propose to UNCITRAL

CONCLUSION There is a need for a consolidated framework for dispute resolu/on in the Islamic nance industry. A conven/on will allow the English court to appropriately refer to Islamic law rules as valid substan/ve law. For a real Islamic nance industry, the dispute resolu/on process should necessarily be Islamic.