Once dismissed as an oddity and a peripheral business activity practised only among a few theocratic Muslim governments, the worldwide growth of Islamic finance during the last decade — most remarkably in the west — has been nothing but phenomenal. The global worth of Islamic finance has been valued variously at between US$200 billion and US$500 billion.
It is now universally accepted that faith-compliant finance, which eschews activities or products forbidden by Islam such as the payment or receipt of interest, gambling, pornography, pork and alcohol, is a viable ethical alternative to conventional banking.
It is also a given that in addition to being — much like conventional banking — legal under civil laws and tax and cost efficient, it should also be compliant with the Shariah.
Be that as it may, what is equally stark is that litigation, which is the most popular mode of dispute resolution in Islamic finance, has proven everywhere to be woefully inadequate particularly in its application and interpretation of the Shariah.
While judges have no problem deciding on the civil law issues relating to Islamic finance, they are glaringly unsuited for adjudicating the Shariah issues. They seldom hold any qualifications in Islamic law. Considering the recent history of Islamic finance, rarely do they have any experience in Islamic finance transactions.
Influence of conventional banking values and practices
Malaysian courts, no doubt influenced by and applying conventional banking values and practices, have treated a Bai Bithaman Ajil (a sale and purchase transaction by which the vendor-financier permits the purchaser-customer to settle the purchase price by instalments) as a “loan”, the financier as a “lender” and the customer as a “borrower”. The Malaysian Court of Appeal ruled in one case that although the financing may be an Islamic facility, it does not mean that the law and the principles applicable to it are any different from those applicable to a conventional banking facility.
In a recent widely commented case, the Malaysian High Court refused to refer patently Islamic points of law to Shariah experts for their opinion, stating that such course would amount to an “indefensible abdication” of the court’s function and duty to apply “established principles” to the questions before it.
This was in spite of the fact that Section 16B (8) of the Central Bank of Malaysia Act 1958 provides that in any proceedings relating to Islamic banking business, the court or an arbitrator may refer any question concerning a Shariah matter to the Shariah Advisory Council (SAC) established by the central bank under Section 16B (1) of that Act.
Section 16B(1) provides that the SAC shall be the authority for the ascertainment of Islamic law for the purposes of Islamic banking business and other businesses that are based on Shariah principles and are supervised and regulated by the central bank.
The attitude of the Malaysian civil courts is perhaps shaped by a questionable and anachronistic reliance on a ruling in the 1927 Federated Malay States Court of Appeal case of Ramah v Laton that as Islamic law is part of the body of Malaysian law, the civil judge must take judicial notice of it and apply it as he himself found it and could not have the benefit of expert evidence on it adduced before him.
The position is not any less undesirable in England. In a case where a Murabahah contract provided that, subject to the principles of the Shariah, the agreement shall be governed and construed in accordance with English law, the Court of Appeal held that the agreement was governed by English law alone and that the reference to the principles of Shariah was simply intended to reflect the Islamic banking principles according to which the bank held itself out as doing business “rather than incorporating a system of law intended to trump the application of English law”.
In another case involving an Istisna contract that provided that any dispute shall be governed by the laws of England, “except to the extent it may conflict with the Shariah which shall prevail”, the High Court held that whatever the Shariah might be, it was not applicable as it was not the law of England and Wales.
The legal fraternity in England is also fond of perpetuating the so-called declaratory theory which is premised on the figment that the judiciary is the sole fountain of all justice, all laws are already well established and the judges need only to declare them in the cases they are adjudicating.
Litigation, which is inherently adversarial and antagonistic, is perhaps not the preferred method of resolution of disputes in Islam. The Quran repeatedly exhorts mankind to avoid discord and disputes.
Instead, it unequivocally commands that disputes be resolved by mediation, reconciliation and arbitration so as to avoid, in the words of Abdullah Yusuf Ali, the eminent translator of the Quran, mud throwing in public and/or resort to the chicaneries of the law.
Proposal for changes
The main disagreeable feature of the present legal matrix is basically the anomaly of civil judges, unqualified and inexperienced in the Shariah, determining or ascertaining Islamic law. Given the existing legal framework, the reality, however, is that civil courts are indeed indispensable as it is they who must decide not only on civil law issues but also on many related aspects of Islamic finance including foreclosure of properties, enforcement of securities, winding-up and bankruptcy.
On analysis, however, it will be seen that Alternative Dispute Resolution modes like conciliation, mediation and arbitration have their respective shortcomings. In the case of conciliators and mediators, they may not be effective due to their unofficial capacities and the non-binding attribute of their advice or decisions.
Arbitration, on the other hand, is more desirable as it is more formal, the arbitrators’ awards bind the parties and it is particularly flexible to deal with the primary complaint that civil judges are incompetent to solve Islamic finance disputes.
Two arbitrators, one a Shariah scholar and the other an expert in civil law, may be appointed. It should be mentioned here that the Kuala Lumpur Regional Centre for Arbitration formulated the Islamic Finance Arbitration Rules for the resolution of Islamic finance disputes.
The downside to arbitration is that under the existing laws, one would still have to resort to the civil courts to enforce or to appeal against the arbitration awards.
Additionally, a review of at least some of the laws may be unavoidable so as to render arbitration a truly viable option.
The civil court scheme is under present exigencies the most appropriate forum for Islamic finance causes, provided that it is complemented by the hybrid Alternative Dispute Resolution feature of expert determination.
If expert determination were to be adopted, the civil court would refer all issues pertaining to or involving Islamic law to a recognized expert or body of experts, namely a Shariah scholar or a tribunal of Shariah scholars, for an opinion which would bind the court. The SAC is arguably the most appropriate such body.
However, Section 16B of the said Act is lacking as, under it, the court has the discretion whether to refer Islamic law questions to the SAC and not to follow the council’s opinion.
However, the section provides that arbitrators, on the other hand, having referred issues to the council are bound by the council’s opinion. There is, therefore, a need to legislate that all Islamic questions of law shall be referred by courts to the SAC and that the opinions of the council shall be binding on the courts.
As all acknowledge, the problem is acute and calls for imperative solutions. It is felt that the introduction of expert determination to augment litigation in Islamic finance cases will go a long way in remedying the present disconnect. Bold action is called for in Malaysia to bury the ghost of Ramah v Laton.
In Malaysia and elsewhere, there should be acknowledgement by the civil courts that the so-called declaratory theory is totally inapplicable in so far as Islamic law issues are concerned.
Mohamad Illiayas is a partner/vice chairman and head of Global Islamic Finance at Azmi & Associates.
He has extensive experience in advising various clients in exercises ranging from banking and Islamic banking, Takaful, corporate and commercial to dispute resolution.
He can be contacted at +603 2118 5000 or via email at [email protected]