With the rapid growth of Islamic finance recently, it has become incumbent upon the experts of this age that they keep exploring new things and keep adding them to the available avenues of Islamic finance. QAISER IMAM surveys the Islamic finance legal landscape.
It should be understood and realized that Islamic economics and finance is not a one-man drive. It needs development in every ancillary sector like legal frameworking, regulatory set-up, product development, Shariah compliance, trust building, real trade and many others. A little carelessness or less research in any sector might imbalance the whole cart. With respect to law, at secondary level much has been done during the recent past and many things are in the pipeline for the near future. Legal frameworking remained a hot topic and was the subject of serious debates from the national as well as international perspective.
Islamic finance across the border has compelled states as a whole to create room for its evolution. Lawmakers have felt and in some jurisdictions were forced by economic pressure to feel the need and development of relevant law. Except for Malaysia, no jurisdiction has promulgated any primary law for the Islamic finance sector; however, major changes were made in the preceding year with respect to subsidiary legislation (rules and regulations) and to some extent through directives. The regulators have played a pivotal role in introducing new regulations in capital markets for the promotion of the Sukuk sector. The integration of stock markets through statutes and regulations made it more convenient for Islamic finance to develop its derivative arm.
Review of 2015
In the preceding year, for Sukuk, the Asian market has developed many new regulations. These regulations deal with the structuring of Sukuk and their legal construction; particularly, a deviation has been seen from previous structurings wherein SPVs were introduced. Following the way paved by Turkey and Malaysia, Pakistan has introduced Sukuk regulations and also integrated the listing of Sukuk into the stock market.
Pakistan is the only jurisdiction where the corporate Mudarabah structure is available since the promulgation of the Mudarabah Ordinance. However in the preceding year, European states have introduced new legal frameworks to facilitate corporate Mudarabah with sovereign guarantee.
An important development in legal structuring has been seen in Gulf states where Tawarruq-based products which previously were legalized are under great Islamic legal stress and Malaysia being a pioneer in these products has already legislated against Tawarruq and Eina-based products.
Central Asian states including Kazakhstan, Azerbaijan and Tajikistan have also entered into many contracts with international legal and financial firms for the development of legal frameworking which has the ability to pull conventional and Islamic financial needs together from the beginning. Azerbaijan has also promulgated regulations for Islamic banking.
All these developments suggest two things: the expansion of the Islamic financial market in terms of volume as well as in terms of allied facilities; and the seriousness of states in adopting such modalities in law and legal frameworking to facilitate Islamic finance.
The most important development is the rehearing of the Riba case by the Federal Shariat Court (FSC) of Pakistan (a constitutional court for revisiting laws which are repugnant to injunctions of Islam). Previously, the court declared interest in all of its forms as prohibited and this decision was challenged before the Shariat Appellate Bench of the Supreme Court of Pakistan which upheld the decision of the FSC. However on review, the same case was remanded to the FSC and is now being heard. This would be a great step in the provision of a foundation to develop a purely Islamized legal framework that excludes interest as a whole.
It is observed that instead of bringing new Islamic financial sector primary laws, a specific mindset of introducing amendments in primary statutes which were actually legislated to provide a legal framework for conventional finance is still prevailing globally irrespective of common law states, civil law states, religious law states or pluralistic law states.
Preview of 2016
In the coming days, it is expected that the necessary development in laws at the domestic level will be taken for making intra-jurisdictional laws more harmonized and secured for the players in Islamic finance. It is also under consideration that product development and contractual engineering should not be mixed with legal frameworking.
The most important achievement in the coming days will be in the shape of a provision of legal forums by international organizations like the United Nations for the development and sustainability of the Islamic finance sector including dispute resolutions. Furthermore, a concept to provide a forum for a joint team of legal experts from almost all the jurisdictions is also to be considered for the preparation of principally agreed general legal principles for harmonizing the legal differences in different jurisdictions, a necessary assignment.
Although it has been realized that law-making is the basic step to initiate and perform any activity particularly in the financial sector and issue-based legislation has been done in a huge volume, work still needs to be done on primary laws so as to give a fair chance to Islamic finance to play its role independently and not through dependent and evasive techniques. One thing that is very important is that with each passing day, conventional finance while feeling itself under threat from Islamic finance will come forward with new strategies and these strategies will undoubtedly be based upon law and legal frameworking.