Camille Paldi

As the Islamic finance industry is growing annually at a rate of 10% to 15% per year, it is imperative that a unique, independent legal framework is established in order to effectively adjudicate Islamic finance disputes around the world. It would be ideal if all Islamic finance disputes were adjudicated in one centre through arbitration according to a standardised dispute resolution contract. This may have been the impetus behind the Islamic Development Bank’s arbitration centre in Dubai — the International Islamic Centre for Reconciliation and Arbitration or the IICRA.

However, the centre has not flourished into an ideal arbitration facility for Islamic finance and is quite heavily underused. Other arbitration centres exist. These include the DIFC-LCIA; the Takheem Sharjah International Arbitration Centre, The Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC), the Regional Centre for International Commercial Arbitration in Lagos in Nigeria, the Tehran Regional Arbitration Centre (TRAC), the International Islamic Mediation and Arbitration Centre (IMAC); The Hong Kong Mediation Council; BCDR-AAA in Bahrain, the Qatar International Centre for Commercial Arbitration (QICCA), the Qatar Financial Centre (QFC), The Cairo Regional Centre for International Commercial Arbitration (CRCICA), the Kuala Lumpur Regional Centre for Arbitration (KLRCA), the Malaysian Mediation Centre, the Financial Mediation Bureau, and the Singapore International Arbitration Centre (SIAC).

However, none of these centres fulfil the mandate of ‘the one’ centre which can adjudicate all Islamic finance and banking disputes through the use of a standardised dispute resolution contract effectively and globally. The various reasons include inadequately trained staff, inability to use shari’ah in the arbitration, and systemic problems etc. The aim of this short article is to introduce the concept of the Dubai World Islamic Finance Arbitration Centre (DWIFAC) and Jurisprudence Office (DWIFACJO), which may serve as the focal point for dispute resolution in the Islamic finance world.

I suggest that the Islamic finance community take steps to form the Dubai World Islamic Finance Arbitration Centre (DWIFAC) and Jurisprudence Office (DWIFACJO) in Dubai, UAE. This centre would produce an Islamic Banking law, which may be gazetted in the UAE and adopted around the world as a model Islamic banking law. The jurisprudence office may also issue a standardised dispute resolution contract to be attached to all Islamic finance, sukuk, and takaful transactions in order to harmonise dispute resolution for the industry on a worldwide scale. The standardised dispute resolution contract would contain a built-in dispute resolution mechanism based on the FIDIC contracts used in construction.

The Centre would be staffed with the leading experts in Islamic finance, shari’ah, and arbitration.  The Centre may utilize law, lex mercatoria or commercial practice, and shari’ah in settling Islamic finance disputes.

All DWIFAC arbitrators must pass arbitration, Islamic finance, and language tests in order to secure a place on the DWIFAC Ambassador’s list of arbitrators. The languages of the centre would include English, French and Arabic. In addition, the DWIFAC jurisprudence office would create the Shari’ah Supreme Council, as envisioned by UAE Federal Law No. 6 of 1985, to act as the highest shari’ah authority for DWIFAC and the UAE, including the DIFC.

When an Islamic finance transaction goes through a common law court or inadequately staffed or utilised arbitration centre, the Islamic transaction often inadvertently transforms into a conventional transaction. This may result in unfair adjudication by the tribunal, centre, or court of the Islamic finance dispute in question. Furthermore, shari’ah is either declared an invalid source of law or inapplicable for various reasons. Therefore, it is imperative to establish a global Islamic finance dispute resolution centre that utilises both arbitration and shari’ah as well as lex mercatoria or commercial practice. Otherwise, we may witness the Islamic finance industry inadvertently changing into a conventional financial industry through the use of a conventional dispute resolution process.

Shari’ah is often denied as a valid source of law for governing a commercial dispute or Islamic finance transaction. When English/common law is designated as the governing jurisdiction of an Islamic finance contract, courts tend to sever any association with shari’ah by recognizing conflict of laws and asserting that only a national law can govern the contract. Judges then strictly apply common law to the commercial dispute, further disassociating the Islamic aspects of the transaction from the adjudication process. Islamic finance dispute resolution must contain recourse to shari’ah in order to preserve shari’ah compliance and the Islamic component of the financial transaction. Therefore, I have a particularly strong argument for the creation of the Dubai World Islamic Finance Centre and Jurisprudence Office.

It is not efficient for the Islamic finance industry to use domestic common and civil law litigation, which does not recognise shari’ah, gives priority to secular national laws, or relies on a controversial Shari’ah Advisory Committee to adjudicate shari’ah issues. It is clear that international arbitration is the best alternative dispute resolution mechanism available for Islamic finance. It is also evident that none of the existing arbitration centres can provide an adequate mechanism for adjudication of disputes for the international Islamic finance industry.

The DWIFAC arbitration centre along with the DWIFAC jurisprudence office (DWIFACJO) provides the best solution of the dispute resolution conundrum of the Islamic finance industry, providing a globally recognised centre for dispute resolution located in one of the world’s major financial centres, Dubai.

DWIFAC would adjudicate disputes using arbitration incorporating lex mercatoria and shari’ah, the DWIFACJO uniform banking law, the DWIFAC arbitration rules, and the procedural law of Dubai as well as use highly qualified shari’ah and Islamic finance/law arbitrators.

DWIFAC may also organise and utilise the existing dispute resolution framework in Dubai, the DIFC, and the UAE, consolidating the centers into one hierarchical system, which includes the Shari’ah Supreme Council for the efficient adjudication and regulation of Islamic finance disputes.

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

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Challenges for Islamic finance in the USA

The post Dispute resolution is the key to unlocking the Islamic finance industry appeared first on International Finance.

Camille Paldi 

March 14, 2017: With proper regulation, legislation, and dispute resolution, Islamic finance, sukuk (Islamic bond) and takaful (Islamic insurance) have tremendous possibilities in the United States at this moment in time. Modes of Islamic finance, including musharakah, mudharabah, murabahah, tawarruq, salam, and istisna’a, can enhance the capitalist performance of the USA and help Americans compete with the rest of the world.

Sukuk or Islamic bonds may be utilised to gain capital for businesses, the state and federal government, and individual entrepreneurs. Islamic finance is gaining popularity around the world and it is time for the United States to tap into the global Islamic finance, sukuk, and takaful markets and compete on the global stage.

As of date, East Cameron Gas [$165,670,000 (2006)], General Electric [$500,000,000.00 (2014)], and Goldman-Sachs [$500,000,000.00 (2014)] have issued sukuk. The states of Illinois and New York have both tabled legislation allowing for sukuk transactions. Ernst and Young predicts that the sukuk market may reach $900 billion worldwide by 2019.

The sukuk instrument is growing in popularity around the world as an innovative financing instrument and a way to raise funds for various projects and business expansion, and increased competitiveness, which attracts ethical and creative investors worldwide. The UK recently announced that it is the first Western nation to issue a sukuk (£200 million). The USA should join the competition.

The topic of Islamic finance is being taught at Drake University, American University, Pebble Hills University, Harvard University and the University of Pennsylvania Wharton School of Business. All major US banks and law firms now have Islamic finance departments, usually with staff from overseas and/or located in other countries. There exists an opportunity now for Americans in Islamic finance.

This short article aims to briefly discuss the regulatory and legal aspects of Islamic finance, sukuk, and takaful in the United States.

In order for the sukuk business to thrive in the USA, each state should pass a law enabling sukuk transactions. Islamic finance and sukuk should be incorporated into federal commercial law. In addition, as each state regulates the insurance industry, each state should also pass a takaful or Islamic insurance law. Takaful should also be incorporated into federal insurance regulations and laws.

Furthermore, dispute resolution in the United States may need to be adjusted in order to accommodate Islamic finance, takaful and sukuk as well as sukuk bankruptcies. The East Cameron Gas sukuk bankruptcy was successfully settled through the US judicial system. However, additional adjustments may be necessary in order to successfully adjudicate Islamic finance transactions, including takaful and sukuk bankruptcies inside the United States.

In terms of the takaful business, the US has a state-regulated insurance system whereby each state determines its own licensing requirements for insurers. In order to obtain a licence, a company must demonstrate that it has the experience and management capability to run the company and show that it is financially sound. Insurers are also required to justify their premium rates. In addition, companies must fulfil the solvency requirements set by the state. Furthermore, there may be limits on the types and concentration of investments made with ‘held’ reserves. These issues should be addressed in the state and federal takaful laws.

The biggest challenge in introducing takaful, sukuk and Islamic finance in the US is the First Amendment of the US Constitution, which prohibits the making of any law respecting an establishment of religion or impeding the free exercise of religion as well as the Establishment Clause. In Murray v Geithner, a case was filed against the Federal government challenging the permissibility of bailout money provided to AIG under the Emergency Economic Stabilization Act (EESA) legislation saying it violated the Establishment Clause. The Act gives the Treasury the ability to purchase troubled assets from any institution.

In this case, EESA was used to purchase $40 billion in AIG shares. AIG conducts takaful business in Bahrain and the US. The plaintiff alleged that tax dollars were going towards the financing of Shari’ah products and activities.

The court found that the EESA legislation and the AIG bailout were created for a secular purpose and did not violate the First Amendment of the Constitution. Although there is a green light for Islamic finance in the USA, Islamic financial institutions may be at a disadvantage in possibly not being able to gain access to federal funds. Islamic institutions may also experience compliance issues as well as legal challenges. Islamic finance is currently offered by Devon Bank, University Bank, LARIBA, Whittier Bank and Guidance Residential all across the United States.

According to CNBC, Islamic banks’ capital grew from $200 billion in 2000 to close at $3 trillion in 2016. This figure is expected to grow to $4 trillion in the 2020s. There are now more than 300 Islamic banks and 250 Islamic mutual funds globally. Islamic finance constitutes approximately 5-6% of the global financial system, and growing. Ernst and Young predicts that Islamic finance will grow 19.7% annually through 2018.

At this point, there are 25 Islamic financial institutions operating in the USA with the top three being The American Islamic Finance House, University Bank’s subsidiary University Islamic Finance, and Harvard Islamic Finance Program. J P Morgan started Islamic banking in 2013. Standard Chartered conducts Islamic finance worldwide through its Islamic ‘Saadiq’. These banks are overseen by federal regulators, such as the Federal Reserve System, and must also comply with local regulations.

The Islamic bank LARIBA Bank of Whittier (CEO: Yahia Abdul Rahman), operating in California, has assets of $10.6 million and offers banking and home financing across the USA. Saturna Capital, an investment advisor and fund management company, manages more than $3.5 billion in assets, which are invested in Shari’ah compliant mutual funds.

The opportunity cost for the USA in not participating in this global market is quite large. On the other hand, the United States could introduce the rules and regulations required to engage in the worldwide Islamic finance, sukuk, and takaful business. Interest-free financing options may enhance the system currently in use in the United States and offers a chance for Americans to diversify their portfolios, attract global investors, enhance liquidity and compete in the global village.

Camille Paldi is CEO of the Franco-American Alliance for Islamic Finance (FAAIF)

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Camille Paldi

January 7, 2016: This book is a fascinating account of the journey of Dr. Yahia Abdul-Rahman and his family from Egypt to America in 1968 in his pursuit of several MA degrees and a PHD. It also offers a glimpse into his rich professional life, which includes pioneering no-interest banking in the United States through his highly successful venture LARIBA Bank of Whittier in southern California.

The LARIBA system and Bank of Whittier serve all 50 states in America. They service a portfolio of no-interest financing that is worth approximately $400 million. In 2001 and 2002, Fannie Mae and Fannie Mac approved the LARIBA financing system.

Dr. Rahman says, ‘What is the first thing one thinks of when one hears the term Islamic banking?’ The most common answer was ‘vast amounts of oil money from the Gulf countries, which are waiting to find investment opportunities’.

However, Dr. Rahman explains the rich philosophical roots embedded in Christianity, Judaism, and Islam behind the no-interest finance principle and cites real-life examples how the majority of people and the economy become more financially sound and stable under a system where money is not rented, but where the bank acts as a finance house that invests in people, productive trade, and promotes economic growth and expansion.

Americans are definitely curious about this new brand of banking. Between 2000 and 2009, the LARIBA site attracted more than 1 million unique visitors who were exploring interest-free banking. In fact, LARIBA has been showcased on ABC Nightly News, The Los Angeles Times, USA Today, the Dallas Morning News, the Wall Street Journal, the Washington Post, the Houston Chronicle, the Chicago Tribune, and the Detroit Free Press to name a few.

When concerns about anything ‘Islamic’ arose in society after September 11, 2001, Dr. Rahman became involved in inter-faith activism and obtained a historic announcement from the Fuller Theological Seminary in Pasadena, CA that the Christian God and the Muslim God were in fact the same God and this pronouncement was published in the Los Angeles Times on December 3, 2006. In fact, the Bible is rich in language which condemns excessive interest and usury, as this creates hardship for the normal person and turns people into slaves of money-lenders. In fact, one can recall that in the Bible, Jesus went to the marketplace to crush stalls of money-lenders.  Jesus Christ stated that one of his goals is to drive money changers out of the temple (John 2:15-15; Matthew 21:12-13; Mark 11:15-18).  A story about community controversy in Nehemiah 5 concerns oppressive lending: It may refer to charging interest or to other tough actions, such as foreclosing on personal properties. It alludes to two reasons for debt: crop failure and imperial taxation. The story makes clear the results of default. One may forfeit fields, orchards and houses, and/or one may end up in slavery.

Rahman says that his brand of no-interest banking is in fact a manifestation of Christian, Jewish, and Islamic values particularly in concern to usury or renting money for profit, which is prohibited in all of the Holy Books. Basically, no-interest finance helps one to live within one’s means, avoid exorbitant debt, enables one to have more cash to invest in his/her business, children, homes, cars and education, promotes cash flow throughout the economy, promoting economic stimulation and growth as well as induces the optimal health of the individual, family, society and world at large.

S.C. Mooney, an author and Protestant opponent to interest finance, states, “What is being argued here is not a new idea or a new interpretation of the scripture. It is the historic position.  This is not a call to strike out in a new direction; it is a call to return to faithfulness to God.”

Throughout the book, the author explains the modes of no-interest finance compared to interest finance and the two foundations of the no-interest banking system, (1) Commodity Indexation and (2) Marking to Market. The no-interest discipline clearly states that fiat (paper) money can be used, and the US dollar may continue to be the reserve currency of the world along with, maybe the Euro, but gold or a basket of commodities may be used to calibrate the real value of the currency.

President John F. Kennedy and Secretary of State James Baker III (1987) have both approved and proposed these concepts previously in US history and monetary policy. John F. Kennedy attempted to introduce silver certificates with Executive Order 11110. In fact, at one time in history, the US dollar was backed by gold. Under the rule of the British empire, the British pound sterling and the gold standard were adopted around the world. In 1913, the gold cover for Federal Reserve notes was set by a 1913 law to be 40%. In 1945, the gold reserves against Federal Reserve notes were reduced to 25%, and to continue the inflation spiral, this figure (25%) had to be reduced to zero.

Toward the end of WWII, the US dollar and gold became the principal international reserve assets under the Bretton Woods Agreement. The US dollar became the world’s reserve currency, and was treated as if it were gold because the agreement defined its value to be $35 per ounce of gold.

On August 15, 1971, President Richard Nixon ordered the gold window closed, ending the international currency’s link to gold. In fact, the US constitution says that each state shall issue currency in gold and silver. Some speculate that the authors of the US constitution may have extracted this principle from the Qu’ran. Thomas Jefferson indeed did have his own Qu’ran collection and often studied these books for various principles of social justice, commercial dealings, fiscal and monetary policy, and treatises on government.

This no-interest discipline is implemented in order to price things fairly in the market while detecting any overpricing ‘bubble’.  It is interesting to note that Dr. Rahman, through his LARIBA system, detected the 2008 bubble as early as 2005 using the Commodity Indexation Discipline. This system helps to fairly define prices and to standardise and stabilise markets, allowing the efficient working of the market forces of supply and demand. It lays the foundation of fair pricing for products and services, based on real market values within an open and free market operation. Thus, we can see that the no-interest banking brand is not based on renting money at a rental price (interest), but on the actual measured fair market rent of properties, businesses and services. This system is also the main reason for the superior portfolio performance of LARIBA since 1988.

Dr. Rahman cites an example to illustrate how the no-interest discipline may be used to buy a house. The buyer and the no-interest bank should mark the house to market. The best way of doing this is to find out how much a similar house in the same neighbourhood and with similar specifications would rent/lease for in terms of US dollars per square foot (or euros/square metre).  This mutually agreed upon live market lease rate is used to calculate the rate of return on investment of the proposed purchase and no-interest transaction, looking at it as a no-interest investment. If the rate of return on investment makes economic sense, the no-interest bank proceeds to finance (invest in) the property. In addition, the no-interest bank does its best to make the monthly payments in the no-interest mode of finance competitive with those offered by conventional banks.

The author summarises that the no-interest banking and finance discipline, in an effort to neutralise the effects of the prevailing fiat currency in the local markets, requires that the financier first apply the Commodity Indexation Discipline to check, in a macroeconomic way, on the existence of a bubble in the business/asset that is being considered for finance. This process is followed by the mark-to-market discipline and approach, evaluating the economic prudence by calculating the real return on investing in this item, using its actual real market rental value.

In this way, it is affirmed that money is not rented with interest and that the rent is that of the market rent of the facility in the marketplace.

Through using the no-interest discipline, Dr. Rahman states that we may enter into a new era where:

1. We normalise prices expressed in fiat money in order to be expressed in the real no-interest value of that currency in terms of staple food and other commodities that are in the economy.

2. Apply the Commodity Indexation Discipline for the early detection of local or international economic bubbles. Use the no-interest currency to measure prices and disengage fluctuations due to normal supply-and-demand factors from major change due to speculation.

3. Devise a fair and intelligent tax policy that will enhance the vibrancy of the economy and create new job opportunities and prosperity leading to peace, happiness, and more production, leading to world peace among all nations.

The author explains the concept of money, the money creation process, the fractional reserve banking system, the financial crisis, spells out US banking regulations and the supervision process, details the US banking system (state, national, federal reserve), discusses conventional and no-interest banking products, and shows how the no-interest model fits into the US banking and legal system without having to change the laws of the USA.

Dr. Rahman consistently backs up theory with real-life examples and case-studies, giving a firm impression and understanding of how the no-interest finance models work in the real banking world and the real results. In addition, a series of review questions at the end of each chapter helps solidify the reader’s understanding of core banking concepts.

He articulates how the most historic moment for the LARIBA no-interest finance model came in 2001 when it got approval from Freddie Mae. In, 2002, Fannie Mae followed suit. With their support, LARIBA went from financing 2-3 homes per month for US citizens to 50.

Another first in the history of the US financial system was LARIBA and Fannie Mae joined forces to issue no-interest mortgage backed securities.

This book is definitely worth reading for anyone curious about no-interest finance and its benefits and success rates as compared to the conventional banking system.

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

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Camille Paldi

December 2, 2015: This scintillating and succinct book is a refreshing, intellectual journey into the heart of Islamic equity complete with an overview of different types of sukuk and explanation of relevant sukuk transactions in the form of a sukuk case study. In addition, Dr. Muhammad Hanif notes the key features of each type of sukuk and provides a set of practice questions at the end of each chapter in order to test the reader’s knowledge.

According to the author, approximately 2,000 issues of sukuk were held with a global volume of around $200 billion by the end of June 2010. Between 2011 and 2013, an additional $281 billion of sukuk were issued around the world. In addition to corporate sukuk, sovereign sukuk have also been issued by Pakistan, Jordan, the UAE, Thailand, Malaysia, Turkey, Indonesia, Bahrain, Qatar, the Cayman Islands, Singapore, Germany, Brunei, Gambia, and Kuwait.

In chapter one – Equity, the author describes a six-part test, which can be used to test a security as a shari’ah compliant investment. In Pakistan, Al-Meezan Investment Management Limited (AIML), subsidiary of a leading Islamic financial institution (Meezan Bank), took the initiative and started screening of KSE listed securities through Shari’ah Compliance Filters and developed KSE-Meezan Index (KMI-30). For a security to be shari’ah compliant based on KMI criteria, it must meet the following parameters: (1) Is the principal activity of the business halal?; (2) Interest based debt to asset ratio should be less than 40%; (3) The ratio of non-compliant investments to total assets should be less than 33%, (4) The ratio of shari’ah non-compliant income to total revenue should be less than 5%, (5) The market price per share should be greater than the net liquid assets per share calculated as (total assets –  illiquid assets – total liabilities) divided by number of shares,  and (6) The ratio of illiquid assets to total asset should be at least 20%.

In addition to KMI, there are more than 10 Islamic indexes operating worldwide, including DJIM, FTSE, S&P, MSCI, HSBC, Ameri, BID and Azzad. The filtering criteria differ among these indexes and it is possible that a company is shari’ah compliant under one index and not under another.

In chapter two – Sukuk, the author defines sukuk, the difference between sukuk and bonds, the types of sukuk, provides the shari’ah rulings about sukuk, and explains in detail the sukuk process from initiation, creation of the SPV and the issuance of sukuk certificates to maturity of the investment.

Dr. Hanif describes in detail the sukuk al ijarah structure as well as gives the example of the Pakistan Motorway Sukuk issued by Pakistan International Sukuk Company Limited in order to illuminate the sukuk al ijarah process. The rest of the chapter is patterned on the same effective learning technique of providing explanations of different sukuk structures accompanied with a sukuk case study illustrating the particular structure.

The author next utilizes the JAFZ Sukuk issued by JAFZ Sukuk Limited in order to demonstrate the process of the sukuk al-musharaka. Dr. Hanif also discusses the sukuk mudaraba and sukuk al-wakala structures in detail.

The author uses the Saudi Holland Bank as an example of the sukuk al-wakala combined with the DIFC Sukuk Guide explanation of the wakala sukuk structure to inculcate into the reader a comprehensive understanding on the sukuk wakala process. Furthermore, in order to shed light on the sukuk-al isthimar process or investment sukuk, Dr. Hanif showcases the Saudi Electric Company sukuk.

The author goes on to write about the istisna’a, salam, and murabahah sukuk and provides one more case study pertaining to a hybrid sukuk, the Sadara Basic Services Company Sukuk, which is a combination of istisna’a, ijara and musharaka sukuk.

Lastly, the author concludes with a thoughtful discussion on whether or not sukuk are in fact Islamic or have regressed into essentially what is the structure of conventional bonds. This is a solid academic instruction on equity and sukuk in Islamic finance. This book is a MUST READ and effective learning tool for any aspiring Islamic banking aficionado, professional, academic, or student of Islamic banking and finance. Well Done.

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June 3, 2015: Institute of Finance & Management subsidiary of aafaq Islamic Finance, a leading provider of Islamic finance products and services in the UAE, has recently signed a memorandum of understanding (MoU) in London with the University of Bolton’s Centre for Islamic Finance, an initiative designed to facilitate research and promote the understanding of Islamic Finance through lectures, conferences and a joint professional certificate in Islamic Banking.

Under the terms of the MoU, both parties have expressed their full commitment in the continued advancement and growth of Islamic Finance—collaborating on a series of projects and initiatives that includes conducting and commissioning joint research in the field of Islamic Finance; develop and promote a new Islamic Banking Professional Certification program and host and organise an annual Islamic Finance-based event.

H H Sheikh Faisal Bin Saoud Al Qassimi, Board Member of aafaq Islamic Finance, shared that the signing of the new MoU proves to be both timely and strategic as global financial experts continue to laud Islamic Finance’s continuing growth. The new alliance between aafaq Islamic Finance and the University of Bolton’s Centre for Islamic Finance represent a cooperative framework that looks towards encouraging more development in Islamic Finance on regional and international levels, particularly in the fields of education, research, capacity building and consultancy.

Dr. Mahmoud Abdalaal, CEO, aafaq Islamic Finance, said, “We are extremely excited with this new partnership that we have forged with the University of Bolton’s Centre for Islamic Finance. aafaq Islamic Finance is confident that this strategic new alliance will successfully be able to drive in more awareness on the many benefits and advantages offered by Islamic Finance. Through our partnership with the University of Bolton’s Centre for Islamic Finance, we are looking towards commissioning more research and studies while also laying the foundation for an international certification program for Islamic banking professionals.”

The Chairman of the Centre for Islamic Finance and the first Chancellor of the University of Bolton, The Baroness Morris of Bolton said, “I am delighted we have signed this MoU and look forward to working with aafaq in encouraging more development in Islamic Finance. This collaboration will help to strengthen the University’s close ties to the UAE and builds on our core strength of working together with leading and innovative industry practitioners.”

The Centre for Islamic Finance was launched in 2012 at the University of Bolton to facilitate research and create a better understanding of Islamic Finance through the holding of key lectures, conferences and the offer of short course programs.

Professor Mohammed Abdel-Haq, Director of the Centre for Islamic Finance and former Global Head of private banking at HSBC Amanah, welcomed the enthusiasm and vision of aafaq and looked forward to working together with aafaq to help drive a better understanding of the benefits and advantages of Islamic Finance.

“We have students studying with us at Bolton for their PhDs in Islamic Finance from around the world and have established a reputation which attracts respected speakers and supporters such as Norman Lamont, the former Chancellor of the Exchequer. Our work with a Company of such quality as aafaq, a leader in Islamic Finance in the UAE, will help us to broaden our research and to reach and educate more people working within the sector,” concluded Professor Abdel-Haq.

Press Release

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Camille Paldi

April 28, 2015: Beximco Pharmaceuticals Ltd, Bangladesh Export Import Co. Ltd., Mr. Ahmad Solail Fasiuhur Rahman, Beximco (Holdings) Ltd. v. Shamil Bank of Bahrain E.C. [2004] EWCA Civ 19, the defendant Beximco Pharmaceuticals Ltd. and the other borrowers entered into a murabahah agreement with the plaintiff.  The defendants defaulted and after a series of various termination events under the agreements, the plaintiff finally brought the case to court and made an application for summary judgement. The defendants argued that the murabahahagreements were invalid and unenforceable because they were in actuality disguised loans charging interest (Asutay and Hasan, 2011: 56).

According to the appeal case, the court ruled that an Islamic finance contract could not be governed by shari’ah law in the UK. Even if so specified in the contract, the judge further ruled, in fact, that shari’ah law is not a recognisable form of law containing principles of law capable of governing a commercial dispute in the UK.

Lord Justice Potter stated in Paragraph 2 of the judgment, ‘It is not in dispute that the principles of the glorious shari’ah referred to are the principles described by the defendants’ expert, Mr. Justice (retd) Khalil-Ur-Rehman Khan as: “…the law laid down by the Qu’ran, which is the Holy Book of Islam and the Sunnah (the sayings, teachings and actions of Prophet Mohammad (pbuh). These are the principal sources of the shari’ah.  The Sunnah is the most important source of the Islamic faith after the Qu’ran and refers essentially to the Prophet’s example as indicated by the practice of the faith. The only way to know the Sunnah is through the collection of hadith, which consist of reports about the sayings, deeds, and reactions of the Prophet.”’

Lord Justice Potter, in this judgment, recognises the definition of shari’ah law stated by Mr. Justice Khalil-Ur-Rehman Khan. However, Lord Justice Potter stated that shari’ah law, which in his opinion is more of a religion than law, could not apply to a commercial banking transaction in the UK.

The judge declined to construe the wording of the clause as a choice of shari’ah law as the governing law for the following reasons. First, Article 3.1 of the Rome Convention (which by s.2 (1) of the Contracts (Applicable Law) Act 1990 has the force of law in the United Kingdom. It contemplates that a contract ‘…shall be governed by the law chosen by the parties’ and Article 1.1 of the Rome Convention makes it clear that the reference to the parties’ choice of law to govern a contract is a reference to the law of a country. Lord Justice Potter further argued that the reference to a choice of a ‘foreign law’ in Article 3.3 suggests that the Convention as a whole only contemplates and sanctions the choice of the law of a country: c.f. Dicey and Morris on The Conflict of Laws (13th ed.) vol. 2 at 32-079 (p.1223) and Briggs: The Conflict of Laws at p. 159.’

Lord Justice Potter stated that shari’ah law is not a national system of law and is classified as a non-national system of law such as ‘lex mercatoria’ or ‘general principles of law’ and therefore cannot apply to a commercial transaction in the UK.

Colon (2011:425) states that even though the Rome Convention has been replaced by Regulation (EC) No. 593/2008 of the European Parliament and the Council of June 17, 2008 on the Law Applicable to Contractual Obligations (Rome I), the conflict of law rules remain the same.

In this appeal case, English law was confirmed as the governing law and it was further confirmed that English law does not recognise shari’ah law as a valid source of law to govern a commercial contract. Furthermore, even if shari’ah law were recognised under English law, under the conflict of law rules applicable in England and Wales, according to this judgment and the new Rome I, English law would prevail as the governing law must be the law of a State.

Colon (2011:425) points out that according to Beximco, under English law a murabahah agreement may be treated the same as an interest-bearing loan, which ironically was part of the initial claim that based on the governing law clause, the murabahah agreements were invalid and unenforceable because they were in truth disguised loans charging interest (Asutay and Hasan, 2011: 56).

In fact, the adjudication of the dispute by an English court guarantees turning the murabahah agreements into loans charging interest.

Beximco interpreted the contract in light of the commercial goals that it served to accomplish, as English law requires (Colon 2011:426) and in line with the common law, interpretational approach as explained by Asutay and Hasan.  This strict approach decimated the Islamic finance transaction (2011:431).

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

Earlier Columns:

Islamic finance and the halal industry

Japan has Islamic finance in the pipeline

Islamic insurance: The next global trend

The post Shari’ah law cannot apply to a commercial transaction in UK appeared first on International Finance.

Camille Paldi

February 16,2015: Takaful Investment Portfolios: A Study of the Composition of Takaful Funds in the GCC and Malaysia provides an explanation and analysis of the investments of takaful funds in the GCC and Malaysia between 2002 and 2005 and explores the rationale behind such decisions. In addition, the author discusses and analyses takaful investment trends and developments and depicts the findings through charts, figures, and tables.

This book contains some useful information and statistics regarding three classes of takaful fund investments in the GCC and Malaysia, including equities, sukuk, and real estate over a set period of several years in the early 21st century.  However, I had to sift through a thick maze of academic prose in a prose pajama party and suffer through pages of jargon in order to get to the heart of the useful information contained in the book. Although this information is slightly outdated for industry use, it provides an insightful guide to past trends, which may or may not be indicative of the performance of takaful investments at present or in the future. This book may be highly useful and relevant for university students and academics, and those wishing to get a glimpse of past industry trends.

I have to admit I enjoyed the academic and scholarly discussion of the takaful concept in Chapter Two: Insurance and Islamic Law: An Introduction to Takaful.  There are some interesting references to the Qu’ran and Sunnah as well as to scholars of the past.  However, in a book, I prefer to see more of the author’s original opinion rather than heavy reliance on other authors.  Furthermore, I want to see an explanation of the cited statement as the author is relying on another author to relay his point.

For example, in Chapter Two, the author writes: “Moreover, it is also claimed that commercial insurance leads to negligence (Moghaizel, 1991), murder (Al-Sayed, 1986; Hassan, 1979), and is exploitative of people’s needs (Mawlawi, 1996), and that the control of government may fall to powerful insurance companies (Abdu, 1987). I would like to see some kind of original and authentic explanation of this statement from the viewpoint of the author. For instance, how does commercial insurance lead to negligence, murder, and exploitation and provide some examples.

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

Furthermore, why and how would control of government fall into the hands of powerful insurance companies and what then would these insurance companies do with the government under their reigns? In addition, it is always an interesting scenario to witness secular, trained academics incorporating religion into their work. The religious references are presented in quite a secular and neutral manner, which makes the book quite easy to understand and digest by religious, non-religious and atheist alike.

Chapter Three contains a comprehensive academic explanation of the various takaful models. In addition, in this chapter, the author explains the differences between takaful, commercial, and mutual insurance and trends and developments in the takaful industry. The entirety of Chapter 4 discusses research methodology, which is geared for academic institutions and academics rather than the industry and practitioners.

Chapter Five on Exploring Investment Behaviors and Investment Portfolios of Takaful Operating Companies in the GCC and Malaysia is where I finally found the hidden treasure. The chapter is full of interesting factoids and figures, analysis and comparisons regarding the investment of takaful funds in equities, sukuk and real estate in the years 2002-2005.  However, this information may or may not be indicative of present and/or future trends as we are now in 2015, 10 years past the period of this study. It is, however, interesting information and may be used in the realm of academics or to see the results of takaful investments in three asset classes in the years 2002-2005. This book may also provide a rough idea on how to perform a feasibility study at the inception of a takaful company in a particular jurisdiction or area of the world or serve as a guide in conducting another similar academic study regarding takaful fund investments.

Although Chapter Six: Locating the Differences Between Actual and Desired Investment Portfolios contains some interesting discussion about the actual and desired investment portfolios of the GCC and Malaysia, I found that much of this chapter could be skim read and probably should have been deleted from the book. In Chapter Seven: Contextualizing the Findings, the only pertinent information includes the discussion on how takaful funds manage their liquidity and the figures for return on investment for the GCC and Malaysian Takaful Funds for the period 2002-2005. I felt like I spotted an oasis after traversing for days through a wild desert sandstorm of verbiage when approaching Chapter Eight: Conclusions and Recommendations.

Chapter Eight: Conclusions and Recommendations provides recommendations for regulatory authorities, takaful operating companies, and Islamic banks/windows. Actually, I found the conclusions and recommendations quite interesting and highly useful especially in regards to whom should be making the investment decisions and the need for more legislation and regulation of the takaful industry in the UAE and globally. Aside from recommendations, the author also explains the research limitations in conducting this study.

The author states that focusing the research only on the initial period of the takaful industry during the years 2002-2005 could, perhaps, be considered a shortcoming.  Furthermore, the author explains that another limitation may lie in the sample size that was chosen.  The author says that the sample is so small – less than 30 companies – that the parametric statistical tests could not be used in this study.  Second, even for use of nonparametric statistical tests, the small number of takaful companies operating in Malaysia limited the author to performing a comparison between the GCC and Malaysia. This can be seen where the author tried to study the differences between levels of actual and desired investment portfolios between the GCC and Malaysia. The author was not able to adopt the Wilcoxon Signed-Rank Test for Malaysian companies.

Despite these and other limitations, overall, the book contains some valuable information. However, is it worth traversing through the pages of academic verbiage to find the hidden treasure? I felt like I was in the TV program Lost while reading this book, sailing on an ocean of words, which just kept taking me around in a circular whirlpool of lost time and space to the same place.

If you have a preference for the lengthy, verbose academic presentation style, are skilled in pinpointing a needle in a haystack, have a lot of time on your hands and are seeking the results of a study conducted from 2002-2005 examining the results of takaful fund investments in real estate, equities and sukuk in the GCC and Malaysia, I recommend this book for you.

The study may also reveal gaps in the asset classes for the takaful industry. After conducting a thorough analysis of the investments of takaful funds of the GCC and Malaysia from 2002-2005, the author concludes that the study shows that convergence is expected in the investment behaviors of takaful companies in the GCC and Malaysia once the primary and secondary markets for sukuk develop in the GCC and an international regulatory framework is practiced.  This book is quite useful for students and academics in the field of insurance, finance, Islamic finance and Islamic insurance or takaful, as it is a comprehensive, analytic, and comparative academic study of takaful investment portfolios in the GCC and Malaysia from 2002-2005 complete with a chapter on literature review and the questionnaire and interview used to conduct the study.

Also Read:

Islamic insurance: The next global trend

The dispute resolution conundrum of the Islamic finance industry

The post Only if you have a lot of time on your hands appeared first on International Finance.

Camille Paldi

January 13, 2015: Takaful, or Islamic insurance, is a cooperative scheme, where in the participants pay a premium in the form of donation, or tabarru, in a common pool in return for the ability to draw upon that pool upon a valid claim. The word takaful originates from the Arabic world kafalah, which means “guaranteeing each other” or “joint-guarantee.” The basis of shared responsibility is taken from the system of aaqilah, which was an arrangement of mutual help or indemnification customary in many tribes of the Arab world. Under this system, if a member of a tribe was accidentally or unjustly killed, the murderer was obliged to pay blood money (dia) to the deceased’s next of kin as a form of life insurance for the deceased’s relatives.

Proprietary insurance is concerned with risk transfer, insured risks being transferred from the insured to the insurer in return for a premium. Takaful is concerned with risk-pooling, whereby the policyholders mutually insure one another in a common risk pool financed by their contributions (premium payments). The purpose of this system is not profits, but to uphold the Qu’ranic, Christian, and Jewish principle of “bear ye one another’s burden“. Therefore, in contrast to conventional insurance, takaful is not a contract of buying and selling where a party offers and sells protection and the other party accepts and buys the service at a certain cost.

Rather, it is an arrangement whereby a group of individuals each pay a fixed amount of money while compensation for losses incurred by members of the group is paid out of the total sum. The funds remaining in the takaful fund on maturity of the policy are distributed among the participants after deduction of the charges due to the operator and according to the type of takaful management model utilised by the fund.

In conventional insurance, one enters a bilateral sale contract or contract of exchange with the insurance provider and transfers risk of loss to the provider. The provider will bear the risk of loss in the event of an accident or harm to the insured item or person. In addition, the insurance provider speculates on risk in the underwriting process. A conventional insurance company speculates on the risk by making an assessment of the risk and then pre-determining profit based on the estimated payout versus the premium. It is in a sense gambling. In regards to transfer of loss or speculation on risk, there is neither in takaful.

In Islamic insurance, the loss and risk are essentially distributed amongst the policyholders. Overall, takaful is a scheme of mutual protection that exists amongst the participants making them both the insurer and the insured, which is a concept promoted by all of the people of the Holy Books.

In conventional insurance, riba (interest) occurs as the amount of money received by the insured, either on the occurrence of the insured event or upon maturity of the policy may be more or less than what is actually paid by the insured.  Furthermore, since the payments are deferred, the compensation paid, which is greater than the instalments paid by the insured may constitute surplus riba (riba al fadl) and credit riba (riba al-nasiah). Secondly, the profits of conventional insurance companies result from riba related transactions (ISRA: 2012).

In addition, conventional insurance contracts contain gharar (uncertainty) in that the subject matter of the contract is not certain until the insured event has taken place. The amount being paid by the two parties is not known at the time of execution of the contract. For example, an accident may occur immediately after the insured makes the first payment requiring a payout or he or she may make all the payments without any accidents happening, never receiving any compensation back from the insurance company during the duration of the policy (ISRA: 2012).

In a conventional insurance contract, the policyholder agrees to pay a certain premium sum in consideration for the guarantee of the insurance company that they will pay a certain sum of compensation in the event of a valid claim. However, the policyholder is not informed of how much compensation the company will pay him or her or how the amount shall be derived (ISRA: 2012).

Maisir, or gambling, means to court such risk as it involves both the hope of gain as well as the fear of loss, which is not a necessary part of any normal activity in life.  In conventional insurance, policyholders are gambling by betting premiums on the condition that the insurer will make payment contingent upon the circumstance of a specified event. On the other hand, the insured does not get anything from his premiums if the insured event does not happen at all (ISRA: 2012). Takaful minimizes riba (interest), gharar (uncertainty) and maisir (gambling)through its cooperative donation scheme (tabarru) and investment in halal activities.

The general takaful contract is a short-term policy where participants pay contributions and operators undertake to manage the risk. According to ISRA (2012:512), contributions by the participants are credited into the general takaful fund, which is then invested and the profits generated are paid back to the fund and eventually to the participants in accordance with the terms of the contract in a pre-agreed upon ratio after deducting operational costs.

The tabarru element is more apparent in general takaful as participants will normally undertake to regard their contributions as donations to fellow participants (ISRA, 2012:513). Tabarru is an agreement by a participant to relinquish, as a donation, a sum of contribution that he or she agrees to pay with the purpose of providing mutual indemnity to takaful participants, where the donation acts as a mutual help and joint guarantee should any fellow participants suffer from a defined loss (ISRA, 2012: 514). Tabarra is derived from the word tabarra’a, which means contribution, gift, donation, or charity. The purpose of this contract is to give a favour to the recipient without any specific consideration in return. Essentially, it is a contribution or donation, which entails no return, but rather a reward from Allah alone. There are two important pillars of tabarru, namely the absence of counter-value and the intention to perform tabarru. For example, if a donor contributes with an expectation of a counter-value from the donation given, then the whole transaction will be perceived as an exchange (muawadah) rather than a tabarru contract.

Takaful, unlike its conventional counterpart, is based on the principles of mutual cooperation (ta’awun) and donation (tabarru). Under the Islamic law of transactions, the existence of gharar (uncertainty) and maisir (gambling), which normally nullifies an exchange contract (muawadah), are tolerated in a contract of donation (tabarru). This corresponds to the Islamic legal maxim, “uncertainties are tolerable in a gratuitous contract“. This is mainly due to the fact that parties who enter into a tabarru contract do not aim to make profit out of the contributed sum, and hence the potential dispute, which normally arises in a profit-making transaction is deemed to be negligible in a gratuitous-based transaction. Furthermore, the issue of uncertainty is nullified as the contributor voluntarily gives away his property or right to the recipient without any consideration.

In contrast, conventional insurance is based on exchange (muawadah), aims at making profit from the insurance operations, and is not shari’ah compliant due to excessive gharar (uncertainty), maysir (gambling), and riba (interest). A takaful contract cannot be considered a pure tabarru contract, but rather a qualified or conditional tabarru contract due to the following reasons: (1) The contribution made by a participant is with consideration to a right to claim for compensation in the event of loss or damage of subject matter. Thus, the tabarru is not merely for charity, but conditional upon certain consideration, namely the right to claim takaful benefits in the event of loss. This is a violation of the fundamental objective of tabarru.  (2) Takaful participants are normally obliged to pay different amounts of contributions depending on the different degree of risk exposure. This implies that their participation in the fund is conditional upon a certain amount of contribution, which deserves compensation. This is in contradiction to the principle of tabarru as the real intention of the contracting parties is not for donation, but rather to make them eligible for certain benefits under takaful. (3) Takaful includes a few controversial practices such as surrendering of benefit, survival of benefit, or sharing of underwriting surplus among participants of takaful although they have surrendered all of their rights over the monies of the fund. (4) Furthermore, when a participant pays a premium to the takaful operator, he has effectively donated his contribution as tabarru, hence, relinquishing his ownership over the object donated as prescribed by the rules of tabarru. Therefore, it should not return to the participants upon maturity of the policy or liquidation of the fund. Many takaful products and operations are starting to converge closely with conventional insurance.

The fundamental structure of takaful, which is premised on the basic concept of tabarru, is questionable as many benefits are offered to the participants in the beginning of the takaful contract in return for the contributions paid to the tabarru pool managed by the takaful operators.

Takaful participants are not insured in the sense of proprietary insurance, but share the profits and bear the deficits of the takaful undertaking in a manner similar to conventional mutual insurance. The takaful operator plays an important role that the management of a conventional mutual does not play in the event of a periodic deficit in a takaful fund that exceeds the reserves of the fund, thereby making it potentially insolvent. In this case, the takaful operator acts as a lender of last resort by providing a qard hassan loan to the takaful fund. Such a loan will be repaid out of future underwriting surpluses. In mutual insurance and takaful, investment profits belong to the policyholders, except that, in takaful, the operator may share in these profits as a mudarib or by virtue of a performance-related wakalah fee for fund management.

The concept of risk-pooling is promoted in all of the Holy Books, including the Torah, the Bible, and the Qu’ran. Therefore, takaful should be seen as a form of Holy Book insurance and promoted amongst all of the people of the Book and among those who favour conventional mutual insurance or cooperative societies. One of the core concepts of takaful is that the participant retains ownership over the paid premiums to the takaful fund and, therefore, has the right to reclaim the unused premiums at the end of the policy. This form of risk-sharing and investment insurance has a positive effect on the health of the individual through maximising coverage and on the economy as a whole as more funds are available to promote productive trade, which may stimulate economic growth.

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

Also read:

The dispute resolution conundrum of the Islamic finance industry

The post Islamic insurance: The next global trend appeared first on International Finance.

Camille Paldi

December 12, 2014: As we hear news of the rapid growth of the Islamic finance industry with billion dollar banks, huge dollar sums of Islamic assets, sukuk issuances and the expansion of Islamic insurance or takaful, one must be realistic and realise that the industry cannot survive without solid and uniform regulation, a unique and independent dispute resolution framework and a bankruptcy court. This article aims to introduce the Dubai World Islamic Finance Arbitration Center (DWIFAC), the Dubai World Islamic Finance Arbitration Center Jurisprudence Office (DWIFACJO) and an Islamic Finance Bankruptcy Court (IFBC) to address the Islamic finance industry dispute resolution conundrum.

Islamic finance contracts should include an additional standardised dispute resolution contract issued by DWIFACJO with a built-in dispute resolution procedure, similar to the International Federation of Consulting Engineers (FIDIC), designating the DWIFAC as the arbitration center. If the contractual dispute resolution procedure is exhausted, then the dispute may be referred to DWIFAC, which may utilise the Model Islamic Banking Law, created by DWIFACJO, as the substantive law of the arbitration, the procedural law of the seat of the arbitration, and the DWIFAC arbitration rules, which includes shari’ah and lex mercatoria.  The arbitration center may be staffed with the world’s top shari’ah scholars and Islamic finance lawyers, judges, and experts who can provide input about the shari’ah aspects of the dispute through the use of an Islamic form of ex aqueo et bono, which allows disputes to be settled using commercial practice rather than purely legal devices. Sukuk transactions should also include a standardised dispute resolution contract designating the IFBC as the governing jurisdiction and body of any dispute or default.

DWIFAC and DWIFAJCO

DWIFAC along with the DWIFAJCO shall be the central command station for Islamic finance dispute resolution in the UAE, GCC and the world, providing a standardised contract with built-in dispute resolution, a uniform Islamic banking law, an arbitration center and a centralized shari’ah authority in the form of the Supreme Shari’ah Council.

It is clear that state courts in common and civil law jurisdictions are inadequate to adjudicate Islamic finance disputes due to the lack of recognition of shari’ah law, lack of independent shari’ah advisory committees, and/or the inability of court staff to apply effectively Islamic finance and shari’ah concepts in dispute resolution. In addition, the currently existing arbitration centers are insufficient to handle Islamic finance matters due to lack of properly trained staff, inadequate procedure and rules, misapplication and non-application of shari’ah and preference for national law, legal uncertainty, and lack of popularity as a mode of dispute resolution.

DWIFAC may offer the Islamic finance industry a globally recognised arbitration center complete with the DWIFAJCO, which may issue a uniform Islamic banking law and a standardised DWIFAC dispute resolution contract, creating harmony, legal certainty, and investor confidence in and across the Islamic finance industry. The DWIFAC standardised dispute resolution contract contains a built-in dispute resolution mechanism, facilitating early dispute settlement and completion of contracts. This contract may be attached to all Islamic finance contracts industry-wide, making DWIFAC the central dispute resolution authority for the industry.

DWIFACJO Uniform Banking Law

As it stands now, the UAE does not have an Islamic banking law. However, it has a law allowing Islamic banks to exist (UAE Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions, and Investment Companies). In 1985, there was a proposal for laws to govern Islamic banks, but it had not been backed up by a decree and therefore, that is why the law is not in existence now.  However, Federal Law No. 6 of 1985 was promulgated to legalise Islamic banking in the UAE. Article 5 provides that a Supreme Shari’ah Council should be established and approved through a cabinet decision, but it never materialised.  The Supreme Shari’ah Council would oversee Islamic banks, financial institutions and investment companies, and its opinion would be binding. However, Article 6 was implemented, which requires that each Islamic firm establish its own Shari’ah Supervisory Authority (SSA) consisting of three members, to be approved by the Shari’ah Supervisory Council (ISRA 2013:656) and inserted into the articles of association (ISRA 2013: 656). The SSA is obligated to apply shari’ah to the company operations and contracts (Thani, Abdullah, Hasan 2004: 256).

DWIFACJO may take the opportunity to formulate and issue a Uniform Islamic Banking Law based upon the draft of the UAE 1985 Islamic Banking Law, UAE Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions and Investment Companies, the Law Regulating Islamic Financial Business DIFC Law No. 13 of 2004, and AAOIFI standards.  The new law may then be utilised as the substantive law in DWIFAC arbitrations and submitted to the UAE government for approval and gazetting, as this law would be necessary for the UAE in order to fulfil its mandate of becoming the capital of the Islamic economy. In addition, DWIFAC may establish a central Shari’ah Supervisory Authority or Supreme Shari’ah Council for the UAE, which may be utilised by all existing UAE dispute resolution bodies, including the Central Bank of the UAE, the Dubai courts and the DIFC/DFSA, which lacks such a board.  The Supreme Shari’ah Council may fulfil its original purpose of approving the shari’ah boards of all Islamic financial institutions in the UAE, including in the DIFC.

The DWIFAC Standardised Dispute Resolution Contract

I propose that DWIFACJO issue a standardised dispute resolution contract, which may be attached to the main contract. It may contain a similar built-in dispute resolution mechanism as the FIDIC contract containing three stages, including (1) the Dispute Resolution Board (DAB), (2) amicable settlement, and (3) final referral to DWIFAC arbitration. Within 30 days of the occurrence of the subject matter of a dispute, any party to the contract may submit a claim to the DAB, addressed to the chairman and with a copy to all parties of the contract.  However, if any of the parties considers that there are circumstances, which justify the late submission, she may submit the details to the DAB for a ruling. If the DAB considers that it, in all the circumstances, is fair and reasonable that the late submission be accepted, the DAB shall have the authority to override the relevant 30 day limit and if it so decides, it shall advise both the parties accordingly.

The DAB shall have 60 days to issue a binding ruling, which must be implemented immediately. If either party is not satisfied with the DAB ruling, either party can give notice of dissatisfaction to the other before the 30 days after the day on which she received the decision on or before the 30 days after the day on which the said period of 60 days expired. If there is no dissatisfaction within 30 days after the day on which she received the decision, the DAB’s decision shall become final and binding upon both parties. The DAB’s decision may then only be overturned by settlement or arbitration.

The DAB shall consist of three people who must be suitably qualified in law, Islamic finance, and shari’ah. Each party shall nominate one member for the approval of the other party. The parties shall consult both these members and shall agree upon the third member, who shall be appointed to act as chairman. However, if a list of potential members is included in the contract, the members shall be selected from those on the list, other than anyone who is unable or unwilling to accept appointment to the DAB.

The agreement between the parties and either a sole member (adjudicator) or each of the three members shall incorporate by reference the General Conditions as written by DWIFACJO, with such amendments as agreed between them. The composition of the DAB shall be by nomination and then joint-selection. DAB members are to be remunerated jointly by the parties with each paying half of any fees. DAB members may only be replaced by mutual agreement. The appointment of any member may be terminated by mutual agreement of both parties, but not by any party acting alone. Unless otherwise agreed by both parties, the appointment of the DAB shall expire when the discharge of the matter shall have become effective. Where the parties fail or are otherwise unable to agree upon the appointment, nomination or replacement of any member of the DAB, then the appointing official so named in the contract shall make the appointment.

DWIFAC may establish an Ambassadors List similar to the FIDIC President’s List, from which arbitrators and DAB members may be selected, if not specified in the contract. Persons who have successfully completed a DWIFAC Adjudication Assessment Workshop and International Arbitrator’s Islamic Finance Contracts Course and applied for entry to the DWIFAC Ambassadors List of Approved Dispute Adjudicators are entered on the List for five years. Successful attendees at an Adjudication Assessment Workshop are required to be fluent in English and to be thoroughly familiar with Islamic finance, law, and shari’ah.

There may be situations where a party fails to comply with a DAB decision.  In such cases, the other party may refer the failure to DWIFAC arbitration. Where notice of dissatisfaction has been given, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the 50th day after the day on which notice of dissatisfaction was given. The attempt to obtain an amicable settlement during this prescribed period of 50 days is a condition precedent to a referral to arbitration. There is no given timeframe to refer a dispute to arbitration. However, it should be without undue delay. Once the procedure has been initiated, the arbitration shall commence according to the DWIFAC arbitration rules.

The arbitrator(s) shall have full power to open up, review, and revise any decision of the DAB relevant to the dispute. Neither party shall be limited, in the proceedings before the arbitrator(s), to the evidence or arguments previously put before the DAB to obtain its decision nor to the reasons for dissatisfaction given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the arbitration. Arbitration may be commenced prior to or after completion of the contract. The obligations of the Parties and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the contract.

All of the DWIFAC decisions (see Appendix B) are to be published in English, French, and Arabic and the arbitration itself to be conducted in English. Any arbitral decision shall be final and binding. In the event of a conflict of laws, the shari’ah shall prevail. A valid arbitration decision should lead to a verdict that conforms to the rules of the shari’ah (AAOIFI 2004:559).  The shari’ah and legal basis of the arbitration decision shall be mentioned in the decision (AAOIFI 2004:559).

In the context of DWIFAC, the Center may make arrangements with the Dubai and DIFC courts for enforceability of DWIFAC arbitration awards.  However, parties to the dispute must realise that the arbitration award issued by DWIFAC may be overturned or enforced in other jurisdictions (International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai 300 F. Supp. 2d 112 (DDC. 2004)) or challenged in UAE courts based on Article 216 of the Civil Procedure Law.  Shari’ah Supreme Council decisions shall act as a source of precedent and shall be binding, thus providing legal certainty to Islamic finance dispute adjudication. The Shari’ah Supreme Council established by DWIFAC shall act as the highest Shari’ah authority for DWIFAC arbitration, the UAE, and the DIFC.

DWIFAC Relationships Courts and Tribunals

A special component of the DWIFAC dispute resolution mechanism is the special relationship between DWIFAC, the Central Bank of the UAE, the Dubai courts, the DIFC, DIFC-LCIA and DIAC. The Central Bank of the UAE (CBUAE) was formed in 1980 and is primarily responsible for overseeing banks in the UAE, except in the DIFC, where the regulatory authority is the Dubai Financial Services Authority (DFSA). The DFSA is a Shari’ah Systems Regulator, requiring that any Islamic firm must have a SSB. The DFSA is, unfortunately, not itself a shari’ah regulator and has not constituted its own Shari’ah Board to oversee the regimes in Islamic firms (DFSA: 2010). Under the Shari’ah Systems Regulator requirements, the firm must have systems and controls to implement the SSB’s rulings and must conduct annual shari’ah reviews and audits and produce disclosures based on AAOIFI standards (DFSA: 2010).

In general, most of the disclosures recommended by the IFSB are already mandated in the DFSA rules (DFSA: 2011) and the DFSA currently requires the use of AAOIFI standards for Islamic financial business (DFSA: 2011). In addition, the DFSA utilises the IFSB standards in determining its capital adequacy regulations and there are also special rules for Islamic funds and for sukuk (DFSA: 2010).

The DIFC has been actively promoting Islamic finance with the Law Regulating Islamic Financial Business DIFC Law No. 13 of 2004, the establishment of the Islamic Finance Advisory Council in 2005, the presence of the Islamic International Rating Agency (IIRA) from 2006, and an MOU between the DFSA and the Securities Commission of Malaysia facilitating cross-border flows of Islamic finance between the DIFC and Malaysia in 2006. There appears to be a substantial amount of Islamic finance business being conducted in the DIFC, under the regulation of the DFSA. However, the DIFC lacks an adequate Islamic finance dispute resolution mechanism and centralized shari’ah authority.

DWIFAC, which shall be funded by Sheikh Mohammed bin Rashid Al Maktoum (Arabic???? ?? ???? ?? ?????), may act as the independent central dispute resolution authority and shari’ah regulator connecting all of the adjudication apparatus of Dubai, the UAE, and the DIFC into one consolidated framework for the adjudication of Islamic finance disputes with a centralised shari’ah authority in the form of the Shari’ah Supreme Council. The decisions of the Shari’ah Supreme Council shall be binding and available to the public for review, thereby giving certainty to legal decisions and promoting confidence amongst investors. The DIFC, Dubai courts, Central Bank of the UAE, and the IICRCA may refer arbitration to DWIFAC and/or utilise the DWIFAC Ambassador’s List and facilities. In addition, DWIFAC may utilise the expert determination, mediation, and other services of the Dubai and DIFC courts and the arbitrators of the IICRCA, DIFC-LCIA, DIAC, and the Central Bank of the UAE governance unit. DWIFAC awards may be enforceable in the Dubai and DIFC courts through a special protocol.

Islamic Finance Bankruptcy Court

Ernst and Young predicts sukuk issuances to inflate to $900 billion in 2017.  It would be wise for the Islamic finance industry to set up an Islamic finance bankruptcy court for the world’s sukuk defaults as many people are experimenting with sukuk structures and, due to unforeseen circumstances, many sukuk go into default. A bankruptcy court for the Islamic finance industry may increase investor confidence and strengthen and add certainty to the overall global sukuk market. This may be better than the current situation where in sukuk defaults are currently being sent to common law courts or even worse, major law firms create special tribunals with their own laws for each individual sukuk default. A special component of the IFBC is that it would issue a standardised dispute resolution contract to be attached to all sukuk transactions worldwide designating the IFBC as the governing jurisdiction and body for any disputes or defaults.

Conclusion

The DWIFAC arbitration center along with the DWIFAC jurisprudence office provides the best solution of the dispute resolution conundrum of the Islamic finance industry, providing a globally recognised center for dispute resolution located in one of the world’s major financial centers and adjudicates disputes using arbitration incorporating lex mercatoria and shari’ah, the DWIFACJO uniform banking law, the DWIFAC arbitration rules, and the procedural law of Dubai as well as uses highly qualified shari’ah and Islamic finance/law arbitrators.  DWIFAC may also organise and utilise the existing dispute resolution framework in Dubai, the DIFC, and the UAE, consolidating the centers into one hierarchical system, which includes the Shari’ah Supreme Council for the efficient adjudication and regulation of Islamic finance disputes. The IFBC is advisable for adjudicating the world’s sukuk defaults and maintaining the dispute resolution for and reputation of the global sukuk industry.

                                                                               Camille Paldi

Camille Paldi is CEO of Franco-American Alliance for Islamic Finance

The post The dispute resolution conundrum of the Islamic finance industry appeared first on International Finance.