Clash of Jurisdictions: Applicability of Islamic Finance Principles under English Law
- Minal Kaul and Margarida Narciso
Previously published: Court Uncourt – Volume III, Issue VI, STA Law Firm - 2016
As in any religion, one may argue, there exists a spectrum of devout belief spanning from those who strictly follow the teachings of the Qur’an, to those that rarely feel the impact of their faith on a daily basis. In countries where there are both conventional and Sharia complaint banks, there are options for every investor, devout or not, Muslim or secular. The last decade has witnessed the rapid growth of Islamic finance on both an international and domestic platform. Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This fact remains constant even when the primary law of the contract is that of a common law or civil law country. If judges and law makers fail to comprehend the reasoning of Islamic finance professionals in incorporating Sharia law, the result could be precedents and codes that may hamper the growth of a multi-trillion dollar industry!
Lord Asquith had refused to apply the provisions of the Sharia Law in the case of Petroleum Development (Trucial Coasts) Ltd. v. Sheikh of Abu Dhabi[1]. He further quoted, “it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments”. However, if Lord Asquith could foresee the future, he would have chosen his words wisely before delivering the far reaching judgment about the inadequacies of ShariaLaw. Little did he know that, years later, the United Kingdom would rank ninth in the world in holdings of Sharia-compliant assets and would become the first western country to issue sovereign sukuk. Islamic Finance is gaining a foothold in the global financial market as a commercially viable alternative to conventional financing. Remarkably, transactions undertaken in the Islamic financial sector are no longer confined to countries whose legal systems are based on Sharia principles.
However, the Sharia compliant structures of the Islamic finance instruments face a serious impediment when it has to be implemented in a non-Islamic legal framework. Most of the countries do not have a legal mechanism to grasp and implement Sharia law in financial structures. Moreover, the western courts do not have the necessary expertise or resources in order to interpret and enforce the Islamic finance transactions and the documents which are based on principles of Sharia law.
In the first 500 years or so after the Hijrah, Islamic law developed rapidly to accommodate the legal needs of an Islamic Empire and its increasingly complex commercial transactions. However with the passage of time, more emphasis was given to jurists and less scope was left for original thinking based on direct reference to the Quran. This is referred to as the closure of the gate of Ijtihad. The resultant outcome was a stagnation of legal thinking by the leading intellectual Muslim scholars. Thus we find that cross border Islamic Finance contracts are usually written under English law. The prime reason proved that English law provides a greater level of certainty to the contracting parties than attempting to write a contract under the rules of Islamic Law. The Global Islamic Finance Magazine recently held an interview allowing people to explain