Professor A F M Maniruzzaman, PhD (Cambridge)

Chair Professor of International & Business Law, University of Portsmouth, UK

Honorary Fellow, IICRA; International Arbitrator & Mediator.

Advocate, Supreme Court of Bangladesh.

INTRODUCTION

Ever since the global financial crisis in the last decade and the recent COVID-19 pandemic induced financial troubles worldwide Islamic finance has been poised to play a significant role in the world economy. Over the last two decades, it has been a growing phenomenon. There appears to be a clarion call for a sound and predictable legal framework and dispute resolution infrastructure in the Islamic financial sector to ensure its sustainable growth in the years ahead in both Muslim and non-Muslim countries so that its vital role in the world economy can be ensured.

The article makes an overview of the recent developments in Islamic finance, its existing and developing legal framework for its governance and also its dispute resolution scenario.

ISLAMIC FINANCE AS A GROWING PHENOMENON IN THE WORLD ECONOMY

The fundamental tenet of Islamic finance is that the expected outcome of such transaction is profit-loss-sharing based (i.e. returns to be linked to risks) as opposed to conventional finance which is interest based. Islam prohibits interest (i.e. riba - the payment of a fixed or determinable interest on funds), hence any transaction based on riba or interest is not allowed in Islamic law or Shari’ah. Islam prohibits not only riba, but also other financial transactions that involve the concept / practice of gharar (deceptive uncertainty, asymmetrical information), maysir (gambling, speculation) and harām (prohibited behaviour). Above all, Islamic finance is geared to social purpose and community welfare, and it is socially inclusive unlike conventional finance. These principles are the drivers of Islamic finance not only on the religious but also on moral grounds.

Since the dawn of Islam, the existence of Islamic finance has been recognised and it has had a long tradition. However, over the last few decades it has been progressively emerging as an alternative finance on the international level as not only many Islamic countries have practised it but many Western banks and financial institutions have sponsored it and made provision for it with the help of their countries’ favourable legislative changes. The popularity of Islamic finance appears to be on the rise since the 2008 financial crisis as it is considered by many as a panacea to the ills of conventional finance in many respects.

In the post-COVID-19 pandemic era, Islamic finance is increasingly considered as a viable means and option of financing global recovery in the years to come alongside the conventional financing. It has been reported that “(m)ajor financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system – and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.” It is also noted lately that “The world currently faces a $15 trillion infrastructure investment gap by 2040.” There is no doubt that Islamic finance can contribute to that much needed fund.

The World Bank, the IMF and other international financial institutions are very much enthusiastic about the global prospect of Islamic financing and more specifically for the UN Sustainable Development Goals, not to mention their increasing attention to Islamic financing vehicles over the last decade or so. Even without the prospect of the post-COVID-19 pandemic in sight, the upward trend of Islamic finance was notable. Over the last decade, Islamic finance grew by 10-15 per cent which is far higher than that of conventional finance. It is noteworthy that according to the 2017 ICD-Reuters report global Islamic finance was estimated to be $2.2 trillion of assets in 2016 which rose by the end of 2018 to $2.6 trillion, $2.88 trillion in 2019 and was expected to grow to $3.8 trillion of assets by 2022 and is also forecast lately to stand at $4.95 trillion in 2025. This means that over the decade since 2016 the global Islamic finance will grow more than double.

The Islamic finance industry consists of Islamic banking, Islamic capital markets (e.g., sukuk and funds), takaful (Islamic insurance), Islamic microfinance, awqaf (endowments), Zakah and Sadaqah.

A per the current state of play, in the Islamic finance industry banking is the largest sector comprising both Islamic banks and conventional banks with Islamic windows in both Muslim and non-Muslim countries. The banking sector globally represents 77% of all Islamic financial assets.

It is noteworthy that in a recent report it was noted that over 50% of the Islamic banking asset is concentrated in two countries such as Saudi Arabia (28.5%) and Iran (22.1%). The other major players are Malaysia (11.4%), the UAE (9.2%), Qatar (6.5%) and Kuwait (6.0%).

It has to be noted that Islamic financial technology (Fintech) has lately proved to be another progressively rapid growth area. In different parts of the world, Fintech is mushrooming consistently. So far, Saudi Islamic Fintech is considered to be the largest worldwide, and it is projected from its current estimate of $17.8 billion to grow to $47.5 billion (a growth of 22 per cent annually) by 2025 in Saudi Arabia with the global projection reaching at $120 billion by the same time. It shows that with the growing computer and online-savvy younger generations (including the marginal ones), especially in the Arab Muslim World, Fintech will exponentially grow “with its tangible traction across multiple markets and jurisdiction” in the years ahead to significantly boost Islamic finance across the globe and thereby the emerging global Islamic economy. It is noteworthy that the 2013 Sheikh Mohammad bin Rashid Al Maktoum initiative to make ‘Dubai as the Capital of the Islamic Economy’ added a new dimension to Islamic finance in the region.

GOVERNANCE OF ISLAMIC FINANCE

It has to be borne in mind that there is no monolithic system of Islamic law to govern Islamic financial transactions. There are different schools of thoughts (uṣūl al-fiqh) in Islam. In Sunni Islam, there are four major schools of jurisprudence or fiqh such as the Hanbali School, the Maliki School, the Shafei School and the Hanafi School. Broadly, apart from the matters that can be clearly governed by the Quran and the Sunnah, differences arise as to the other sources of Islamic law or Shari’ah such as ijma (consensus) and qiyas (analogical deduction by reasoning), etc. There are also other schools of jurisprudence in Shia Islam, e.g., Ihna Ashari, or Ja-fari, Ismaili, and Zayadi.

There are also legal systems in Muslim countries which are either a combination of civil law or common law and Islamic law as a hybrid system such as in the UAE, Egypt and Pakistan, etc. This can also add an extra layer of complexity. Given the differences of views, their nature, scope and context on many matters especially in Islamic finance, a unified and harmonised system of Islamic law is increasingly desired across the globe as Islamic finance is gaining the momentum at present.

It has to be acknowledged that the Bahrain-based entity called Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) has, as noted, “developed more than 100 standards on Shari’ah law, accounting, auditing, ethics and governance issues for international Islamic finance.” Such standardization of the Shari’ah rules is market-driven, responsive to stakeholders’ needs and also forward-looking in the context of the ever-developing Islamic financial architecture. In order to facilitate the sustainable growth of Islamic finance around the world, efforts are currently going on in various forums to build a unified global legislative framework for Islamic finance.

The Paris-based International Chamber of Commerce (ICC) has the vision of such a global legal framework for “Islamic Finance through the convergence and codification of Islamic contract law” and legality of various transactional structures and modes under Islamic financing. There is also, according to some views, some urgency, given the fast and steady growth of Islamic finance, in favour of an international treaty to harmonize the laws, standards and practice of Islamic finance across the board. In 2020, the UAE also took an initiative along the lines as it aspires to be the Islamic Financial Hub in the foreseeable future. It is, however, still on the drawing board and the work is in progress. It is noted in a 2022 Report that “(t)he project’s stated objectives include providing a global legal benchmark for Islamic finance, reducing regional differences in product offerings and practices, providing legal protection to all parties involved, and developing an international dispute resolution framework.” If it comes to fruition, it may pave the way for the building blocks towards the development of a uniform body of law amounting to Islamic lex mercatoria / lex Islamica in the Islamic financial sector across the globe over time. It is notable that to this body of law the jurisprudence or case law of Islamic finance litigation and arbitral tribunals’ awards and decisions will progressively contribute to the sustainable growth of Islamic finance globally.

ISLAMIC FINANCE DISPUTE RESOLUTION

As pointed out above, if such is the upward trend of the growth of Islamic finance, there will also be a concomitant growth of disputes between parties in various Islamic finance transactions along the way. A sound dispute resolution system is considered to provide the vehicle for the progressive growth and development of Islamic finance worldwide. Thus, the Islamic finance disputes horizon appears to be a progressive growth area in the foreseeable future for serious consideration by dispute resolution specialists.

Disputes arising out of Islamic finance have been in many cases referred to litigations by the parties involved leading to unsatisfactory outcomes due to the failure of the courts, especially in the Western world, concerned to apply Shari’ah (Islamic law) principles as agreed by the parties in their contract, or due to their misconceptions of Shari’ah. As the popularity of Islamic finance is on the rise in both Islamic and non-Islamic countries, so will be the differences in understanding Shari’ah or Islamic rules and principles applicable to such transactions between diverse parties giving rise to multifarious types of disputes on the international level. Besides, there also arises the debate about the suitability of the various methods of resolution of Islamic finance disputes such as litigation, arbitration, mediation, and conciliation, etc. Various other issues relating to Islamic financial disputes may arise.

It has to be noted that arbitration in increasingly considered to be a suitable mechanism for Islamic finance dispute resolution to avoid unpredictable outcomes in litigation in national courts when Shari’ah is in issue due to the courts’ attitude to Shari’ah as well as their often misconceptions of Shari’ah as reflected in English court cases concerning Islamic finance, for example. Thus, the International Islamic Financial Market (IIFM) provides for arbitration in its standard documents. There are also other prominent institutions for Islamic dispute resolution which make suitable arbitration rules and adoptable model clauses suitable for such disputes. For example, the International Islamic Mediation & Arbitration Centre (IMAC)’s Shari’a Arbitration Rules, the Asian International Arbitration Centre (AIAC)’s i-Arbitration Rules (2021) and the International Islamic Centre for Reconciliation and Arbitration, i.e. IICRA’s revised Arbitration and Reconciliation Rules (December 2020), the revised P.R.I.M.E. Finance Arbitration Rules (January 2022). The Astana International Financial Centre (AIFC), which was officially launched in July 2018, is a prospective venue for disputes arising out of Islamic finance. In a recent report ICC points out the suitability of the ICC Arbitration Rules as it states that the disputes arising out of Islamic finance instruments (as any other dispute involving financial institutions) can be resolved through arbitration and existing rules.

CONCLUSION

Islamic finance is still a nascent industry and is emerging as a rapidly growing phenomenon as a prime driver of the Islamic economy as part of the world economy. For its sound and sustainable growth there should be a uniform and harmonized legal regime and appropriate dispute settlement mechanisms, preferably arbitration, for building trust and confidence of its stakeholders in the financial sector and beyond. A global legal framework for its governance and consistent practice in dispute resolution would ensure its viability as an option and its prospective significant contribution to the world economy.