Complex Islamic finance disputes can be a thorny business, depending on the jurisdiction (Shutterstock).

Islamic Finance

International standards and tribunals being developed to solve global Islamic finance disputes

Shifts in political structures, widely varying legislation and jurisprudence, and demands to straddle two legal obligations causing significant complications.


Dubai, Jakarta and Ottawa: International legal arbitration systems and judicial standards are emerging to solve complex Islamic finance disputes, while national judicial and informal dispute resolution systems continue developing in civil and religious law institutions.

Informal dispute resolution processes can resolve disagreements without recourse to damage payments and potentially without harming valuable reputations, while avoiding litigation can pay dividends in Islamic finance.

Islamic financial services developers face jurisprudential complexities given their simultaneous grounding in traditional commercial civil law and in Sharia law for which different courts may apply.

Muslim-majority countries also have widely varying legislation and jurisprudence impacting Islamic finance with laws and precedents spanning the traditions of Arab monarchies and former French, UK and Dutch colonies.

Their legislation, judicial and political systems have dramatically changed over the past 60 years, resulting in profound difficulties in solving Islamic finance disputes, especially those with an international component.

Building international standards

Aware this can hinder the global development of Islamic finance, there is a move to build international standards and create transnational dispute resolution systems. While there is no globally dominant Islamic finance international tribunal, expert minds have been assessing the possibilities – looking to codify laws governing Islamic finance to formulate a global body of law.

One key issue is developing common principles for dispute resolution. The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has developed more than 100 standards on Sharia law, accounting, auditing, ethics and governance issues for international Islamic finance.

It works with the central banks and regulatory authorities, financial institutions, accounting, auditing and legal firms from more than 45 countries. A recent development is a Sharia standard on gold trading that categorises the metal and explains Sharia parameters for its trading and Sharia rulings for using gold-based financial products in Islamic finance institutions.

Its accounting standards include those on recording sukuk (Islamic bonds) investments and financial reporting for zakat charitable donations.

One solution floated by Gordon Blanke, founding partner Blanke Arbitration LLC, an arbitration specialist operating from London, Paris, Dubai and further afield focused on international commercial and investment arbitration, is developing semi-secular arbitration systems.

These can potentially combine civil and Sharia law rather than “settling for one or the other option, devoutly Sharia or entirely secular” that can be the initial hurdle for arbitration. Writing in Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, he said tribunals need banking and finance and, if a three-member panel, “it might be sufficient only for the chairperson to have Islamic finance experience or expertise”.

Solid examples for dispute resolutions emerging from the UAE

The UAE is leading the way in developing dispute resolution systems and jurisprudence. Here, Islamic finance disputes can be resolved through litigation, arbitration or other alternative processes. Mediation (wasata) and arbitration (tahkim) are deeply rooted in the Islamic culture that values reconciliation (sulh) and a discreet settlement of conflicts, noted Antonin Sobek, counsel at the Dubai International Arbitration Centre (DIAC) and dispute resolution lecturer at the Paris-based Sciences Po University.

Last year Dubai issued a decree to consolidate all local arbitration centres under a revamped DIAC with Sobek indicating the centre is exploring opportunities to become the parties’ choice for Islamic finance dispute resolution.

He says in consultation with major global Islamic finance industry players, the DIAC can design sector-specific services including dedicated dispute resolution rules. It can also establish a list of arbitrator experts in Islamic law, banking and finance.

This development could be important given the UAE does not operate Sharia courts for Islamic finance disputes. Sobek says commercial and finance disputes are currently resolved by the civil courts, but there is potential for establishing specialised Islamic finance courts.

“Such courts could ensure Sharia compliance and contribute to developing consistent approaches to Islamic finance, thereby bolstering the attractiveness of the Islamic finance sector,” he says.

Industry not fully behind arbitration

However, the Islamic finance industry has not fully embraced arbitration.

“Islamic financial institutions may be reluctant to have their disputes resolved by private arbitrators in accordance with Sharia law. They may also be unfamiliar with the advantages of arbitration and the services available to deliver a Sharia-compliant dispute resolution process,” Sobek told Salaam Gateway.

The rapid growth of the global Islamic finance market has been accompanied by an increasing sophistication and proliferation of Islamic finance offerings. These factors inevitably create potential for future domestic and cross-border disputes between financial institutions and between these institutions and their clients and third parties.

Such concerns may have inspired the launch in 2005 of the Dubai-headquartered International Islamic Centre for Reconciliation and Arbitration to assist in resolving, through reconciliation or arbitration, disputes arising from the Islamic finance industry.

Parties to IICRA-administered proceedings are mainly from the Gulf Cooperation Council (GCC) countries and Malaysia, although Sobek noted claims that the “IICRA is yet to achieve widespread acceptance in the Islamic finance community”.

“In the absence of casework statistics, IICRCA’s popularity and international outreach remain uncertain,” he said.

Another proposal anticipates disputes resolved via dedicated rules and experienced Sharia scholars

Another option on the table is establishing a Dubai World Islamic Finance Arbitration Centre (DWIFAC) specialised in settling Islamic finance disputes; equipped with a dedicated set of arbitration rules and staffed by experienced Sharia scholars.

First proposed in 2013 by Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance, the institution would be assisted by a jurisprudence office entrusted with developing a unified Islamic banking law.

While the centre has yet to be established, Sobek believes this proposal may have “nourished the debate about the need to design Sharia-compliant dispute resolution processes and harmonise Islamic finance standards and practices”.

The discussions led to a tangible initiative in May 2020 to build a unified global legal framework for Islamic finance. Announced by the UAE ministry of finance in partnership with the Islamic Development Bank and the now-defunct Dubai Islamic Economy Development Centre (DIEDC), the project aims to adopt an international treaty or global Islamic finance code.

Ultimately, it will expand the global reach of Islamic finance by integrating local differences in Islamic finance standards, practices and product offerings. A steering committee held its first meeting in November 2020 with participation from multiple global Islamic finance bodies.

More talks on the cards

Sobek says while dissolving the DIEDC in 2021 and transferring its duties, assets, rights and obligations to Dubai’s department of economic development may have slowed down progress, more talks will be staged.

He added a global Islamic finance code is currently being drafted in consultation with international strategic partners and with due regard to the AAOIFI’s non-binding Sharia standards. He expects arbitration and mediation to progressively gain traction as a mechanism for resolving Islamic finance disputes, especially as they provide significant advantages compared to litigation.

For instance, the UAE announced in March it would join the Singapore Convention on Mediation that provides its signatories from 55 countries with a mechanism for enforcing settlement agreements in other jurisdictions.

This might boost Islamic arbitration worldwide including in Indonesia where Amran Suadi, chair of the religious chamber at Indonesia’s Supreme Court, notes disputes involving Islamic finance are usually settled in religious courts for litigious cases and Sharia arbitration bodies plus the country’s Financial Services Sector Alternative Dispute Settlement Agency for non-litigious disputes.

The Supreme Court oversees the country’s regular and religious courts.

Amran said Islamic finance disputes handled by the religious courts had steadily increased from 229 in 2017 to 562 in 2020. Cases were becoming increasingly varied from simple ones involving sales and profit-sharing contracts to more complex subrogation and novation issues.

The country has more than 1,300 judges certified to handle Sharia finance cases, some trained in Saudi Arabia and Bahrain. Under Supreme Court rules, a dispute involving money less than $34,300 must be settled in 25 days.

“Thank God many disputes involving Sharia banks and customers are now settled through mediation. They don’t have to be decided by courts and that’s better,” he said.

Indonesia boosting its judges’ capacity

Indonesia’s Supreme Court has continued improving the capacity of its judges to handle Sharia finance cases via training conducted in co-operation with Indonesia’s Financial Services Authority (OJK – Otoritas Jasa Keuangan) and other authorities including Saudi Arabia and Morocco.

The LAPS SJK began operating on 1 January 2021, replacing six such agencies and simultaneously expanding the settlement scope to include the fintech sector. It works alongside the National Sharia Arbitration Board (Basyarnas-MUI) established in 2003 by the Indonesian Council of Ulema (MUI - Majelis Ulama Indonesia), a semi-official authority on Islam, amid rapid growth in Indonesia’s Islamic finance sector.

The board is tasked with resolving disputes in trade, finance, law, industry and services based on Sharia principles and provides binding legal opinions at the parties’ request. Basyarnas-MUI now has representative offices in 20 of the country’s 32 provinces.

Mochammad Buchori Muslim, head of the MUI Sharia economic department, said the council regularly issued fatwas (edicts) on points of Islamic finance.

“The Supreme Court conducts annual deliberations where our recommendations are included in the court’s circulars. Universities with law faculties have also been engaged in discussions on dispute settlement via theses, dissertations and journals,” he says.

Progress in Malaysia

In November the Kuala Lumpur-based Asian International Arbitration Centre (AIAC) in November introduced the i-Arbitration Rules 2021, a neutral international framework for resolving disputes related to Islamic finance. Malaysia’s national news agency Bernama quoted the prime minister’s department (parliament and law) minister Seri Wan Junaidi Tuanku Jaafar saying the rules meant the AIAC had pioneered the development of global disput resolution.
“This method is believed to help consumers around the world bring an integrated approach in dispute resolution and provide continuity in conventional business practices as well as Sharia requirements for such transactions,” he said.

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Heba Hashem, Ahmad Pathoni and Keith Nuthall