Once dismissed as an oddity and a peripheral business activity, the world-wide growth and development of Islamic finance during the last decade has been phenomenal. The faith-compliant finance, which eschews activities or products forbidden by Islam such as the payment or the receiving of interest, gambling, pornography, pork and alcohol, is a viable ethical alternative to conventional banking. In addition to it being legal under civil laws and tax and cost efficient, Islamic finance should also be compliant with the Shari’ah.

 

Litigation, which is the most popular mode of dispute resolution in Islamic finance, has proven to be inadequate particularly in its application and interpretation of the Shari’ah. Malaysian courts have, for instance, treated a Bai’ Bithaman Aajil contract (a sale and purchase transaction by which the vendor-financier permits the purchaser-customer to settle the purchase price by installments) as a “loan” and the financier as a “lender” and the customer as a “borrower”. Malaysian judges are probably influenced by the ruling in the 1927 case of Ramah v Laton that as Islamic law is part of the body of law of Malaysia, they must apply it as they themselves find it and cannot admit expert evidence on it.

 

English courts have held that Islamic finance agreements are governed by English law alone and that the reference to the principles of Shari’ah in the contracts did not intend to incorporate a system of law “intended to trump the application of English law” and that the Shari’ah was not applicable as it was not the law of England and Wales.

 

The reality, however, is that civil courts are indispensable as it is they who must decide not only on civil law issues but also on many related aspects of Islamic finance including foreclosure of properties, enforcement of securities, winding up and bankruptcy.

 

However, there is a need to complement the civil court scheme with the hybrid Alternative Dispute Resolution feature of expert determination whereby the court would refer all issues pertaining to Islamic law to a recognised body of Shari’ah experts for an opinion which would bind the court. In Malaysia the Shari’ah Advisory Council is perhaps the most appropriate body. However, Section 16B of the Central Bank of Malaysia Act is lacking as, under it, the court has the discretion whether to refer Islamic law questions to the Shari’ah Advisory Council and not to follow the Council’s opinion. There is, therefore, a need to legislate that all Islamic questions of law shall be referred by courts to the Shari’ah Advisory Council and that the opinions of the Council shall bind the courts.