UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for June, 2010

An Introduction to Islamic Finance


An Introductio to Islamic Finance

Readings provided by: 

Amin Fateh

Operations Director


Minhaj Shari’ah Financial Advisory

Dubai, UAE

The Principles of Islamic Finance


The Principles of islamic Finance

Powerpoint presentation courtesy of:

Nasser Al Qawas

General Secretary of the Board

National Commercial Bank

Jeddah-Kingdom of Saudi Arabia

Governing Law Clauses in Islamic Finance Contracts


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 In the Supreme Court of Judicature Court of Appeal Civil Division On Appeal From the High Court of Justice Queen’s Bench Division (Morison J)

Link to Judgment:

According to this Appeal Case, the Court ruled that an Islamic Finance contract could not be governed by Sharia’h law in the UK even if so specified in the contract  and that in fact Sharia’h law is not a recognizable form of law that contains principles of law capable of governing a commercial dispute in the UK. 

In this case specifically, the governing law clause of the Islamic Finance contract stated, ‘Subject to the principles of Glorious Sharia’a, this Agreement shall be governed by and construed in accordance with the laws of England.’

Lord Justice Potter stated in Paragraph 2 of the judgment, ‘It is not in dispute that the principles of the Glorious Sharia’a 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 Sharia’a.  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 Ahadith, which consist of reports about the sayings, deeds, and reactions of the Prophet…”’

Lord Justice Potter, in this judgment, recognizes the definition of Sharia’h law stated by Mr. Justice Khalil-Ur-Rehman Khan, however, Lord Justice Potter states that Sharia’h law, which in his opinion is more of a religion than law, could not apply to a commercial banking transaction in the UK.  Even if it was a source of law according to Lord Justice Potter, the conflict of law rules of the UK would apply.

Lord Justice Potter referred to the decision of Morison J.  In paragraph 38, Lord Justice Potter states, “The judge held and it is accepted by the Bank on this appeal, that if, on a proper construction of the applicable law clause, the court is obliged to concern itself with the application of Sharia’h law and its impact on the lawfulness of the agreements, it is arguable which of the two parties experts was right and that it would offend the principles underlying CPR Part 24 to seek to resolve the conflict between them before a trial.’

In paragraph 39, Lord Justice Potter states, ‘On the proper construction of the applicable law clause, he was not concerned with the principles of Sharia’h at all for the following reasons.’

In Paragraph 40, Lord Justice Potter states, ‘First it was common ground by concession that there could not be two separate systems of law governing the contract (paragraph 43).  Yet, by contending that Sharia’h law and not English law would determine the enforceability of the agreement, the appellants were in substance contending that the agreements were governed both by English law and Sharia’h law (paragraph 48).  The judge declined to construe the wording of the clause as a choice of Sharia’h 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) 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. 

There is no provision for the choice or application of a non-national system of law such as Sharia’h law (paragraphs 39, 48, and 51).  In any event, the principles of Sharia’h are not simply principles of law but principles which apply to other aspects of life and behavior (paragraph 53).  Even treating the principles of Sharia’h as principles of law, the application of such principles in relation to matters of commerce and banking were plainly matters of controversy (paragraphs 49 and 53).  In particular there is controversy as to the strictness with which principles of Sharia’h law will be interpreted or applied.  In consequence it was highly improbable that the parties to the agreements intended an English court to determine any dispute as to the nature or application of such controversial religious principles which would involve it in the task of deciding between opposing points of view which themselves might be based on geopolitical and particular religious beliefs (paragraphs 49-54).’

Lord Justice Potter does not recognize Sharia’h as containing principles of law and certainly not principles of law which could govern a commercial/banking transaction. 

Lord Justice Potter states in Paragraph 41, ‘The judge accepted the submission of the bank that the words ‘subject to the principles of Glorious Sharia’h were no more than a reference to the fact that the Bank purported to conduct all its affairs according to the principles of Sharia’h.

According to this statement by Lord Justice Potter, mentioning Sharia’h law in an Islamic Finance contract is not a reference to law, however, just a description of how the parties to the contract do business.  Further according to Lord Justice Potter, even if Sharia’h law were a valid source of law with principles that could govern commercial banking transactions, there cannot be two governing laws in the agreements.  In addition, according to Lord Justice Potter, the governing law of the contract must be the law of a country, which Lord Justice Potter states that Sharia’h law is not.  Lord Justice Potter states that Sharia’h law is classified as a non-national system of law such as ‘lex mercatoria’ or ‘general principles of law’.

In Paragraph 48, Lord Justice Potter states, ‘It is conceded by Mr. Hacker that there cannot be two governing laws in respect of these agreements.  He further concedes that the governing law is that of England.  It seems to me that he is rightly driven to this concession.  The wording of Article 1.1 of the Rome Convention (“the rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries.”) is not on the face of it applicable to a choice between the law of a country and a non-national system of law, such as the lex mercatoria, or ‘general principles of law,’ or as in this case, the law of Sharia’h.  Nevertheless, that wording, taken with Article 3.1 (“a contract shall be governed by the law chosen by the parties”) and the reference to a choice of a ‘foreign law’ in Article 3.3, make it clear 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.’

Again, Lord Justice Potter states that mentioning Sharia’h law in the contract merely referred to how the Bank does business rather than system of law intended to govern the contract.

In Paragraph 54, Lord Justice Potter states, ‘It seems to me that there is an appropriate alternative construction, namely that favored by the judge, that the words are intended simply to reflect the Islamic religious principles according to which the Bank holds itself out as doing business rather than a system of law intended to trump the application of English law as the law to be applied in ascertaining the liability of the parties under the terms of the agreement.  English law is a law commonly adapted internationally as the governing law for banking and commercial contracts, having a well-known and well-developed jurisprudence in that respect which is not open to doubt or disputation on the basis of religious or philosophical principle.  I share the judge’s view that, having chosen English law as the governing law, it would be both unusual and improbable for the parties to intend that the English court should proceed to determine and apply the Sharia’h in relation to the legality or enforceability of the obligations clearly set out in the contract.’

Lord Justice Laws and Lady Justice Arden agreed. 

In this appeal case, English law was confirmed as the governing law of the contract.

It is not advisable to put the laws of England or New York as governing an Islamic Finance contract. I recommend legislating a unified Islamic Banking Law and having it implemented in all countries which are commercial centers to facilitate Islamic Banking dispute resolution. It is advisable to create a world-recognized Islamic Finance Arbitration Center staffed with the world’s top Sharia’h scholars to settle disputes in Islamic Finance Transactions/Contracts.  Otherwise, if the Laws of England and other western countries are designated as the governing law of an Islamic Finance contract in conjunction with Sharia’h Law, the transaction may be converted from an Islamic Finance to a conventional Western finance transaction by default as the governing law will most likely be construed as the law of the western country only. 

Please see below Link for Suggestion for the regulation of the Islamic Finance Industry.

Interesting factoids about the interplay of UAE and Sharia’h Law and the recent Blom Bank Case:

Blom Bank Case in Emirates 24/7 Business News

Blom Bank Case

Blom Bank CPI Financial

Actual Blom Bank Judgment

Fire Insurance Under UAE Law

Civil Transactions Law, Federal Law No. 5 of 1985

Article 1037:

In fire insurance, the insurer shall be liable for:

a. damage arising from fire even if resulting from earthquakes, lightings, storms, winds, cyclones, domestic explosions and confusions caused by the crash of airplanes and other aircraft or what is customarily believed to be included in such kinds of insurance.

b. damage which is an inevitable result of the fire.

c. damage that affects insured things because of the means used for rescue or for prevention of spreading fire. d. loss or disappearance of insured thing during fire unless it is proved that such an incident is a result of burglary.

Article 1038:

The insurer shall be responsible for fire damage if it results from the insured or beneficiary’s fault.

Article 1039:

The insurer shall not be responsible for damage intentionally or deceitfully caused by the insured or the beneficiary even if otherwise agreed.

Article 1040:

The insurer shall be responsible for damage of fire caused by the agents of the insured regardless of their fault.

Article 1041:

The insurer shall be responsible for damage resulting from fire even if such fire arises from a defect in the insured thing.

Article 1042:

1. Whoever insures a thing or interest with more than one insurer shall notify each of them of the other insurance policies as well as the amount of each policy and names of the other insurers.

2. The amount of insurance must not exceed the value of the insured thing or interest if the insurers are several.

Article 1043:

If a thing or interest has been insured with more than one insurer for amounts the total of which exceeds the value of said insured thing or interest, each insurer shall be liable for payment of a proportion equivalent to the difference between the insured amount and the value of the combined insurance policies, provided that the total amount payable to the insured shall not exceed the value of the fire damage sustained by him.

Article 1044: Fire insurance that covers all the movables of the insured which at the time of fire exist in places occupied by him shall cover other things that belong to members of his family and persons attending to his service if they cohabit with him.

Article 1045:

1. If the insured thing is burdened with a pledge or other real securities, the title to such rights shall be transferred to the liability due to the insured according to the insurance policy.

2. If such rights are registered or communicated to the insurer, even by a registered letter, he may not be liable to pay what he owes to the insured except with the consent of said creditors.

Insurance and Life Insurance in the UAE

UAE Federal Law No. 6 of 2007 Concerning the Formation of the Insurance Commission

Article 2:

A. The provisions of this Law shall apply to national insurance companies and to branches of foreign companies that are engaged in cooperative insurance. Takaful and to insurance agencies that carry out all or some of the insurance or reinsurance business specified herein and the business related thereto.

Article 3:

1. An insurance contract is one under which the Insurer is obliged to pay to the Insured or to the Beneficiary in whose favor the insurance is made, a sum of money, a regular income or any other monetary consideration on the happening of the insured risk or accident in return for premiums or any other form of payment made by the Insured.

2. Immediately, upon the occurrence of the insured event or the materialization of the risk insured against, the Insurer shall pay to the Insured or to the Beneficiary the insurance indemnity specified in the Insurance Contract. Thereupon, the Insurer, shall be subrogated to the Insured or the Beneficiary’s rights and obligations.

Article 64:

Companies engaged in life assurance and funds accumulation may not deduct directly or indirectly any amount from the funds ear marked to meet the obligations arising from Insurance Policies for distributing it as profit among shareholders or policyholders, or for making any payment other than those made for obligations arising from Insurance Policies that they have issued. The distribution of profits shall only be made out of the surplus funds indicated in the actuary’s report after concluding the verification stipulated in Article 59 of the Law.

Article 102:

A fine of not less than AED 100,000.00 and not exceeding AED 200,000.00 shall be imposed on persons who violate the provisions of Article 30, 35, 59, 64, 66, 73, paragraph 2 of Article 74, paragraph 1 of Article 76 paragraph 2 of Article 117 of this Law. The same penalty shall be imposed on persons who refrain from providing the Commission with the document, information and data required to be submitted according to this Law, the regulations and instructions issued in pursuance thereof, or hinder or prevent the Director General or authorized persons to implement their functions and authorities stipulated in this Law, the regulations and instructions issued in pursuance thereof or interfered with to prevent them from obtaining the information necessary to perform their duties, or declined to provide them with such information or failed to do so within the specified period. The fine shall be doubled in event of repeat violations.

The Civil Transactions Law, Federal Law No. 5 of 1985:

Article 1026:

1. Insurance is a contract under which insured persons and an insurer collaborate to face the risks or accidents against which insurance is made; accordingly, the insured shall pay to the insurer a certain sum of money or regular premiums. However, in case of occurrence of the risk or the accident shown in the contract, the insurer shall pay to the insured person or beneficiary in whose favor the insurance is made, a sum of money, a regular income, or any other pecuniary right.

2. The law regulates the provisions dealing with the agencies that engage in the business of insurance, particularly, their legal status, and manner of incorporation as well as the techniques for carrying on their activities and overseeing them in order to achieve the cooperative targets of insurance without prejudice to the conclusive provisions and fundamental principles of the Islamic Law (Sharia’h).

3. Until the law referred to in the foregoing clause is issued, the rules and regulations currently applicable to insurance and agencies dealing with it shall remain in effect.

Article 1027:

Without prejudice to the provisions of the foregoing Article, insurance may be made against risks resulting from personal accidents, work emergencies, burglary, breach of trust, motor car accident liability, civil liability and all accidents against which insurance is made according to the prevailing practice and special laws.

Article 1028:

Any of the following conditions, if included in the insurance policy shall be void:

a. The condition that calls for the lapse of the right to insurance by reason of breach of law unless such a breach involves a criminal offence or willful felony.

b. The condition that calls for the lapse of the right of the insured person because of his delay in giving notice of the insured accident to the authorities concerned, or in producing the documents if it appears that the delay is due to a reasonable excuse.

c. Every printed condition now shown conspicuously, if it deals with any of the conditions that lead to the invalidity of the contract or lapse of the right of the insured person.

d. Arbitration clause, if it is not contained in a special agreement separate from the general conditions printed in the insurance policy.

e. Every arbitrary condition whose breach appears to have no effect on the occurrence of the insured accident.

Article 1029:

1. It may be agreed to exempt the insurer form payment of damages if the beneficiary has paid the damages to the injured party without the consent of the insurer.

2. Such an agreement may not be invoked if it is proved that payment of the damages is in the interest of the insurer.

Article 1030:

The insurer may subrogate the insured person in any liability for damage paid by him in legal actions filed by the insured against the person causing the damage which resulted in the liability of the insurer unless the person who has caused the unintentional damage is one of the ascendants and descendants of the insured person or one of his spouses or those cohabiting with him, or a person for whose acts the insured person is responsible.

Article 1031:

Provisions dealing with different insurance contracts other than those provided for in this law shall be organized by special law.

Article 1046:

In life insurance, the insurer shall be liable to pay to the insured or the beneficiary the amount agreed on upon occurrence of the insured accident or upon maturity of the time provided for in the contract without need to prove the harm inflicted on the insured or the beneficiary.

Article 1047:

Life insurance of a third party shall not be effected without his written consent prior to conclusion of the contract. However, if he is legally incompetent, the contract shall not be concluded without the consent of his legal representative.

Article 1048:

1. The insurer shall not be liable to pay the insurance amount if the insured commits suicide and he shall refund to the beneficiary an amount equal to the amount of the insurance reserve unless the beneficiary proves that the suicide was not intended for obtaining the insurance money and in this case, all premiums paid shall become due after deduction of the necessary expenses therefrom.

2. If the suicide is not committed voluntarily or consciously due to a cause that leads to the loss of will, the insurer shall be liable to pay the full amount of the insurance agreed upon and the beneficiary shall prove that the person who has insured his life was lacking will-power at the time of the suicide.

Article 1049:

1. The insurer shall be discharged of his obligation if the life insurance is made in favor of another person and the insured intentionally caused the death of said person, or if the death occurred by instigation from the insured.

2. If the insurance is made in favor of a person other than the insured and said person intentionally caused the death of the insured, or if the death has occurred by instigation from him, he shall be deprived of the amount of the insurance. However, if what has happened was an attempt to cause death the insured shall have the right to replace the beneficiary with another person.

Article 1050:

1. The insured may stipulate that amount of the insurance be paid to persons designated in the contract or to whomever he may designate at a later time.

2. If the insurance is made in favor of a spouse, children, descendants or heirs of the insured, the amount of the insurance shall accrue to the person who proves such capacity upon the death of the insured. However, if the heirs are the beneficiary, the amount of the insurance shall be distributed among them according to the legal shares of inheritance.

Article 1051:

The insured person who undertakes to pay regular premiums shall have the right to terminate the contract at anytime provided that he notifies the insurer of his desire in writing and he shall be released of the subsequent premiums.

Article 1052:

1. Neither incorrect information regarding the age of the person whose life is insured nor erroneous statements in respect thereof shall not render the insurance policy void unless the real age of the insured exceeds the limit specified in the insurance regulations.

2. However, if the untrue information or erroneous statements cause premiums to become less than what is to be paid, the insurance shall be reduced in proportion to the difference between the premium agreed on and the premium required to be paid according to the real age.

3. If the premium agreed on is greater than what is required to be paid according to the real age of the insured, the insurer must refund the amount overpaid to him and he must reduce the subsequent premiums to the limit which is commensurate with the real age.

Article 1053:

If a life insurer pays the amount of the insurance, he shall not be entitled to subrogate the insured or the beneficiary in his rights vis-à-vis the person who has caused the insured against incident or vis-à-vis the person who is responsible for it.

Article 1054:

The amount of insurance received by the insured or the beneficiary at the end of the period provided for in the contract must not include any usury interests.

Article 1055:

Amounts agreed upon to be paid on the death of the insured shall not be included in his legacy.

Annuities in the UAE

The Civil Transactions Law, Federal Law No. 5 of 1985:

Article 1022:

1. A person may undertake to pay another person a regular annuity without a consideration.

2. If such an obligation pertains to education, medical treatment or maintenance, it must be fulfilled as is customary unless the obligation provides for otherwise.

3. Such an obligation shall not be valid unless it is written.

Article 1023:

1. The obligation for payment of such annuity may be made for the life of obligor, obligee, or any other person.

2. The absolute obligation shall be considered perpetual for the life of the obligor unless it is otherwise agreed.

Article 1024:

If an obligor fails to fulfill his obligation, the other party may apply for performance of the contract.

Article 1025:

If the annuity has been made for the whole life of the promisor and the promisor dies before the death of the oblige, and payment of the regular annuity has not yet fallen due, the oblige shall become entitled to a party of the annuity proportionate to the period that has elapsed until the death of the promisor within the customary limits and he shall make recourse against the legacy since this being similar in its nature to the will unless otherwise agreed.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance