UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for July, 2011

The Gold Dinar and the Role of Money In Islam

Sheikh Zayed Mosque at Night, Abu Dhabi, UAE 



Serve Allah and join not any partners with Him: and do good – to parents, kinsfolk, orphans, those in need, neighbors who are near neighbors who are strangers, the Companion by your side, the wayfarer (ye meet), and what your right hand possess.  (4:36)[1]

The gold dinar is referred to in the Qu’ran in various surahs, indicating that it is the preferred vehicle of expenditure and medium of exchange along with the silver dirham.  However, if gold dinar and silver dirham were not available, then trading in commodities was allowed.

Shiekh Imran Hosein observes that (2007:14): “Abi Sa’id al-Khudri reported Allah’s messenger as saying, “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt.  (When a transaction is) like for like, payment being made on the spot, then if anyone gives more or asks for more, he has dealt in Riba, the receiver and the giver being equally guilty.  (Sahih, Muslim)”[2]

Although fiat money is not expressly prohibited by the Qu’ran, fiat money defeats the Islamic concept of the role of money, which ideally should be in the form of the commodities such as gold and/or silver and used as a medium of exchange and measure of value.  In Islam, it is permissible to trade money for commodity, commodity for commodity, however, not money for money as this produces interest (riba).  In order to purify the economic system of this M-M occurrence (interest), the basis of transaction should be commodity such as gold.  It is the endogenous Islamic money later replaced by fuluws.

Dr. Nik Nozrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan state that issuing currency in gold would be advantageous due to the fact that (2003:243): ‘It is commodity based and therefore has intrinsic value; The intrinsic value would remain stable notwithstanding the passage of time whereas paper money can rapidly fluctuate in accordance with inflation (the rise and fall of interest rates); It does not need a government to issue it, in fact, it does not need rules or regulations, laws or official control.  It only needs the individual freedom to possess and use gold and silver coins, with an implicit elimination of all taxes imposed on their use; It is a naturally international currency notwithstanding different names and various weights and standards; It cannot be inflated by printing more of it; it cannot be devalued by government decree and unlike paper currency it is an asset, which does not depend upon anyone’s promise to pay.’[3]

The use of gold would lead to a more stable economy where transactions are based on true money rather than false money or credit and would eventually lead to the cleansing of the capitalist system of interest and its subsequent pitfalls. Transacting within a system based on debt with paper money, which is in essence issued debt and where all transactions are based on debt can only lead to more debt.  As paper money is devalued at the whim of the bankers who control the money supply in a system entirely based on debt within a framework of interest and speculation, inflation further kills the purchasing power of paper money.  Not only does this devalue currency, however, it devalues all of one’s labor efforts, asset values, and the future.

Fiat money is based on supply and demand and may lose its’ value without notice due to economic crisis or the collapse of the issuing government or other events engineered by bankers.  According to Ezry Fahmy Bin Eddy Yusof (taken from Umar Vandillo[4] (2002)), “fiat money is basically a piece of paper not backed by any specie, whose legal value is determined by the compulsion of State Law.  Therefore, in other words, the fiat and even credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender.”[5]

Ezry Fahmy Bin Eddy Yusof explains that, in capitalist theory, money has three main functions including medium of exchange, unit of account, and store- of -value.  As a medium of exchange, money is used as an intermediary for trade. A unit of account is a standard numerical unit of measurement of the market value of goods, services, and transactions.  A unit of account is a pre-requisite for the formulation of commercial agreements that involve debt.  The store- of- value is known as an act of a store of value or in other words, the money must be reliably saved, stored, and retrieved.[6]

Toutounchian elaborates on the function of fiat money in the capitalist system, which is built upon the foundations of interest, speculation, and uncertainty.  He asserts that within capitalism (2009:72), “the store- of -value function of money equates to a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money – none of which can be studied independently from the rate of interest.”  He says (2009:72): ‘speculation, in any market, produces a rate of interest in terms of itself.”[7]  Toutounchian says that in an Islamic economic system, which is riba-free and presumably based on the gold dinar (2009:78), “money can no longer perform the conventional store-of-value function.  No speculation in any market is allowable because of the interest (Rate) that it naturally bears.  All in all, there is a one-to-one correspondence between the store-of-value function of money and speculative demand for money.”[8]  Without speculation, interest, and uncertainty, we would ideally have a stable economic system based upon gold dinar transactions, absent of fictitious crashes and minus unemployment and inflation and where variables cancelled each other out to produce harmony.

In capitalism, Toutounchian explains that unemployment and inflation are the normal offspring of a system based upon interest, uncertainty, and speculation.  He says that (2009:79): “Speculation in any market brings about income for the major speculators behind the scenes.  The gains are enjoyed by a few and the losses borne by the rest of society.  The money whirlpool, which emerges from every speculative activity does not allow the equality between saving (S) and investment (I) to hold. This means that speculation and the interest bearing on it produces a savings gap; that is S>I.  Hence, the necessary condition for full employment is never satisfied.  The loss to society is the cost of unemployment.”[9]  He says that (2009:78): “Uncertainty – artificial risk – is an essential element in all speculative activities, the sole purpose of which is to make the environment suitable for a few speculators to make a profit.  Such a risk manifests itself directly in the rate of interest.”

Toutounchian explains that (2009:80), “There are two reasons to believe that in an interest- free Islamic economic system, money cannot be speculated upon: firstly, it is an impure public good; and secondly, speculation on any commodity in any market, which brings forth with it a rate of interest is totally prohibited.  These factors bring about equality between saving and investment, the consequence of which is full employment.”[10]  Therefore, the abolition of interlinked speculation and interest in an interest-free Islamic economic system brought about by the introduction of the gold dinar eliminates the classical capitalist store-of-value function of money and would restore the original Islamic function of money as medium of exchange and measure of value.

Choudhury explains (2007:89), “In development regimes with the supply of saving (S) being either higher or lower than the demand for investment (I), there will be either upward pressure on interest rates or interest rate volatility will appear.  These will adversely affect capital market and real economy linkages…When savings (S) exceed investment (I), potential financial resource withdrawal, and thereby debt, are caused by the financing of the potential output gap.  When investment (I) exceeds savings (S), there is excess demand for funds.  Consequently, debt financing and increasing interest rate in the face of scarcity of funds draw down investment once again.”  According to Toutounchian, as long as we exist in an economic framework built upon speculation, there will exist a savings gap, which according to Choudhury, will produce debt-financing and increasing interest rates, which will draw down investment.  This cyclical whirlpool of speculation, interest, and uncertainty can only result in a cyclone of volatility and devaluation of currency and investment.

Choudhury says that (2007:89): “In between these scenarios, when savings (S) equate to investments (I), interest rates decrease.” Choudhury explains that (2007:89): Keynesian macroeconomics refers to this state of the economy as the low-level equilibrium trap with low interest rates and a corresponding expansion of potential output.[11]  This can only be brought about if we subtract speculation from the economic framework and this in turn is only possible if we transact in an interest free system based upon gold dinar, where money serves as measure of value and medium of exchange rather than store-of-value, which according to Toutounchian, results in (2009:72): “a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money.”

Choudhury states that (2007:86), “There is an inverse relationship between interest rate and real rate of return.  Therefore, if savings increase under the impact of a high interest regime, then all along, the real rates of return in productive outlets will remain low…Consequently, real output and rates of return will be discouraged, while savings with higher interest rates continue to be attractive…this kind of withdrawal by the route of savings means continuously increasing loss in potential output.”[12]  Therefore, as long as interest rates remain high in the cyclical whirlpool caused by the store-of-value function of money in capitalism, we can never grow because this results in increasing loss in potential output.  Therefore, development is halted and we shrink rather than expand.

Choudhury says that (2007:87), “Savings accumulated in banks go to build up the excess reserves and the statutory reserves.  The excess reserve becomes the source of multiple credit creation by interbank loans.  Part of this rate is paid to customers as interest to maintain the incentive to save and continue on the saving process.  A higher differential is retained with the banks as surpluses from the multiple credit creation generated by interbank interest rates…The savings as financial withdrawal at the time it is done causes both a potential loss of output that could otherwise have come from real returns, and it represents contrarily an amount that must now come from multiple credit creation, which generates bank interest related to profit and income.  Thus, the interest on the principal is not generated productively. It comes out of nothing, i.e. as paper money through multiple credit creation.  Such interbank and interproject or clientele loans are multiplied by interbank lending at given interest rates to produce compound interest.”[13]  In our fractional reserve banking system, we need interest to produce debt so that we can create debt by issuing debt (money) to produce profit by keeping everyone in debt.  As long as interest is compounded, money- lenders  grow rich by slowly stealing the value of your money until you reach a position where you can no longer get out of debt in this lifetime or any lifetime in the future.

Dr. Nik Nozrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan clarify this process by explaining that (2003: 242): “Fiat money is issued by a central bank to which the government owes money and will have to pay interest for the use of that money.  This is of course (riba) interest.  Then, the money is circulated in the market and lent by commercial banks to earn interest without any real economic activity, which would be (gharar) uncertainty.  In recent times, the currency speculators earned their notoriety by flagrantly manipulating weaknesses in the international monetary regime to influence the rise and downfall of currencies.  Their excessive speculative maneuvers are clearly (maisir) gambling as the effects have caused absolute disasters to economies.”[14]

In Islamic thought, gold as a commodity can help to avoid transacting within a monetary system, which is inherently based on (riba) interest, (gharar) uncertainty, and (maisir) speculation.  If governments rather than banks controlled the supply of gold in circulation even better as bankers would lose the power to wreak havoc and engineer crises and war for profit.  When the laws of man overpower the laws of God, we get an invisible prison creating hell on earth where all of humanity is locked into debt servitude to the banking elite, living each day purely within the profit motive of the bankers, whom make money from the exchange of money for money or interest.  In this process, 99% of humanity loses purchasing power by the day while the bankers manipulate the monetary system purely out of self-interest.  If we injected Divine law into the monetary system, for example, by transacting in gold dinar and purifying the capitalist system of (riba) interest, (gharar) uncertainty, and (maisir) speculation, slowly life would be pumped back into the economy and people and nations would break free from their shackles.

It is not righteousness that ye turn your faces towards East or West; but it is righteousness to believe in Allah and the Last Day and the Angels, and the Book, and the Messengers: to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayers, and practice regular charity, to fulfill the contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and throughout all periods of panic.  Such are the people of the truth, the God-fearing.  (2:177)[15]

[1] The Qu’ran.

[2]  Hosein, Imran N. (2007).  The Gold Dinar and Silver Dirham: Islam and the Future of Money.  Available at: <URL:> Access Date: 22 October, 2012

[3] Thani, Dr. Nik Nozrul; Abdullah, Mohamed Ridza Mohamed; and Hassan, Megat Hizaini (2003). Law and Practice of Islamic Banking and Finance. Selangor, Malaysia: Sweet and Maxwell Asia.

[5] Bin Eddy Yusof, Ezra Fahmy (2009). The Role of Money as a Medium of Exchange and Price of Goods Sold (thaman al-Mabi) According to Islamic Law of Transactions.  Available at  <URL:> Access Date: 22 October, 2012.

[6]Bin Eddy Yusof, Ezra Fahmy (2009). The Role of Money as a Medium of Exchange and Price of Goods Sold (thaman al-Mabi) According to Islamic Law of Transactions.  Available at  <URL:> Access Date: 22 October, 2012.

[7]Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.  

[8]Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

 [9] Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

[10] Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

[11] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[12] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[13] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[14] Thani, Dr. Nik Nozrul; Abdullah, Mohamed Ridza Mohamed; and Hassan, Megat Hizaini (2003). Law and Practice of Islamic Banking and Finance. Selangor, Malaysia: Sweet and Maxwell Asia.

[15] The Qu’ran.

Project Finance and Raising Equity Capital in Islamic Finance: Al-Muqaradah Bonds

Is Islamic finance debt slavery in another form?  I would have to argue that Islamic finance in its true form does not constitute debt slavery, however, if instruments and products are developed in a manner which are not in conformity with the Sharia’h, then we may witness the emergence of a morphed version of Islamic finance based on misinterpretation of Islamic principles, which if left unregulated, may continue to cement us in a form of debt slavery whereby the powerful continue to enslave the masses in invisible chains of debt incarceration.  It’s time to break free from prison.  The answer lies in developing the Islamic finance industry in the correct manner with the proper regulation and dispute resolution mechanisms.  Otherwise, Islamic finance will be unknowingly harnessed by the powerful elite which currently oppress the masses and mold the world economy to fit their own needs through the Bretton-Woods institutions and system and this elite class will then distort and misuse Islamic finance to continue their same agenda under an ethical guise.  Who or what is protecting the Islamic finance industry from this clandestine project?

A Muqaradah bond is an Islamic bond in which no interest is earned but whose market value varies with expected profits.  (A) The term is based on the conclusion of lawful Muqaradah with capital on one hand and labor on the other.  The shares of profit are mutually determined by the parties beforehand by a definite proportion of the total.  (B, 72)  It is called a bond because it is terminal in nature…its maturity is determined by the tenure or project completion date.  (A)

In essence, the Muqaradah bond is a financial instrument with the purpose of raising equity capital to finance a project or business.  The unit price is determined by dividing the Muqaradah capital by the number of units issued.  It is registered under the bondholder’s name (recorded bonds) all of which represent the common asset in the Muqaradah capital.  (B, 73)

Mudharabah is another name for the Muqaradah Bonds.  (B, 74) The Mudharabah concept involves a process whereby the financiers purchase raw materials and equipment from the supplier.  The goods are then sold to the customers at a mark-up price.  In fact, the Muqaradah certificate is an investment instrument arising from a valid Mudharabah contract that evidences the rights and ownership of the Rah al-mal (owner of the capital) over the capital invested in the project.  (B, 74)

Muqaradah Sukuk Bonds (MSB)

A Muqaradah Sukuk Bond (MSB) represents common ownership and entitles the bondholders shares in the specific project in which the bonds have been issued for.  The duration of this ownership is limited to the duration of the specific project or business on which the Muqaradah is based.  On the ownership of the Muqaradah bond, a bondholder is entitled to all the rights as specified in the Sharia’h in the matter of sale, gift, mortgage, succession, and other matters.  (A)

The contract (‘aqd) in Muqaradah Sukuk Bond is based on the official notice of bonds sale, mainly the Prospectus.  Subscription of the bonds is considered the ‘offer’ from the investor and the approval of the issuer is regarded as the ‘acceptance’ in the formation of the Muqaradah contract.  The official notice of sale must contain the conditions which are required by Sharia’h in Muqaradah (Mudharaba) ‘aqd’ contracts as well as clear information concerning the capital and the proportion and distribution of profits between the investors and the issuer in accordance with Sharia’h rules.  (A) The issuer and the investors of the Muqaradah bond are bound by the Sharia’h.

Upon the expiry of the specified time period of the MSB, the bondholder has the right to transfer the ownership of the bond by sale or trade in the securities market as long as this has been agreed by the issuer or mudarib and is specified in the contract.

Disposal or Sale

  1. After the subscription period is over and before the operation of the specific project, if the Muqaradah capital is still in the form of money, the trading of bonds would be based on the exchange of money for money and therefore must satisfy the rules of sarf.
  2. If the Muqaradah capital is still in the form of debt, the trading of bonds must be based on the principle of Islamic debt trading or exchange: debt for debt.
  3. If the Muqaradah capital is in the form of money, debt, assets and benefits, the trading of bonds must be based on the market price evolved by mutual consent.  (A)

Distribution of Profits

The profits realized from such investment should be distributed between the investors and the issuer according to the Muqaradah agreement.  (B, 74)  In the distribution of profits, factors need to be taken into account such as the ratio of the  issuer’s share with the investor’s share together with the ratio of the investors’ and  issuer’s ownership of the assets in accordance with his or her participation to the total value of the company or project assets.

In the Muqaradah Sukuk Bond instrument, it is not permissible to guarantee the investor a fixed lump- sum profit amount.  (B, 73) However, there are scholars who purport that it is permissible to provide, for example, that for the first RM1 million (Malaysian currency), the sum can be allocated in preference to one party and the balance to the other party.

Other scholars purport that where the investors agree that if the profit is over a particular ceiling, then one of the parties may take the additional profit.  Several scholars also advocate that if the profit is below or equal to the amount of the ceiling, then the distribution of profit may be in accordance with a pre-determined ratio as specified in the transaction agreement.

It is important to note that Muqaradah bond ratings represent the probability of realizing expected returns rather than the ability to meet scheduled payments as there is no predetermined profit to be paid at agreed intervals.  (B, 74)


The Mudarib


The issuer in a Muqaradah bond is regarded as the depository of the common fund and the project assets are entrusted to him or her to administer similar to the common law concept of a trustee. (mudarib)  In Muqaradah, the mudarib is held to similar standards of a trustee in the common law.  For example, any act of negligence or dishonesty committed by the mudarib shall render him or her liable for losses.  The issuer has the right to purchase bonds offered for sale by other according to the prices declared from time to time by the issuer similar to the common law concept of a right of first redemption.  (B,73)

  1. The mudarib realizes profit from his or her investment in Muqaradah bonds according to a pre-determined ratio with the investors according to the agreement.
  2. Mudaribs share with the investors the ownership of the project assets in a ratio according to his or her participation to the total value of the company/project assets.
  3. It is not permissible to guarantee a fixed lump sum amount of profits.
  4. The mudarib has the right to purchase bonds offered for sale by others according to the prices declared from time to time by the mudarib.
  5. The mudarib is considered as the depositary of the common fund and the project assets entrusted to him or her.  If he or she is negligent or has committed dishonesty leading to losses, he or she shall be liable for the losses.  (A)

Guarantee of Muqaradah Bonds


A third party guarantor may guarantee to compensate any losses sustained in the project.   However, such guarantee must be concluded in a separate contract from the main contract.  The issuer is not permitted to guarantee the capital of the Muqaradah itself as this would amount to a situation where the investor would not bear any loss in the value of the bonds.  Furthermore in this structure, the issuer cannot guarantee the investor a fixed amount paid as profit.  On the other hand, it is permissible for both the issuer and the investor to agree to put aside a pre-agreed portion of the profits as reserves in order to provide protection or to meet any losses which may arise during the project.  (B, 74)

  1. It is permissible for a third party to promise to compensate any losses sustained in the project.  However, this guarantee should be concluded in a separate contract and not included in the main contract of the Muqaradah bond between the issuer and the investor.
  2. It is not permissible for the issuer to guarantee the capital of the Muqaradah (the investor would not bear any loss in the value of the bonds) or to guarantee the investor a fixed amount paid as profit.
  3. It is permissible for the issuer and the investor to agree to put aside a specific or certain portion of the profit as reserves in order to provide for protection or to meet any losses arising during the implementation of the project. (A)

Muqaradah bonds do not need any form of securitization since the Muqaradah bond is a genuine asset.  The sale of Muqaradah bonds to the investors is also free from any discounting mechanism as the need for discounting no longer exists as the value of the bond depends on company performance rather than movement in interest rates.  Thus, when investors wish to dispose the Muqaradah bonds before maturity, the investors may do so on the basis of project performance which implies that the bonds can be sold at below or above face value. (A)

Muqaradah bonds provide an alternative to interest-bearing financial instrument.  There are many Islamic finance instruments in existence today which may allow interest in other forms or do not comply with Sharia’h rulings.  Unfortunately, the proliferation of such instruments is jeopardizing the success of the Islamic finance industry.  (A)  A pure Islamic financial system would contain a set of rules and regulations governed strictly by Sharia’h principles which would not give an opportunity for usurious financial instruments such as debt related bonds to evolve.  (B, 72)  What is it about the current Islamic finance industry which is allowing this virus to infect the industry?  A closer examination may be needed in order to detect the problem and the solution.

If the Islamic finance industry is to evolve in its true form, practitioners must develop financial instruments which adhere to Sharia’h rules such as the Muqaradah bond and expel all usurious financial instruments currently in use today.  (A)  Furthermore, solid and reliable regulation and dispute resolution mechanisms must be put in place in order to secure the future evolution of the Islamic finance industry in its pure form.

Al-Muqaradah Bonds as the Basis of Profit-Sharing by Walid Khayrullah

End Notes:

A. International Journal of Islamic Financial Services Vol. 1 and No. 2. (1992)

B. Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan. (2003)

Living in Debt Bondage


From the moment we are born, no matter where in the world, we are choking on a dollar bill. Someone has made a profit off of our birth and many will continue to profit off of our very existence through schemes such as conventional insurance and banking.  In fact, in our current world economic system fashioned by the Bretton Woods institutions, it is just as profitable to enslave blood as it is to spill blood.  Enslave, spill, enslave, spill and enslave, bomb, and profit.  Tax me to death, make obtaining an education impossible for the vast majority, however, a lifetime economic burden for some, and a privilege for the elite few.  Brand me Harvard, Yale, or Oxford and make me the master of the debt bondage system.  Yes I want to live off debt slavery!  I want to see the whole world suffer by being bonded into an activity by invisible chains which squeezes every ounce of creativity from that human life, wrecks the environment, and kills spirituality.  Debt bondage is the system we are living in now but there is a way out.  If  we take a close look at Islam and the Qu’ran, we might discover that the Prophet Muhammad lived in a time in Mecca when all the people around him were enslaved in a system of grueling debt bondage.  However, through divine revelation, He was able to set everyone free.  The answer to freeing ourselves from the current system of debt bondage, where many of us are already dead or barely living, can be found in the true interpretation and application of Islamic finance.  Every culture and religion is a hidden treasure and has a gift to offer humanity.  Islamic finance is like a beautiful untouched rose whose radiant fragrance is being whiffed around the world and whose intricate beauty offers hope of setting us free.  Let’s discover how to free ourselves of debt bondage and restore ourselves as human beings that respect and learn from one another rather than enslave, exploit, and kill one another for profit from the cradle to the grave.

Institutions Related to the Planning, Regulation, and Supervision of the International Islamic Finance Industry



The International Financial Services Board (IFSB) (Based in Kuala Lumpur, Malaysia)

The International Financial Services Board (IFSB) was established in 2002 with the purpose of acting as an association of central banks and monetary authorities and other institutions that are responsible for the regulation and supervision of the Islamic Finance Services Industry.

In this capacity, the IFSB serves as an international standard-setting organization that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry related issues, as well as organizes roundtables, seminars and conferences for regulators and industry stakeholders.

Published Standards

International Islamic Financial Market (IIFM) (Based in Bahrain)

IIFM is the global standardization body for the Islamic Capital & Money Market segment of the IFSI. Its primary focus lies in the standardization of Islamic products, documentation and related processes.

IIFM was founded with the collective efforts of Central Bank of Bahrain, Bank Indonesia, Central Bank of Sudan, Labuan Financial Services Authority (Malaysia), Ministry of Finance (Brunei Darussalam) and Islamic Development Bank (a multilateral institution based in Saudi Arabia).  Besides the founding members, IIFM is supported by its permanent members namely State Bank of Pakistan and Dubai International Financial Centre Authority (UAE). IIFM is further supported by a number of regional and international financial institutions as well as other market participants as its members.

The principle objective of the IIFM is to encourage self-regulation for the development and promotion of the Islamic Capital and Money Market segment. IIFM, in partnership with its member institutions, creates initiatives that include issuance and trading guidelines; best practice procedures; standardization of financial contracts leading to product innovation; market recommendations and infrastructure development. In particular, IIFM promotes the emergence and integration of Islamic financial market into mainstream global financial markets.

IIFM acts as a market body in the development and maintenance of uniformity, assisting with standards benchmarking for transparency and robustness of Islamic financial markets.

IIFM plays an active role in the establishment, development and enhancement of trading, settlement and related systems infrastructure and involves itself with several challenging issues of the Islamic financial market such as Islamic Hedging, Secondary Market Documentation and products i.e. possible Islamic Repo, Treasury Murabaha contract mechanisms and similar elements vital to a well developed and functional Islamic financial system.

The IIFM will create the financial instruments and maintain an active market for about 200 Islamic banks and financial institutions around the world.  The instruments will be endorsed by the IIFM’s Islamic Sharia’h Committee.

Sharia’h Advisory Panel


AAOFI or The Accounting and Auditing Organization for Islamic Financial Institutions   (Based in Bahrain)

The Accounting and Auding Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia’h standards for Islamic financial institutions and the industry.

Professional qualification programs (notably CIPA, the Shari’a Adviser and Auditor “CSAA”, and the corporate compliance program) are presented now by AAOIFI in its efforts to enhance the industry’s human resources base and governance structures.

AAOIFI was established in accordance with the Agreement of Association, which was signed by Islamic financial institutions on 1 Safar, 1410H corresponding to 26 February, 1990 in Algiers. Then, it was registered on 11 Ramadan 1411 corresponding to 27 March, 1991 in the State of Bahrain.

As an independent international organization, AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide.

AAOIFI has gained assuring support for the implementation of its standards, which are now adopted in the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s standards and pronouncements.

Key Publications

Islamic Corporation for the Development of the Private Sector (ICD) (Based in Jeddah, Saudi Arabia)

‘The ICD is an independent international multilateral financial institution created for the development of its member countries through investment in the private sector and the provision of financial services to those private sector entities.  Its authorized capital is US $1 Billion and its paid up capital is US$500 million.  The structure of the subscribed capital is as follows: Islamic Development Bank – 50% member countries; 30% public financial institutions of member countries – 20%.

The ICD has the following objectives: (1) Identifying opportunities in the private sector that could function as engines of growth; (2) providing a wide range of Sharia’h compliant compatible financial products and services; and (3) expanding access to Islamic capital markets by private companies in the IDB member countries. In achieving these objectives, the ICD seeks to play a role in mobilizing funds for private sector investment as well as acting as a catalyst in privatization programs and restructuring of companies in member countries by providing advisory services to both public and private sectors and encouraging the development of Islamic capital markets according to Sharia’h principles.  The ICD’s core-business activity, the direct financing of projects or companies is accomplished through the provision of equity and term financing to commercially viable projects/companies for enterprise restructuring and modernization.  The ICD develops intermediary investment vehicles such as leasing companies and investment funds to reach the private sector in cooperation with similar multilateral and national financial institutions.’  (The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

International Islamic Rating Agency (IIRA) (Based in Bahrain)

The IIRA was established as the first rating agency in the Islamic Finance Industry.  It was set up to support Sharia’h compatible banks and mutual funds including assisting their entrance into international markets.  The IIRA was established with an authorized share capital of USD 10 Million and a paid-up capital of USD 2 million.


  • To become the ultimate reference point for credit ratings in accordance with Sharia’h principles.


The mission of the Islamic International Rating Agency is to foster development of the financial markets in which it operates through provision of –

  • Ratings for Sovereigns;
  • Traditional bond/sukuk Ratings and Rating framework to permit rational pricing;
  • Shari’a Quality Ratings to reflect institutional compliance;
  • Investment quality and/or Issuer ratings;
  • Specialist, focused Corporate Governance Ratings;
  • A periodic summary bulletin of market activity and ratings;
  • Economic commentary from a credit and investment quality perspective;
  • Detailed rating reports to enhance the investment decision process;
  • Sector reports clarifying company status within industry groupings;
  • A record of actual and prospective money and capital market activity;
  • Analysis of financial institution counterparty risk for treasurers;
  • Seminars on the analytical principles employed by rating agencies.

The General Council for Islamic Banks and Financial Institutions (GCIBFI) (Based in Bahrain)

Founded in 2001 with the mission of working for the support of the Islamic Banking industry with a view to promoting it through the dissemination of appropriate information and accurate data, the objectives of the organization are as follows: (1) To provide information to the public regarding the concepts and rules governing Islamic banking and finance practices; (2) To enhance cooperation between members of the GCIBFI and other related institutions, such as regulatory bodies, in order to achieve common objectives; (3) To help the GCIBFI members face challenges and problems in a collective manner in order to pave the way for success; (4) To prepare and disseminate information pertinent to Islamic banking practices.’ (The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

The Institute of Islamic Banking and Insurance (Based in London)

This institute was set up in 1991 in London with the purpose of providing education and training in Islamic Finance.

With members, students and other individuals and organizations that span the globe, the Institute brings together people of all faiths, and those with no faith, to create  the awareness of an alternative financial system that is true to the spirit which should mark every financial service.  Islamic banking and Islamic insurance follow the moral principles that are emphasized  in Islamic belief with attention to the human dimension of the economy.

The Aim of the Institute is to
Create a wider base of knowledge and understanding of the principles and methodologies of Islamic banking and Islamic insurance by delivering the highest quality of professional education, training and research relevant to the needs of the industry and raise awareness across all financial disciplines of the positive benefits of incorporating moral and ethical aspects in all dealings.

The Institute will achieve its aims through the following strategic objectives:
  • To develop, organize and promote for the public benefit, programs of education, training and research in Islamic finance, banking and Islamic insurance and related financial systems;
  • To develop, organize and conduct examinations and award qualifications, certificates, diplomas and other forms of professional accreditations;
  • To advance education and knowledge on the subject of Islamic finance, Islamic banking and Islamic insurance and to promote research for the public benefit in all aspects of the subject;
  • To act as an authoritative body for the purpose of consultation and research in matters of education, training, professional development, industry practice or public interest concerning Islamic finance, banking and insurance.

The Islamic Research and Training Institute (IRTI) (Based in Saudi Arabia)

The IRTI is the research and training arm of the Islamic Development Bank (IDB).  The purpose of the Institute is to conduct research in order to ensure that the economic, financial, and banking activities of the IDB in Muslim countries conform to Sharia’h and to extend training facilities to IDB personnel engaged in economic development activities in the Bank’s member countries.

Paper Published by the Institute ‘Contemporary Practices of Islamic Finance Techniques’

The Dow Jones Islamic Market Indexes

The Dow Jones Islamic Market Index family includes thousands of broad-market, blue-chip, fixed-income and strategy and thematic indexes that have passed rules-based screens for Shari´ah compliance. The indexes are the most visible and widely-used set of Shari´ah-compliant benchmarks in the world.

To determine their eligibility for the indexes, stocks are screened to ensure that they meet the standards set out in the published methodology. Companies must meet Shari´ah requirements for acceptable products, business activities, debt levels, and interest income and expenses. The screening methodology is subject to input from an independent Shari´ah supervisory board. By screening stocks for consistency with Shari´ah law, the indexes help to reduce research costs and compliance concerns Muslim investors would otherwise face in constructing Islamic investment portfolios.

In sum, the Dow Jones Islamic Market Indexes were created for people who desire to invest according to Islamic investment guidelines.  The indexes track Sharia’h compliant stocks from around the world and all securities selected for the Dow Jones Islamic Market Indexes are acceptable under Sharia’h law.  A Sharia’h Board of Scholars advises the Dow Jones on Sharia’h compliance to ensure acceptability under Sharia’h law.

Islamic Offshore (Labuan)

An Example For the World


In November 1989, the Malaysian government announced that the Federal Territory of Labuan would be given the status of an International Offshore Financial Center.  (IOFC)  Consequently, Labuan Offshore Financial Service Authority (LOFSA) was established on February 15, 1996 under the Labuan Offshore Financial Services Authority Act 1996.  LOFSA initiated its operations in March of 1996 and is the single regulatory authority of the financial services sector  in Labuan.

Labuan Offers the following non-exhaustive List of Services:

Islamic Financing

Islamic Insurance (Takaful)

Islamic Reinsurance (re-Takaful)

Islamic Trust

Islamic Investment Funds

Islamic Capital Market Instruments

Islamic Code of Conduct

The Islamic Code of Conduct is based on Shari’ah principles and is the origin and basis of Islamic banking/insurance and finance principles with a strong emphasis on Muamalat (social, financial, and economic affairs of personal relationships).  Under this principle, legislation should not contradict pre-ordained divine laws to meet the needs of society, lawmakers, or special privileged segments of business.  The Sharia’h Advisory Council (SAC) advises LOFSA on this subject.  Now, due to  innovative foresight and the creation of a solid legal framework through which to conduct business, Labuan is now at the forefront of Islamic Product Development and Islamic offshore as envisioned at the time of its inception.


Offshore Banking

Application for Offshore Banking License:

See S. 5(1)(2) of the Offshore Banking Act. (OBA)

  1. The minimum capital requirement is ten million Ringitt (S.11 of the OBA);
  2. Annual License Fee:  60,000 Ringitt (S.2 of the OBA).

Offshore banking has been defined in S. 2 of the OBA as ‘the business of receiving deposits on current account, deposit account, savings account, or any other account as may be specified by Bank Negara Malaysia, and the provision of credit facilities, in any currency other than Malaysian currency.  Accordingly, any person who accepts deposits and grants credit facilities in foreign currencies would be considered to be carrying on offshore banking business and would require a license to operate in Labuan.’

In Labuan,  it is possible for traditional offshore banks to offer Islamic products to customers with the assistance of management companies providing Sharia’h consultancy and advisory services in Islamic offshore instruments.  In fact,  the OBA was amended to allow merchant banks and Islamic banks to operate side-by-side in Labuan in 1997 as part of its’ strategy for growth.

Although Offshore Banks must follow duties as set out in the OBA, Labuan does provide banking secrecy and the expected amenities and advantages of an international offshore financial center.

Offshore Companies

In Labuan, offshore companies are incorporated under the Offshore Companies Act 1990 (OCA) under three categories:  (1) Banking Offshore Companies; (2) Insurance Offshore Companies; and (3) General Trading Offshore Companies.

For incorporation, three main documents need to be submitted:  (1) A copy of the Memorandum and Articles of the Proposed Offshore Company; (2) a Statutory Declaration by a Resident Director or Secretary; (3)  A Consent to Act as Director by every person named as a proposed director.

Trust Companies

Trust Companies can be formed under the Labuan Trust Companies Act 1990 (LTCA).  S.4(2) of the LTCA provides the following criteria for registration as a Trust Company:

  1. ‘Its authorized capital must be more than 500,000 Ringitt divided into shares of more than ten Ringitt each;
  2. At least half the amount of the nominal value of each share must remain unpaid and not liable to be called up except in the event of winding-up;
  3. It has a paid up capital of at least 150,000.00 Ringitt;
  4. It has deposited with the Accountant General Securities approved by the registrar to the value of 100,000.00 Ringitt;
  5. It is able to meet its obligations without taking into account the securities deposited with the Accountant General not taking into account its liability to its shareholders; and
  6. It has its head office or registered office in Labuan.  If its head office or registered office is not in Labuan, it must designate and notify the registrar in writing of: (a) its office in Labuan and (b) two of its officers as authorized agents of the trust company in Labuan.’

In addition, The Labuan Offshore Trusts Act (LOTA) 1996 provides for the creation and recognition of offshore trusts.

Offshore Limited Partnerships


The Labuan Offshore Limited Partnership Act 1997 (LOLPA) allows three different types of offshore limited partnership:

  1. An offshore professional partnership, which can only be formed by a professional who carries out the practice of accounting, actuarial science, engineering, or law.  The professional must have indemnity insurance cover for the prescribed amount through an insurer approved by LOFSA;
  2. An offshore project partnership, which is established solely for the purpose of undertaking the project or the business specified in the partnership agreement.  It must be specified in the partnership agreement that the partnership shall dissolve after the project is completed and all the partners must be body corporate;
  3. An offshore general limited partnership, which may be formed by any lawful person for any lawful purpose

There is almost no supervision or monitoring of the activities of Labuan offshore and trust companies.

The Labuan Offshore Securities Industry Act 1998 (LOSIA) amended by Labuan Offshore Security Industries Act 2003. (LOSIA)

LOSIA provides for the regulation of mutual funds in Labuan and for the establishment of an exchange.  LOSIA provides the legal infrastructure for setting up of offshore investment funds, the management of such funds and the provision of fund administration services.

Labuan International Financial Exchange (LFX)

The LFX was launched on November 23, 2000 and is a web based financial exchange that provides listing and trading facilities for a wide range of financial and non-financial products and Islamic products.  These include mutual funds, bonds, derivatives, insurance linked products and intellectual properties.

LFX is a wholly owned subsidiary of Kuala Lumpur Stock Exchange.  (KLSE)  The operating website of LFX  It is possible to submit licensing and listing applications via this website.

LFX is governed by LOSIA and is targeted to reach out to investment funds, debt instruments, and conventional securities.  LFX also caters to wide range of products and instruments based on Sharia’h principles and there are very few other exchanges in the world which have committed themselves to promoting, listing, and trading Sharia’h based products.  It is the only offshore exchange within the South-East Asia/Pacific region.

*[Information based on ‘Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan]

Labuan Offshore Regulations

Types of Labuan Companies

Links About Labuan Offshore

Informational Link about Labuan

IMF Report on Regulation of Labuan Financial Sector

Dubai as the Dispute Resolution Center for the Islamic Finance Industry

Dubai as the Dispute Resolution Center for the Islamic Finance Industry



There is no doubt that the Islamic Finance Industry is booming worldwide.  However, to the industry’s detriment, there does not exist a sufficient regulatory framework through which to solve disputes in Islamic Finance transactions.  If this situation persists, the Islamic Finance Industry will not survive.


Currently the practice is to have Islamic finance disputes settled by the Law of England and Wales or the State of New York often times subject to Sharia’h law.  I recognize that these jurisdictions are well-established and well-recognized for handling business transactional disputes, however, inserting these two jurisdictions in the governing law clauses of Islamic Finance contracts is a grave mistake.  First of all, these two jurisdictions generally do not recognize Sharia’h law is a system of law capable of governing a financial transaction.  However, the Islamic Financial transaction itself is rooted in Sharia’h law and principles as well as the Qu’ran.  Therefore, some aspect of Sharia’h must be applied in settling an Islamic Finance dispute to preserve the Islamic Finance transaction.  Furthermore, a judge in England and New York may have had no exposure to Islam, Islamic Finance, or Islamic culture except in a negative light.  However, a judge in the UK is more likely to have heard of Islamic Finance concepts but most likely has no grasp on Islamic Finance, its’ structures, principles, implementation, or how to resolve disputes in such situations.  Therefore, when an Islamic Finance dispute goes before a judge in England or New York, the transaction by default turns into a conventional transaction as the judge declares Sharia’h law to be invalid and applies the laws and principles of conventional finance only to the Islamic Finance transaction.


For example in 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), Lord Justice Potter confirms the judgment of Morrison J and explicitly denies that Sharia’h law could be applied to settle an Islamic Finance transaction.  In this matter, the UK judges don’t seem to recognize that the Islamic concepts themselves were born from the Qu’ran and the Sharia’h and can only be properly settled by a law that incorporates Islamic law and concepts.


According to the 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’h, 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’h 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’h.  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 hadith, 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 the 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 only was confirmed as the governing law of the contract and it was confirmed that English law does not recognize Sharia’h law.  Furthermore, even if Sharia’h law were recognized under English law, under the conflict of law rules applicable in England and Wales, according to this judgment, English law would prevail as the governing law as the governing law must be the law of a State.  Furthermore, two systems of law cannot govern a contract in England and Wales.


It is not advisable to put the laws of England or New York as the governing law for an Islamic Finance contract for the previously mentioned reasons. Alternatively, it is advisable to create a world-recognized Islamic Finance Arbitration Center (the Dubai World Islamic Finance Arbitration Center (DWIFAC)) staffed with the world’s top Sharia’h scholars to settle disputes in Islamic Finance Transactions/Contracts.  This world-recognized Islamic Finance Arbitration Center shall be based in Dubai, transforming Dubai into the pinnacle of the Islamic Finance Industry, surpassing Malaysia, Bahrain, and Saudi Arabia, and turning Dubai into the dispute resolution center for the all the world’s Islamic Finance Transactions.  The Dubai World Islamic Finance Arbitration Center (DWIFAC) could have its’ own set of rules and could have a Jurisprudence Office and Islamic Finance Education Institute attached to it.

It is imperative that the UAE legislate its’ own Federal Islamic Banking Law in conjunction to forming DWIFAC so that the parties to an Islamic Finance contract can designate the Laws of the UAE as the substantive law governing the Islamic Finance Contract.  For instance, when drafting the governing law clause of an Islamic Finance contract, it would become standard for the industry to put the Laws of the United Arab Emirates as the governing law of the contract and designate the Dubai World Islamic Finance Arbitration Center (DWIFAC) and the rules of the DWIFAC as the dispute resolution body and applicable procedural law.  DWIFAC would be staffed by the top 20 or so Sharia’h Scholars who could be chosen as arbitrator(s) for the dispute.  Most if not all of the top Sharia’h scholars have been highly educated in both Sharia’h law and conventional western finance and law and are highly capable to resolve Islamic Finance Disputes.  Not only would Dubai move to the forefront of the Islamic Finance Industry, however, Dubai would save the Islamic Finance Industry by providing effective, streamlined dispute resolution which preserves Islamic Finance concepts and through this would ensure the Islamic Finance industry’s survival into the future.

Otherwise, if the Laws of England and other western countries are designated as the governing law of an Islamic Finance contract in conjunction with or without 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 with the result that the Islamic Finance Industry would eventually die out.

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.  As only a few countries to date actually have an Islamic Banking Law, if Dubai could formulate a strong Islamic Banking Law in conjunction with the Dubai World Islamic Finance Arbitration Center (DWIFAC) – this law may become the universal Islamic Banking Law which all other nations adopt or legislate into their domestic systems.  In fact, the UAE could make agreements with other nations to use DWIFAC as the designated dispute resolution center for Islamic Finance disputes and encourage the country in question to implement the Federal Islamic Banking Law of the UAE into their domestic legal systems.  In that way, in the case that the jurisdiction of DWIFAC is successfully challenged, the court in the relevant jurisdiction would have an Islamic Banking law to apply to the dispute.

As it stands now, even the UAE does not have an Islamic Banking law, however, it has a law allowing Islamic Banks to exist. The secretary-general of the Fatwa and Sharia’h Supervision Board in the UAE, Mabid Ali Al Jarhi has called for modifications to some civil laws and the introduction of an Islamic banking law.  Al Jarhi said that Islamic banks are presently guided by their own Sharia’h boards and have policies that often differ from those of other Islamic finance houses.  He said that “To achieve a unified Sharia’h standard for Islamic finance, the civil law should be revised and the law of Islamic banking should be activated.”He added that the law governing Islamic banks was issued in 1985 but it had not been backed up by a decree and therefore that is why the law is not in existence now.

Therefore, attached to the Islamic Finance Arbitration Center, there should be an Islamic Finance Jurisprudence Office entrusted with the task of creating a unified Islamic Banking Law and to have it implemented in all countries around the world which are commercial centers.  This law may incorporate the AAOIFI standards and/ or be based on the 1985 law which was never officially enacted.


IV. The Example of Bahrain

Currently, the Kingdom of Bahrain surpasses the UAE as a hub of Islamic Finance as Bahrain houses AAOFI, the Accounting and Auditing Organization for Islamic Financial Institutions and the very popular Bahrain Institute of Banking and Finance (BIBF).  Bahrain also recently launched Bait- al- Bursa, the first Islamic Finance Division of a stock exchange (BFX) to exclusively offer electronically traded Islamic Financial instruments.  It currently monopolizes all the exchange traded business in the Islamic finance sector.  Furthermore, Bait al Bursa recently launched e-Tayseer, which is a fully automated platform for transactions in supply, purchase and sale of assets for facilitating Murabaha transactions.  E-Tayseer allows suppliers to place their assets onto the platform ready to be purchased by financial institutions.  Financial institutions can then purchase these assets and conduct Murabahah transactions with counterparties to fulfill their liquidity management requirements in a secure online environment.

V. Dubai World/Nakheel Default

The Dubai World/Nakheel debt re-structuring was essentially an Islamic Finance Dispute over a default in a Sukuk issuance. Instead of creating an ad-hoc tribunal based on a version of the DIFC insolvency laws (Decree No. 57 of 2009 Establishing a Tribunal to Decide

the Disputes Related to the Settlement of the Financial Position of  Dubai World and its Subsidiaries) this matter could have been handled at the Dubai World Islamic Finance Arbitration Center (DWIFAC)) according to the DWIFAC Rules and the laws of the United Arab Emirates including the UAE Federal Islamic Banking Law of the UAE.




Blom Bank Judgment

In the case of Investment Dar Co KSCC v Blom Developments Bank Sal [2009] EWHC 3545 (Ch) High Court of Justice Chancery Division, TID successfully claimed that to uphold the Wakalah that it had entered into with Blom Bank would be un-Islamic and a breach of its statutes.  TID won the appeal case largely because the dispute was administered by an English Court where the judge had absolutely no understanding of Islamic finance and applied conventional finance and common law to the dispute which by default turned the transaction into a conventional transaction.

The Two Claims

“The two claims were advanced in the Particulars of Claim, one on the contract itself, where it was alleged that default had been made in making payments due pursuant to the master wakalah contract and secondly a claim expressed to be based in trust founding itself also on the terms of the master wakalah contract. The master found that there was an arguable defence to the contractual claim but not to the trust claim.  TID appealed and Blom sought to uphold the decision of the master on the alternative basis that he should have got judgment on the contract claim.  The judgment that the master granted was for repayment of all the principal sums advanced or deposited and not for any profit element or as TID would have it, interest.”

Judge Perle QC in his judgment stated that the Wakalah Agreement was ‘For all intents and purposes the commercial result is equivalent to that of a deposit at interest.’  Judge Perle QC applied conventional western finance concepts to the Islamic finance transaction and came to this conclusion thereby turning the transaction by default into a conventional western finance transaction.

Judge Perle QC stated that ‘A further recital was that the contract had been entered into and signed by both the parties to regulate the mechanism and procedures for accepting the muwakkil/depositor’s funds by the wakeel and their investment in the treasury pool in the agreed manner and the payment of profit to the muwakkil/depositor upon completion of each Wakalah period.’  The judge then goes on to say that ‘Thus the form was that of an investment by TID as agent’ and further applies western concepts to the Islamic finance transaction and further turns the deal into a western finance transaction.


A Wakalah is not a deposit at interest.

According to HM Revenue and Customs, (A UK entity), a Wakalah Investment is the following:

“This is an investment product, which functions in the same way as Mudarabah, which is discussed at VATFIN8600. The difference between the two is that with a Mudarabah all the profit is divided between the parties, whilst with a Wakalah the investor receives only the agreed ratio against investment. Anything made above that ratio is kept by the financial institution and not given to the investor.

Example: An investor agrees to invest a sum with the bank for an agreed return (e.g. 5%). The bank pools the investor’s funds with the funds of other investors and its own capital and invests in Sharia’h compliant assets. At the end of a given period (e.g. a month) the bank returns the invested sum to the investor along with the agreed 5%. Any additional revenue that the bank makes on the customer’s money is kept by the bank (e.g. if the bank makes 6% then 5% is given to the customer and the additional 1% is kept by the bank). If the bank does not make the agreed percentage return then the investor gets what has been made whilst the bank gets nothing (e.g. if only 4% is achieved then the investor gets the full 4%).”

Judge Perle QC states that “That example seems to presuppose that any shortfall is at the risk of the depositor or investor so that it can fairly be seen as a true investment agency, the bank in that example keeping any surplus over the agreed return, whilst the shortfall is borne by the depositor/investor.”  However the Judge has got it wrong here again.  If TID as the agent does not reach the agreed target, than the investor or Blom retains the entire return.  However, if TID exceeds the target, TID gives Blom the funds plus the agreed 5% return and anything over that TID keeps.  Any shortfall is not at the risk of the depositor or Blom.  Either way Blom gets funds.  The risk lies with the agent TID.  IF TID does not meet the target, the investor keeps all of the return.


In this matter the Judge re-states clauses 5.4 and 5.5 of the Wakalah Agreement in question and states that ‘We appear in those circumstances to be moving away from the concept of pure agency or trust.’  However, a Wakalah is not a common law agency or trust.  The judge goes onto nullify the agreement based on the fact that the Wakalah Agreement does not meet the criteria of a common law trust.

In the judgment, Judge Perle QC repeatedly states, ‘Thus there was an unconditional obligation to pay the on account profit in the amount of the anticipated profit whether or not it had in fact been earned by the investment (so called) in the treasury pool.’  The judge goes on to say, “ That is to say, although the on account payment of the anticipated profit was expressed as an on account payment, any surplus in fact went to the wakeel, TID, as an incentive so that the anticipated profit was in fact the only profit that could be made by Blom.”  But this is how the Wakalah works. However, the judge uses this argument to discredit the validity of the Wakalah and consider it null and void.

The Judge goes on to state: “There was no provision anywhere down to that point (or later) for the muwakkil/depositor, Blom, to bear any losses should losses be made or to receive less than the anticipated profit should the actual profit be less than that.   (But this is how Wakalah works)  “On the contrary, the unconditional obligation to make an on account payment of profit in the amount of the anticipated profit was in the other direction.” (But this is how Wakalah works)

The Judge states, “Furthermore, under clause 9.11, the wakeel, TID, undertook to indemnify the muwakkil/depositor, Blom, against amongst other things, any loss it might suffer or incur as a result of any wakalah transaction or the wakeel acting as its agent.” (But this is how Wakalah works).  The Judge than states, “Thus Blom was in a position where the only risk it took was of the insolvency of TID.”  However, this is again incorrect because Blom would lose the excess profit in the event that the investment resulted in excess of a 5% return, the amount of which TID would be entitled to keep under the Wakalah Agreement.

The Judge goes on to say that ‘The Wakeel, TID, was bound to pay that sum unconditionally and the depositor, Blom, under no circumstances had the right to anymore than that sum.’

True but that is the way Wakalah Investment works.  The Judge elaborates this argument to deny the existence of a trust.  The Judge says, ‘ That was objected to before me by TID on the basis that, if one looks at the contract as a whole, and in particular the provisions for pooling of funds and the actual obligations of TID, which were essentially obligations to pay sums irrespective of whether they had been earned, the label of trust used in the contract is something which I should ignore.’

The judge says, “I do not think it is established that the contract gives rise to a trust.”  The Judge goes on to state that the contract is null and void incapable of being saved by severance.

The Judge then goes on to say that, ‘It is said on behalf of TID that that contract amounted to a non-compliant Sharia’h transaction because in reality and substance what TID was doing was taking deposits at interest.’  The Judge goes on to agree with TID and refers to the Wakalah Agreement as simply an agreement to take deposits at interest, turning the transaction into a de facto western finance transaction.  The Judge says, “I agree that the court should approach the matter with some circumspection, but that does not take anything away from what is essentially a simple point, albeit difficult to apply, namely, that where one finds, as one does in this master wakalah contract, a device to enable what would at least to some eyes appear to be the payment of interest under another guise, that is at least an indirect practice of a non-Sharia’h compliant activity.’  Thus, here we have a UK Judge with absolutely no Sharia’h law training ruling on whether a transaction is Sharia’h compliant!

Based on the Judge’s opinion that the transaction was not Sharia’h compliant and that the Wakalah did not form a trust,  the Judge then goes on to suggest common law remedies, further turning the transaction into a conventional western finance transaction.  The Judge says, “On the footing that the transactions were ultra vires and void, that would give rise to a restitutionary claim in principle either based upon a failure of consideration or payment under a mistake but it would not in the absence of knowledge of the invalidity or mistake on the part of TID necessarily give rise to a trust claim.  Moreover, if there were a trust claim the appropriate remedy would be for an account and possibly an interim payment, not for the whole judgment sum.’ That would be good if this were a conventional western finance transaction, but in Wakalah, the money was being held on trust according to the terms of the Wakalah Investment Agreement (contractual) and the dispute should not be settled according to English trust law.  Contrary to English Trust Law but according to the Wakalah Agreement, if TID did not reach a certain target, Blom was entitled to whatever return TID had made using Blom’s deposits as breach of contract and trust.   However, the Judge allowed the appeal by TID of the judgment for $10,733,292.55 USD in favor of Blom and instead ordered an interim payment to Blom Bank as the Judge stated that TID was liable for at least the whole of the amounts deposited.  But under the Wakalah, Blom Bank was entitled the rate of return which TID had made if the target wasn’t met.

The Judge ordered an interim payment to be paid to Blom based on the fact that the contract was null and void (no trust) and that the transaction was ultra vires (not Sharia’h compliant), however, in reality the amount paid to Blom should have been the rate of return and should have been paid to Blom based on the fact that TID defaulted on the contractual obligation of gaining a return on investment according to the Wakalah Agreement, which was also a breach of trust.  By applying Western Trust Concepts to an Islamic finance transaction, the judge defacto turned the transaction into a western finance transaction (in both the first instance and appeal).  The UK appeal judge was also in no position to make rulings on Sharia’h law and compliance.


VII. Conclusion

It is advisable to create a world recognized Islamic Finance Arbitration Center (Dubai World Islamic Finance Arbitration Center (DWIFAC)) to be set up immediately in order to handle current Islamic banking disputes staffed by the worlds’ top Sharia’h and Islamic Finance Scholars.  Currently, there is an Islamic Finance Arbitration Center in existence, but it is not widely used or recognized. Other people are working on this concept now, such as in Cairo and possibly other locations, therefore, the process must be swift and speedy with immediate action and implementation in order to lift Dubai to the forefront of the Islamic Finance Industry.  In addition, a unified Islamic Banking Law should be enacted in the UAE as soon as possible.  Furthermore, attached to the DWIFAC, it is advisable to attach  a Jurisprudence Office to oversee the creation and implementation of Islamic Banking Law in the UAE and worldwide as well as oversee the creation of an Islamic Division to all UAE stock exchanges including the NASDAQ, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM).  In addition, attached to the Arbitration Center, there should be a world-class Islamic Finance Training Institute which offers world-recognized certificate programs for Islamic Finance professionals.

*Judgments for Reference







UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance