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Opalesque Islamic Finance Intelligence

Lex Islamicus: Standardisation v Harmonisation: Towards Recognition? By: Hakimah Yaacob

Thursday, December 16, 2010

Hakimah Yaacob is an Associate Researcher at the Islamic Banking Unit, International Shari'ah Research Academy (ISRA) for Islamic Finance.She holds a Bachelor of Laws (Hons), Bachelor of Syariah (Hons), a Master in Comparative Laws, from International Islamic University Malaysia and a diploma from Tokiwa International Institute, Japan. Previous positions held include Head of Law Reform & International Treaties, SUHAKAM, legal practitioner, as well as being the Drafter of International Standard Organisation 26000 on social responsibility. She has published many articles on alternative dispute resolution (ADR) in Islamic finance including arbitration, mediation and hybrid ADR.

Many speak about harmonisation and standardisation in Islamic finance at the international level. There are currently thirty nine (39) Conventions for the harmonisation of rules of private international law and for the promotion of international law and for the promotion of international judicial and administrative cooperation in civil and commercial matters. The greatest challenge in examining the Convention from Shariah perspectives lies in the difficulty in figuring out exactly what it means and what reforms would be required to give full effect to the object of the Convention. The current Hague Convention available discusses the application of civil and commercial matters, whereas a Shariah transaction does not fall within the ambit of civil or commercial matters. Where matters cannot be harmonised then the author propose that Islamic transactions should be recognised. Should they want to proceed with a treaty, a separate international treaty mainly for Islamic finance should be established. Alternatively, should we want to ratify the existing Hague Convention on Private International Law, then Optional Protocol should be established in order to show the recognition of a unique set of principles in Shariah.

An effective legal framework at the international level is needed to ensure a resilient development of Islamic finance. This relies on creating a framework that is accommodating and facilitates the development of the industry. This is also to ensure the enforceability of Islamic financial contracts and be given a credit on its own merit. Due to this, a credible and reliable forum for settlement of legal disputes arising from Islamic finance transactions is pivotal. The industry and supervisory authorities should not hesitate to take the lead in spearheading the development of Islamic finance through the issuance of clear policy decisions and directions from which market players could be certain in their involvement. This is to avoid any legal and Shari’ah risks in the future. On the other hand, it could help in avoiding stigma at international level. Indeed the Convention needs to be carefully pronounced without causing any confusion to the industry. The law is to support the market, smooth out lingering legal anomalies with the conventional system and induce greater legal standardisation and convergence.

International conventions or treaties guarantee that the litigants will be judged according to the law of their choice. However, scrutinising the case of Mount Albert Borough Council v. Australasian Temperance & General Mutual Life Assurance Society Ltd,[1] the proper law of contract was defined as the law which the English or other Court is to apply in determining the obligation under the contract. In the absence of comprehensive legislation in governing Islamic finance across the globe, the parties should be given a freedom to enter into a contract with their own choice of law. It means they may opt for the best for the contract or the best for their interest and position. Thus, where the parties have an agreement extracting out the manner in which they have chosen to resolve their disputes, it should be respected in every way possible. It is common to see in an agreement the governing law clause written as "The Contract shall be governed by the law of England and any dispute, question or remedy however-so arising determined exclusively by the Courts of England." This happens when the parties have not been given many choices in settling disputes involving their interests. Hence, they finally opted for an English court to decide on the validity of the contract.

Referring to Re Herbert Wagg & Co. Ltd.' it was held that "This Court will not necessarily regard the parties' choice of law as being the governing consideration where a system of law is chosen which has no real or substantial connection with the contract looked as a whole". The views concluded that the courts should have residual power to struck off, for good reason, choice of law clauses totally unconnected with the contract. However, in this case also, Re Helbert Wagg it was held that 'the parties may well contemplate that different parts of their contract shall be governed by different law. Is there any justification to exclude the intended terms of the agreeing parties in the contract and merely apply English law for the execution of the contract and to be considered as valid and name it as a proper law.

Standardisation can be defined as: "A framework of agreements to which all relevant parties in an industry or organization must adhere to ensure that all processes associated with the creation of a good or performance of a service are performed within set guidelines. This is done to ensure the end product has consistent quality, and that any conclusions made are comparable with all other equivalent items in the same class."[2]

Thus, standardizing the rulings would make it easier for both companies and ordinary people to understand it better. "The lack of standardized religious decisions leads to uncertainty, confusion, and unease among scholars and investors. This situation restricts the industry from reaching its potential because a number of inefficiencies arise from the lack of standardisation. For example, different interpretations of Shari'ah mean that one Islamic bank may not be able to accept or use as a model another Islamic bank's products, which can stifle the integration of Islamic finance at both the national and international levels."[3]

This is especially true for Islamic banking products that are far from being standardized across the different jurisdictions, thus creating obstacles at the international level. Apart from reducing the confusion and increasing efficiency, the standardisation would increase the consistency and transparency, reduce the costs, and provide more time for innovation.[4] One of the suggested solutions (although it may not be the perfect one) would be to establish an International Shari'ah Board that will consist of the members from the all schools of law and whose decisions will be mandatory for all jurisdictions.[5]

In brief, this article can be concluded as follows;
i. The existing Hague Convention on Private International Law is ill suited with the Islamic finance and consequently in appropriate to be harmonised.
ii. In relation to the above, by having its own intricacies and principals, the Islamic finance framework is different from Commercial or trade law which is based on Euro Centric since adaptation of 100 years ago.
iii. The author are of the view that the current existing Convention on trade and Commerce cannot be harmonised with Islamic commercial law. This is timely to recognise the difference and not to merely harmonise!
iv. The Convention may serves as platform to leverage the freedom of contract looking from Islamic point of view as part of Siyar.
v. The authors are of the view that OIC should promote the Convention at The Hague level and supported by AALCO. This is due to the fact that Islamic Finance is worldwide practiced and not merely in Islamic countries.

The issues of standardisation, as recommended above, is the issue on which, according to many, the whole Islamic finance industry depends on. It is the pre-requisite for this industry to go to the next level in its development and to be able to make changes in the banking industry in general. Cross-border transactions will be stuck with differences of opinions among Shari'ah scholars until and unless we sit together and come up with a unified voice.

References:
[1] [1938] AC 224, 240; [1937] 4 All ER 206, 214 (PC)
[2] Investopedia. (2010). "Standardization." Retrieved April 15, 2010, from http://www.investopedia.com/terms/s/standardization.asp.
[3] Shanmugam, B. and Z. R. Zahari (2009). A Primer on Islamic Finance. Charlottesville, VA, Research Foundation of CFA Institute, p. 93.
[4] Al-Jassar, J. (2002). ‘Islamic Finance: Successes, Prospects, and Neglected Areas.' Islamic Finance: The Task Ahead - Proceedings of the Fourth Harvard University Forum on Islamic Finance. Cambridge, Massachusetts, Center for Middle Eastern Studies, Harvard University: 173-176, Shanmugam, B. and Z. R. Zahari (2009). A Primer on Islamic Finance. Charlottesville, VA, Research Foundation of CFA Institute, Smolo, E. (2009). ‘Sustaining the Growth of Islamic Financial Industry: What Needs to Be Done?' Islamic Finance Bulletin (RAM) October-December(26): 15-23. Alvi, I. (2009, May). ‘Standardization of Documentation in Islamic Finance & Role of the International Islamic Financial Market (IIFM).' Islamic Financial Sector Development (IFSD) Forum 2009. Ashgabat, Turkmenistan..
[5] Kamal, R. M. (2008). ‘Standardization the Password to Progress.' Islamic Finance Asia. August/September: 28-30, Shanmugam, B. and Z. R. Zahari (2009). A Primer on Islamic Finance. Charlottesville, VA, Research Foundation of CFA Institute, Quoted from Smolo, Edib, Marjan and Hakimah, International Treaties for Islamci Finance, AAIOFI Bahrain, 1-2 December 2010.


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