Comparing Law Making Process by Islamic Finance Dispute ...

Comparing Law Making Process by Islamic Finance Dispute Resolution System in the UAE and Malaysia

University of Tsukuba

Assistant Professor

Ai Kawamura (Ph.D)

”

NUS-Tsukuba Joint-Online-Workshop on “Sustainable Management and Data Sciences

Today’s Topic

• Aim of this presentation

• What is Islamic Economics

• Emergence of Islamic Economics and Finance

• Legal Issues on Islamic finance

• Mindset of Islamic Finance Dispute Resolution

• Law Making Process by Dispute Resolution: Malaysia

• Law Making Process by Dispute Resolution: the UAE

• Digital Transformation in Islamic Finance

• Conclusion

The aim of this presentation

How the emergence of Islamic finance transformed the legislation in the pioneering countries

Focus on how a new economic phenomena change legal structure

Methodology: Bibliographic Survey and Interview Survey (Field Research)

What is Islamic Economics?

• Islamic Finance

• Developing and reconstructing the economic system and financial products into “Sharī’ah compliant scheme”=Islamic Finance

• Financial product produced and guaranteed by the Sharī’ah board

Photo taken in March 2017


• Sharī’ah board

• Committee formed by Islamic law specialists

• Group of Islamic scholars

• Each Islamic Bank form its own Sharī’ah board

Photo taken in August 2014


Islamic finance: $ 2.88 trillion

Halal Food & Services: $1.17 trillion

Cosmetics: $66 billion

Modest Fashion: $277 billion

Islamic Tourism: $194 billion

Global Islamic Economy in 2019

Source: [DinarStandard 2020:4]


Islamic Economics

• Conglomerate discipline combining academic research with political movement

• Based on economics and traditional Islamic studies

“Islamic Economic Studies”

• Purely Academic

• Interdisciplinary Approach

• Comparative analyses (history and region)

• Field Research and original text

Source: [Nagaoka 2018]

Methodology

Emergence of Islamic

Economics and Finance

Why did Islamic Economics emerge?

• (Islamic Economics) was a “response to the failure of economic development in the Muslim world and the rise in the Islamic political identity motivated certain academics, activists and financier/bankers to discuss the initial foundation issues of the what was later to become Islamic economics” or now called Islamic Moral Economy [Asutay 2012]



What is Islamic economics and finance aim?

• Community banking: Serving the communities, not the market

• Responsible Finance: building systematic checks on financial providers

• Alternative economical system for capitalism



Why does Islamic finance work with interest-free

How is it possible???

• In Islam, “riba ” ربا is prohibited in Islamic law

Ex) Interest, speculation, high risks etc. are prohibited in Islam

• Different approach are taken by Islamic banking and finance

Ex) Profit Loss Sharing (PLS), Partnership, Lease etc.



How can Islamic financial institution do business?

• Prohibition of Riba

= Use PLS and other Islamic financial products

• Making money out of money is prohibited

= The financial institution will need to work and be qualified to earn a fee for it

• Speculation (gambling) is prohibited

= Avoid high risk transaction



• Reconstructing economic system for sustainable economic and social development by protecting human dignity : Islamic Moral Economy [Chapra 2003, Asutay2012]

• Islamic Moral Economy: Islamic banking and financial institutions needs to behave morally and uphold social justice = Consistent application of Islamic Value for Islamic finance



Various Islamic financial products are developed in order to achieve the SDGs

• ESG Investment: Green Sukuk

• Islamic Social Finance: Zakat (mandatory alms), Sadakah (charitable), Waqf (endowments)

• Islamic Micro-Finance: Qard-Hassan

• UN organization and governments had adapted Islamic financial scheme for their projects

Legal Issues on Islamic Finance

• Historically, civil law in the Gulf countries has been modernized based on the Egyptian civil code, except for Muslim family law and to some extent property law [Amin 1985; Ballantyne 1986; Brown 1997]

• It is oversimplified to say that commercial laws in the Gulf countries introduced Western law, as some of the contracts were formed by law firms dealing with common law [Al-Tamimi 2003; Mallat 2000]

• This led to difficulties in dealing with Islamic financial products under such western law is difficult [Nyazee 1998; Kuran 2005; Usmani 2008; Foster 2010].


• Legal Framework for Islamic finance in the Gulf Countries

• UAE: Federal Law No.6 of 1985）

• Kuwait: Central Banking Law 2003

• Bahrain: Central Bank of Bahrain Rulebook Volume 2- Islamic Banks 2006

• Qatar: Law No.33 of 2006, Instruction to Banks 2009

• Framework for Islamic Finance covers mostly on the establishment of Islamic financial institutions, governance, guideline on management for Islamic banking and finance


Conventional Finance

Islamic Finance

？？

♪


• Under the Islamic Economics and finance theory, Islamic banking and financial institutions should behave morally and uphold social justice

• Consequently, a nation’s economic system, legal system and, of course, its dispute resolution system would need to be consistent with the application of Islamic ethics and morality to guide and protect the Islamic banking and financial activities in order to achieve Islamic justice [Kawamura 2021: 116]

Malaysian Model

Special law for Islamic banking was established in 1983: The

Islamic Banking Act (IBA) 1983

The IBA was amended to Islamic Financial Services Act 2013,

repealing the IBA and the Takaful Act 1984

Sharī’ah Advisory Council (SAC) in the central bank of Malaysia

had been gradually increasing its presence

Malaysian Model

1980-2002

No obligations for the court to refer on the SAC when the case is related to Islamic finance

2003-2007

The court had started to decide proactively on Islamic financial dispute cases. Islamic finance disputes have been bringing up issues related to the conventional court to deal on Sharī’a compliancy

Sourse: (Hasan and Asutay 2011:43-49) and updated from the field research at UKM during 29/6/2015-9/9/2015]

Malaysian Model

• 2008-2010

• In the High Court (Kuala Lumpur), Arab-Malaysia Finance Bhd v. Taman Ihsan Jaya & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631 the BBA transaction was judged to be ‘contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989’

• In other cases, such as Bank Islam Malaysia Bhd v. Lim KokHoe & Anor and other appeals [2009] 6 MLJ 839 and Tan Sri Abdul Khalid Ibrahim v. Bank Islam Malaysia Bhd & Another Case [2010] 4 CLJ 388 the judge ruled on the legitimacy of BBA.

Malaysian Model

• In Bank Islam Malaysia Bhd v. Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ 839, the judge compared the BBA contract, a sales contract, and the loan, a money-lending contract

• The judgment states that BBA contracts are ‘[f]ar more onerous than the conventional loan with riba’

• BBA was criticized in the Fiqh in the Middle East as not being Sharī‘ah compliant

• However, until 2009 BBA was one of the most popular Islamic financial product

Malaysian Model

2008-2010

Most of the court cases related to Islamic finance were dealing the legitimacy of the BBA. As negative judgment increased, public perception

2011-2014

The SAC had gained more jurisdictions on the court judgment associated with the Islamic finance. In this stage, reference on SAC was obliged for the court, only when there is an issue on Sharī’aSourse: (Hasan and Asutay 2011:43-49) and updated from the field research at UKM during

29/6/2015-9/9/2015]

Malaysian Model

• The SAC had been launched in 1997 as the highest Sharī‘ahauthority to supervise the Islamic financial market

• Theoretically, the courts in Malaysia refers cases to the SAC if there is any issue related to the Sharī‘ah, but the SAC was not effective for the courts until recently

• The Central Bank Act was amended in 2003, and the courts could voluntarily refer cases to the SAC; therefore, the courts were not obliged to do so

• When the Central Bank Act 2009 was established, the court was required to consider referral to the SAC

Malaysian Model

• In the previous Act, the court had more freedom in reaching their decisions; in the 2009 amendment, the role of the SAC is prescribed

• The Islamic Financial Act 2013 made consulting with the SAC and adhering to their advice ‘obligatory’

• After the negative judgment on BBA and bay’ al-īna, the SAC gradually expanded its authority to supervise the Malaysian court’s judgements on Islamic financial cases

Malaysian Model

Source: [Kawamura 2021:113]

Law Making Process by Dispute Resolution: the UAE

• speculative short-term investment against real estate and mortgage

development

• pre-sales and re-sales of real estate were taken place

Expansion of the Market to foreigners

• Capability for investors became unlimited

Lack of unified credit bureau

Delay of the bankruptcy law


The mortgage prices dropped

nearly 50% from the third quarter

of 2008 till the first quarter of

2009

2008

Dubai Shock occurred Dubai

World, sovereign company of

Dubai government, had

announced it delay for their

repayments on 25th November

2009

25 Nov. 2009

Law Making Process by Dispute Resolution: the UAE• Massive financial dispute related to Dubai Shock, including

Islamic financial products

• Dispute resolution were needed to stabilize the market

• New dispute resolution had been established in Dubai, named “Dubai Approach” [Kawamura 2013]


Time line Decree and incident Phase

1st November2009

Dubai DecreeNo.56 of 2009

One

25th November 2009

Dubai Worlddelays $26 billion repayment

13th December 2009

Dubai DecreeNo. 57 of 2009

One

27th December 2009

Dubai Decree No. 61 of 2009

Two

Source: [Kawamura 2013]


• Characteristics of Dubai Approach

• Special Judicial Committee (Lajna Qaḍā'īya Khāṣ)

• Three Dubai Decree specified the establishment of the Special Judicial Committee

• Third Type dispute resolution complement the court and ADR system

• Ad-hoc Approach

Photo taken in August 2013


Source: [Kawamura 2021: 104]

Digital Transformation in Islamic Finance

DX

• Smart Society “Society 5.0” to achieve human centric

• Fintech

• InsurTech

• RegTech

→New business model and financial services emerged through social implementation


DX in Islamic banking and finance• Islamic Development Bank Group, Islamic Research

Training Institution（IRTI) created ishhād platform in order to record and protect Waqf property with blockchain

• Issue of Gold back crypto-currency by the US GoldCurrency Inc and Blockfills and the UAE’s IBMCFinancial Professionals in June, 2020

• Fintech Hub was developed in Bahrain and the UAE→Regulation could not catch up with the development of the financial market


Regulatory Sandboxes and Regulatory Laboratory：Hub for demonstration experiment for official institution to deregulate or delay the application of law

UAE

• Abu Dhabi Global Market（ADGM) RegLab

• Dubai Financial Services Authority

Malaysia

• Financial Technology Enabler Group：Under BNM

Malaysia（Proactive Legislation）

• 2016：Bank Negara Malaysia established Financial Technology Enabler Group

• 2019. 1：Order on Capital Market and Services Act 2007 (Crypto Currency and Digital Token will be regulated under the Capital Markets and Services Order 2019)→not clear for postscript this order in the law provision

• 2020.1：Prohibit Initial Coin Offering (ICO) which does not have approval from the Malaysia Security Commision（SC), bascically Initial exchange offering (IEO) by allowing ICO that is registered as “digital stock exchange”

• 2020：Drafting regulation for digital banking including Islamic digital banking

UAE（Wait and see at the Special Economic Zone）Promoting block chain technology and Distributed Ledger Technology by the UAE government

• 2020.5：Sustain cryptocurrency exchange started transaction with Shari’ah compliant cryptocurrency（Under the jurisdiction of ADGM）

• 2020.7：Dubai Department of Economic Development and 6 banks including Emirates Islamic bank started the UAE blockchain Know YourCustomer（KYC) platform

• 2020.11：Bilateral cooperation with Saudhi Arabia to facilitate “Azzam”, Released its report on the Project Aber to “explore the viability of a single dual-issued digital currency as an interment of domestic and cross-broder settlement between the two countries[SAMA and CBUAE 2019: 8]

Summary

• Regulation for new business model and transaction by digitalization are being tried out in the Regulatory Sandboxes and Regulatory Laboratory

• While these demonstration experience were taken place, discussion on Islamic law or Islamic ideology are expected to increase (Legitimacy of cryptocurrency, operation of central bank digital currency, backed asset etc.)

• New ”Values” are emerging by digitalization

→New value will take root in the society through innovation, and a new value would create a new legal concept

Conclusion (1)

• Islamic economics and finance emerged due to create an alternative economic system to reset the capitalistic mindset in the Muslim world

• Islamic Moral Economy also emerged as a response for achieving social justice in the Islamic world

• While the Islamic banking and finance market expanded, its legislation also developed in the dual legal system by the conventional legal system and the Islamic jurisdiction

Conclusion (2)

• In the case of Malaysia and the UAE’s new dispute resolution models and its approach toward new technology reflects the political and legal aspects of their respective countries

• The justice system is theoretically unified under the Islamic law and Sharī‘ah, but as the two representative cases for Islamic dispute resolution system shows, diversified approaches taken to protect and sustain the Islamic financial markets

Reference

• Amin, S.H. 1985. Middle East Legal Systems. Glasgow: Royston.

• Al-Tamimi, E. 2003. Practical Guide to Litigation and Arbitration in the United Arab Emirates. Hague: Kluwer Law International.

• Asutay, M. 2012. “Conceptualising and Locating the Social Failure of Islamic Finance: Aspiration of Islamic Moral Economy vs the Realities of Islamic Finance,” Asian and African Area Studies, 11(2), pp.93-113.

• Ballantyne, W.M. 1986. Commercial Law in the Arab Middle East: The Gulf States. London: Lloyd’s of London.

• Brown, N.J. 1997. The Rule of Law in the Arab World. Cambridge: Cambridge University Press.

• Chapra, M.U. 2003. Islam and the Economic Challenge. Lester: Islamic Foundation

• DinarStandard. 2020. State of the Global Islamic Economy Report 2020/2021. available at < https://www.salaamgateway.com/specialcoverage/SGIE20-21 >(accessed on 2021/3/10)

• Hasan, Z. and M. Asutay. 2011. ‘An Analysis of the Courts’ Decisions on Islamic Finance Disputes’, ISRA International Journal of Islamic Finance 3(2), pp. 41-71.

Reference

• Foster, N. H. D. 2010. “Islamic Perspective on the Law of Business Organizations 1: An Overview of the Classical Sharia and a Brief Comparison of the Sharia Regimes with Western-Style Law”. European Business Organization Law Review 11, pp.273-307.

• Kawamura Ai . 2021. Grafting an Islamic Sapling on to the Tree of Legal Dispute Resolution, Asia-Japan Research Institute, Ritsumeikan University.

• --------------, 2013, The Emergence of “Dubai Approach” for Civil Dispute Resolution for Islamic Finance: Third System to Coplement the Court System and the Financial ADR, Annals of Japan Association for Middle East Studies 29(1), pp. 97-127.

• Kuran, T. 2005. “The Absence of the Corporation in Islamic Law: Origins and Persistence”. American Journal of Comparative Law 53(4), pp.785-834.

• Mallat, C. 2000. “Commercial Law in the Middle East: Between Classical Transactions and Modern Business”. American Journal of Comparative Law 48(1), pp. 81-141.

• Nagaoka, S. 2018. “Why Doing Islamic Economics Studies in Kyoto” presentation at 30th Society for the Advancement of Socio-Economics Annual Meeting, 24th June 2014, Doshisha University, Kyoto

• Nyazee, I.A.K. 1998. Islamic Law of Business Organization: Corporations. Islamabad: The International Institute of Islamic Thought and Islamic Research Institute.

• Usmani, M.T. 2008. An Introduction to Islamic Finance. Karachi: Quranic Studies Publishers.

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Comparing Law Making Process by Islamic Finance Dispute ...

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