Comparing Law Making Process by Islamic Finance Dispute Resolution System in the UAE and Malaysia - University of Tsukuba Assistant Professor Ai ...
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NUS-Tsukuba Joint-Online-Workshop on “Sustainable Management and Data Sciences
Comparing Law Making
Process by Islamic Finance
Dispute Resolution System
in the UAE and Malaysia
University of Tsukuba
Assistant Professor
Ai Kawamura (Ph.D)
”• 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
Today’s Topic • Law Making Process by Dispute
Resolution: Malaysia
• Law Making Process by Dispute
Resolution: the UAE
• Digital Transformation in Islamic
Finance
• ConclusionHow the emergence of Islamic
finance transformed the
legislation in the pioneering
countries
Focus on how a new
The aim of this economic phenomena change
legal structure
presentation
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 2017What is Islamic
Economics?
• 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 2014Global Islamic Economy in 2019
Islamic finance: $ 2.88 trillion
What is Halal Food & Services: $1.17 trillion
Islamic
Economics? Cosmetics: $66 billion
Modest Fashion: $277 billion
Islamic Tourism: $194 billion
Source: [DinarStandard 2020:4]What is Islamic Economics?
Islamic Economics “Islamic Economic Studies”
• Conglomerate discipline • Purely Academic
combining academic research
• Interdisciplinary Approach
with political movement
• Comparative analyses (history
• Based on economics and and region)
traditional Islamic studies
• Field Research and original text
Methodology
Source: [Nagaoka 2018]Why did Islamic Economics emerge?
• (Islamic Economics) was a
Emergence of “response to the failure of economic
development in the Muslim world
Islamic and the rise in the Islamic political
identity motivated certain academics,
Economics and activists and financier/bankers to
discuss the initial foundation issues
Finance 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
Emergence of the communities, not the
market
Islamic
• Responsible Finance:
Economics and building systematic checks
Finance on financial providers
• Alternative economical
system for capitalismWhy does Islamic finance work with
interest-free
How is it possible???
Emergence of • In Islam, “riba ”رباis prohibited in
Islamic law
Islamic Ex) Interest, speculation, high
Economics and risks etc. are prohibited in
Islam
Finance • 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
Emergence of products
Islamic • Making money out of money is
prohibited
Economics and = The financial institution will need to
work and be qualified to earn a fee for it
Finance • Speculation (gambling) is prohibited
= Avoid high risk transaction• Reconstructing economic system
for sustainable economic and
social development by protecting
human dignity : Islamic Moral
Emergence of Economy [Chapra 2003, Asutay
2012]
Islamic • Islamic Moral Economy: Islamic
Economics and banking and financial institutions
needs to behave morally and
Finance uphold social justice =
Consistent application of
Islamic Value for Islamic financeVarious Islamic financial products are
developed in order to achieve the
SDGs
• ESG Investment: Green Sukuk
Emergence of • Islamic Social Finance: Zakat
Islamic (mandatory alms), Sadakah
(charitable), Waqf (endowments)
Economics and • Islamic Micro-Finance: Qard-Hassan
Finance • UN organization and governments
had adapted Islamic financial
scheme for their projectsLegal 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 Issues on Islamic Finance
• 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 financeLegal Issues on Islamic Finance
♪
Conventional
Finance
？？
Islamic
FinanceLegal Issues on 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- No obligations for the court to refer on
2002 the SAC when the case is related to
Islamic finance
2003- The court had started to decide proactively
2007 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 Kok Hoe & 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- Most of the court cases related to Islamic
2010 finance were dealing the legitimacy of the
BBA. As negative judgment increased,
public perception
2011- The SAC had gained more jurisdictions on the
2014 court judgment associated with the Islamic
finance. In this stage, reference on SAC was
obliged for the court, only when there is an
Sourse: (Hasan and issue on Sharī’a
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‘ah authority 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 Expansion of the Market to foreigners • speculative short-term investment against real estate and mortgage development • pre-sales and re-sales of real estate were taken place Lack of unified credit bureau • Capability for investors became unlimited Delay of the bankruptcy law
2008
Law
Making
The mortgage prices dropped
nearly 50% from the third quarter
of 2008 till the first quarter of
2009
Process
Dubai Shock occurred Dubai
World, sovereign company of by Dispute
Resolution
Dubai government, had
announced it delay for their
repayments on 25th November
2009
25 Nov. 2009 : the UAELaw 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]
Law Making Process by Dispute
Resolution: the UAE
Time line Decree and incident Phase
1st November Dubai Decree One
2009 No.56 of 2009
25th November Dubai World
2009 delays $26
billion
repayment
13th December Dubai Decree One
2009 No. 57 of 2009
27th December Dubai Decree Two
2009 No. 61 of 2009
Source: [Kawamura 2013]Law Making Process by
Dispute Resolution: the
UAE
• 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 2013Law Making
Process by
Dispute
Resolution: the
UAE
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
Digital Transformation in Islamic Finance 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 Gold Currency Inc and Blockfills and the UAE’s IBMC Financial 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
Digital Transformation in Islamic Finance 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 Your Customer（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]
• 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
Summary 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• 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
Conclusion (1) 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• 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
Conclusion (2) • 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 marketsReference • 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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