The issue of how to resolve disputes in Islamic finance is complicated. Currently, the most common way is to make most large Islamic finance products subject to English law (or more rarely New York law) to capitalize on those regions' long history in finance and strong legal systems. The legal systems in many countries where Islamic finance is prevalent are not viewed as sufficiently predictable should a dispute, insolvency or restructuring happen. I addressed the issue in my last newsletter (sign up on the right side of my blog) with respects to new laws being considered in the UAE to develop a new insolvency and restructuring regime that will be Shari'ah-compliant.
The issue of Shari'ah-compliance particularly in insolvency and restructurings, but also in commercial dispute is important for Islamic finance. When using English and New York law, the need for certainty outweighs Shari'ah considerations (and those can be considered, but only consensually; these courts will not consider Shari'ah in their decisions, nor should they be expected to being a part of secular legal systems). However, for Islamic financial institutions, there will come a day when the consensual system of finding solutions that are Shari'ah-compliant will not be sufficient and there will be disputes that involve important issues of Islamic jurisprudence at the heart of the contracts, and a secular legal system will not be able to handle it.
The UAE route of changing their laws to put in place a system that is both based on well established legal systems but also tailored to the needs of that country (including incorporating Shari'ah). An alternative is being considered in Qatar through the Qatar International Court and Dispute Resolution Centre (QICDRC), which would operate within Qatar but with a more global focus. Both systems would be a welcome change from the situation today where Shari'ah disputes that are part of conflicts between parties or are involved within insolvency and restructuring situations cannot be directly addressed. It will undoubtedly be a long time before any new system through either the QICDRC or the new UAE laws will develop the credibility and predictability required to challenge London or New York as the legal homes for cross-border products, but to get to that point requires a first step, which the UAE and Qatar appear to be taking.