Michael Kerr, Regional Managing Partner, Dentons, on a new model for Islamic finance law

In 2013 Dubai’s government announced the framework of its plan to become the centre of the global Islamic economy. The scale of this cannot be underestimated. The aggregate GDP of Islamic countries worldwide is more than $8trn, added to which will be significant Islamic business elsewhere. The plan includes a number of elements from Islamic finance and reinsurance, as well as global accreditation of halal products and promotion of halal tourism, with Islamic hotels, arts and fashion centres all lynchpins of Dubai’s economy.

Islamic finance is, of course, not new to Dubai. On the contrary, it has been an important activity for many years. Dubai’s government established the world’s first Islamic financial institution, the Dubai Islamic Bank, in 1975. The UAE’s Islamic financial services are said to represent over a quarter of the global Islamic banking industry, from Islamic funding of major infrastructure projects to retail, banking and domestic real estate finance. Much of this UAE activity is based in Dubai, both in and out of the Dubai International Financial Centre. A main focus of Dubai’s increased strength in Islamic finance will be the sukuk, or Islamic bond, market. Dubai has already established itself as a global centre for sukuk, and 2013 saw some of Dubai’s giants raise significant funds through sukuk issues. Its new plans include the launch of a centre for sharia-compliant finance and an Islamic governance centre to develop corporate governance standards for Islamic firms.

And yet, Dubai has no specific legal frameworks to govern Islamic finance and has limited regulations, despite the importance of the sector to Dubai’s economy. This is in contrast to some of its Gulf neighbours, such as Bahrain, Qatar and, recently, Oman. According to the emirate’s law, the sector is governed by the general framework of the UAE’s civil and commercial codes. These trace back to the French Napoleonic codes via Egypt, with some Ottoman input. While these codes are influenced to some extent by sharia, that influence is very mild (particularly compared to some other GCC countries). Given the fundamental requirement that Islamic financial structures and products be fully compliant with sharia, the scope for mismatch is real. This has troubled both scholars and practitioners.

This is not unique to Dubai, of course. In fact, it applies to almost all national laws to which Islamic financial arrangements may be subject, and all such agreements need to be governed by some national legal system as sharia is not, in itself, law. However, it is a particular concern in civil law jurisdictions such as Dubai, since in the absence of specific Islamic financial regulations there is broad scope for courts to imply terms and obligations beyond the written agreement. This is much less of a risk in common law systems where the general approach is to adhere strictly to the written agreement, meaning a well-drafted Islamic financial document is likely to operate exactly as was intended.

A further concern, to both scholars and practitioners, is the risk of undermining the role of the sharia supervisory board (SSB) of the relevant financial institution. Any Islamic financial arrangement or product requires the approval of a SSB. However, from a legal perspective, this would have no binding effect on any court or arbitrator in the event of a dispute.

These legal concerns will need to be tackled in Dubai’s path to leading the international Islamic economy. A key part of the Dubai plan is therefore to develop a legal framework with both legislative and regulatory bodies for Islamic financial markets. Ambitiously, this framework will then be held up as a global model for legislating Islamic finance regulation. This exercise will need great care. The growth of Islamic finance has seen great innovations in order to marry the economic requirements of the market with the need to fully respect sharia. Any legislation would need to ensure that this innovation is not stifled. We can only wait and see. In the meantime, Dubai’s plan has had its first boost. The all important Islamic Development Bank (Jeddah-based) has announced plans to launch a major sukuk programme in Dubai, adding to the multibillion dollar initiatives it has established in London and Kuala Lumpur.