Use arbitration to solve Islamic finance disputes

With the growing number of the Islamic financial service providers in Kenya, we are bound to experience a significant increase in the value and volumes of the financial as well as commercial transactions generated within the industry. As the uptake of the Islamic finance products increases, we should also expect to see a proportionate increase in Shariah commercial and financial disputes with time.

It is important to appreciate that compliance with the Shariah principles is an integral part of Islamic finance. Shariah in essence refers to a set of well-defined rules, teachings and values that governs and regulates the lives of Muslims. The Islamic teachings encourages mutual dealings and exchange of commodities or other necessities through buying, selling, provisions of gifts, donations, lending and establishment of debt and other contractual obligations. However, such dealings and exchanges should be devoid of violence, misappropriation, dishonesty and fraud. The true spirit of brotherhood, honesty, fairness and justice should form the basis of exchanges and dealings .

One of the common challenges encountered in commercial and financial dealings is the inadequacy and inaccuracy of information between the parties involved in the transactions. Relevant and timely information is central to the Islamic financial transactions and contracts. All parties to the contract must have access to accurate, relevant and timely disclosures as well as information that should be adequate enough to make reasonable estimates of possible outcomes. The absence of such disclosures and information is deemed to be a source of uncertainties which is referred to as ‘’Gharar’’ that renders contracts and dealings non-Shariah compliant. A great deal of disputes stem from misrepresentations, fraud, deceit, inadequacy in disclosures and total disregard of Shariah expectations.

In Kenya, we lack a comprehensive legal and regulatory framework that governs the application of Shariah principles to the financial transactions and contracts between the Islamic finance (IF) institutions and their clients. Cases of litigation arising out of any form of breach to the terms and conditions of contracts and the enforcement of rights and duties of parties in transactions are determined on the basis of Kenyan laws that make no reference to Shariah standards.

In the absence of a comprehensive legal framework that recognises Shariah for resolving disputes involving the IF institutions and their clients, the industry shall face constraints to attract quality investors whose concerns are about securing their interests in the event of disputes. In fact some misgivings about the quality of shariah-compliance of the products offered by the Islamic banks in Kenya may be attributed to the lack of well-developed ecosystem that promotes the application of shariah from regulatory and legal perspectives.

Questions touching on the lack of capacity by the Central Bank of Kenya (CBK) to regulate the operations of the Islamic banks through appropriate frameworks which takes into account Shariah expectations undermines the efforts of these banks to enhance the uptake of their products.

If transactions and contracts have been designed on Shariah basis, then disputes arising out of the same should be resolved in a manner that complies with Shariah guidelines. One of the most progressive approach in the execution of Islamic financial contracts is to have arbitration clause to the contracts in order to establish a legal framework to be applied for Shariah dispute resolution.

Arbitration is a process used by the agreement of the parties to resolves disputes outside the court systems. The process is voluntary and the parties in dispute have control over the process in terms of defining all the aspects of the arbitration like the applicable law, procedures, the arbiters, and the work schedule among others. Arbitration as a form of Alternative Dispute Resolution (ADR) mechanism is gaining in popularity owing to the time and cost it takes to resolve disputes. The disputing parties can select the arbiters and the proceedings can be held in private away from the media glare and therefore does not damage reputations and destroy brands.

Unlike litigation where cases may be swayed through compromising the judicial and legal staff, arbitration in IF can be dealt with through reputable jurists and scholars who get selected on the basis of their independence, integrity, knowledge and commitment.

The IF players and their clients need to ensure that arbitration clauses are factored in their contractual documentations to take care of the need to seek sound Shariah determination of commercial disputes since our courts are not well equipped in terms of legal infrastructure and knowledge to apply Shariah in the resolution of such disputes .

It makes no sense for banks offering Shariah-compliant products to have well-structured letters of offer that stipulates sound Shariah contractual terms and obligations and yet in their charge documents avoid the reference to Shariah which could be taken care of through the provision of arbitration clause before Kenya gets progressive financial laws as well as regulations that supports the fulfilment of Shariah obligations in contracts.

The stakeholders in IF industry should proactively undertake initiatives that seeks to fulfil shariah expectations in the development of products, legal as well as shariah documentations and dispute resolutions.

The writer is Islamic Finance Consultant.