Malaysia seeks reforms

KUALA LUMPUR: Malaysian Sharia finance experts, backed by the central bank, are studying possible conflicts between civil and Islamic law amid a raft of high-profile legal disputes which have dampened the industry's appeal.

Legal wrangles have taken centre stage in Islamic finance in the last year as difficult economic conditions triggered defaults and exposed gaps in legal systems, some of which struggled to deal with Sharia banking disputes for the first time.

Where sukuk holders rank in priority of payment when default occurs and the competence of civil courts to adjudicate on Islamic banking disputes are some issues that have come to the fore in the $1 trillion industry.

Lawyers, bankers and Sharia scholars in Malaysia, which has the world's largest sukuk market, are looking into civil law provisions which may conflict with the Sharia and impede the use of Islamic finance.

"We are producing Islamic products in conventional surroundings. The other laws that are applicable - land law, contract law, all other laws - are conventional laws," Abdul Hamid Mohamad, a former Malaysian chief judge who is heading the expert body, said on the sidelines of a law conference.

"So the question arises whether the implementation of Islamic banking is Islamic."

Any conflicts could be addressed with an amendment of the legislation, he said adding that the group would seek the industry's views.

Islamic banking matters in Malaysia are heard in civil law courts, with one judge dedicated to hearing these disputes.

The $130 billion sukuk market has been a source of financing for issuers from Bahrain to Japan but its reputation has suffered in recent years.

The near-default in December of the dollar-denominated sukuk from Dubai property developer Nakheel shattered perceptions that Islamic financing instruments were a safer alternative.

Source : Gulf Daily News