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The fertile fields of Islamic finance and banking in Britain have a growing relationship with English contract law and ADR. By Scott Morrison
Shari’a-compliant financing made possible the construction of London’s Shard and the purchase of Chelsea Barracks by a Qatari sovereign wealth fund (Project Blue Ltd v Commissioners for Her Majesty’s Revenue and Customs [2016] EWCA Civ 485).
Such facilities – and the knowledge and legal infrastructure necessary to their effective formation and use – comprise a card that the government has been wise to play; and it has done so strategically for over a decade. The legal community would be well advised to follow suit and develop familiarity with financial services purporting compliance with Islamic law (Shari’a) – that is, Islamic finance and banking (IFB). Here lie fertile fields for transactional and contentious work through dispute resolution and, to a lesser degree, in litigation and the courts.
The first Islamic bank in the United Kingdom, licensed by the FSA in 2004, was the Islamic Bank of Britain (IBB). It was purchased by a Qatari bank and renamed Al Rayan in 2014. About the same time a series of amended Finance Acts and statutory instruments provided for reliefs making Islamic mortgages viable. In competition with the largest European home of Islamic funds (Luxembourg), in a bid to attract listings to the London Stock Exchange (LSE) and a reputation as western centre of Islamic finance, the government floated a sukuk worth £200m in 2014. It was oversubscribed ten-fold.
As compared with other EU states, according to Pew Research Centre figures (published July 2016) Germany has the second highest proportion of Muslims in the EU (5.8%), France the highest (7.5%), with Britain possessing the third largest (4.8%). These statistics demonstrate the efficacy of regulatory action. It is apparent that the government-led growth of IFB in the UK comprises a decisive, successful policy intervention – not the relative size of the Muslim population. However, a jointly necessary contribution has been made by other factors: this country’s legal and judicial system, human capital, location and time zone – among other factors.
A sukuk, or Islamic bond, is a structured capital market overlay or instrument that combines features of an equity and a bond. Underneath it may be any one (or combination) of 14 contract types that are widely accepted by scholars and schools of Islamic commercial jurisprudence. From the Shari’a perspective, the underlying contract or contracts should have as their subject matter tangible, physical assets (subject to some exceptions) which are themselves lawful; for instance the asset(s) must not involve gambling, alcohol, tobacco, pork, or pornography. Sukuk should be used to raise funds for specific projects and investment activity, not for generalised financial needs.
Sixty-five sukuk have been listed on the LSE, with a combined value of USD$48bn (LSE data, April 2017). The Bank of England’s ongoing consultation concerning establishment of a liquidity facility for Islamic financial institutions (IFIs) is evidence of a continuing government policy of fostering IFB.
The high end of the London property market, rendered still more attractive to foreign buyers (especially those holding currencies pegged to the US dollar, such as those of several GCC states) with the weakening of the pound sterling, is an element accorded special importance by IFB. This is a result of IFB’s orientation towards asset-based means of financing, as exemplified by the now most popular form of sukuk: one based on a sale and leaseback arrangement of interests in land or other tangible assets – as with the sovereign sukuk issue (three government buildings) and a second issue in 2015 (based in aircraft) made possible by means of a sovereign guarantee.
Due to the perceived weakness or relative novelty (or both) of the jurisdictions in which international IFB contracts are performed or the nationalities of the parties (legal or human), English law is frequently adopted for choice of law provisions, rather than any law with a connection to performance or parties. A sukuk for instance may have as its core assets interests in land in Dubai. Lex situs is inescapable with regard to those assets. However, the transaction documents in relation to the capital market instrument, those setting out the rights and duties of obligor and the obligee, would often nevertheless be English law.
There is both a pull, exercised by features of this jurisdiction; and a push – away from civil legal systems (which recognise neither the trust nor beneficial title) and the weak insolvency laws of, for example, the UAE. Insolvency regimes are generally either non-existent or weak in the Gulf Cooperation Council countries, although there is recent evidence of efforts aiming at improvement.
A succinct explanation for the pull, the favour with which global IFB treats this jurisdiction, is: confidence in the impartiality of English legal system, augmented with the settled position that an English judge will not adjudicate Islamic law except insofar as Islamic law is incorporated into a contract (Shamil Bank of Bahrain EC vs Beximco Pharmaceuticals Ltd and others [2004] EWCA Civ 19), therefore falling to be constructed under the established principles of English contract law. Further reasons for the choice of English law and courts are past (based in colonialism) and present: commercial ties with Muslim majority societies – members of the Commonwealth, and the Gulf Arab states.
Regardless of the extent to which litigation and court dispositions of IFB disputes increase, with the local and global growth of the industry, the scope for dispute resolution out of court certainly will. In this respect as well the UK and IFB hold out the promise of a symbiotic relationship. Between the Arbitration Act 1996 (AA 1996), the Civil Procedure Rules, and the existing magnitude of alternative dispute resolution (ADR) cases and providers, this is manifestly a jurisdiction that sees value in promoting ADR.
Because of the religious element of IFB, and the importance accorded expertise in Islamic commercial law, arbitration agreements incorporated into IFB contracts may stipulate the religious or sectarian identity of the arbitrator or members of the arbitral tribunal. Section 19 of the AA 1996 places a duty on the court to have regard to arbitrator(s)’ qualifications as agreed by the parties; these may include expertise in Islamic law. Jivraj v Hashwani [2010] EWCA Civ 712 establishes that selecting an arbitrator on the basis of religious or sectarian identity does not violate employment law, rendering the UK a more attractive juridical seat for arbitration agreements between IFB counterparties, and clearing the way for more IFB disputes to be arbitrated here. It is also true that since IFB has developed inside the modern system of banking, finance and markets, the knowledge of conventional variants of these possessed by professionals in London and regional centres such as Birmingham is highly facilitative to increasing the sophistication of innovative and credible IFB products and practices. In this regard the work of the Bank of England and its dialogue with IFB participants in creating a shari’a compliant credit facility is an example of the flexibility and entrepreneurial spirit of the central banking authority and its predisposition to support IFB, among other forms of alternative finance.
The secular approach of the material authorities (FCA, PRA, HMT, HMRC etc), like that of the English court, represents an incentive rather than a deterrent to the use of this jurisdiction for the formation, performance and enforcement of IFB contracts and for IFI growth. Admittedly this approach created difficulties in the licensing of the IBB. Principal among these challenges were the requirements under EU/UK rules of deposit insurance, and lender of last resort provisions. Due to the ingenuity and determination of both IFB professionals and the licensing authorities these challengers were overcome. This was an auspicious precedent for the development of innovative new products which may – as IBB did – attract inward investment from the Gulf, or from the other major regional centre of IFB, Southeast Asia. The same point may be made still more forcefully regarding the debut sovereign sukuk.
British business and law schools with MBA and LLM offerings in IFB help to attract and shape the next generation of industry personnel who – whether staying on or returning to their countries of origin – may be predisposed towards this jurisdiction and the regulatory framework with which they will have become familiar. Magic and silver circle, as well as some of the largest US firms operating in London, have deemed IFB of sufficient importance and profitability to develop IFB units and to name some London-based partners (in addition to those based in offices in Africa, Asia and the Middle East) specialist in IFB. Opportunities await.
Contributor Scott Morrison is the Director of IDRAK Ltd, an Islamic banking and finance consultancy based in London
Scott is the Director of IDRAK Ltd, an Islamic banking and finance consultancy based in London. He is author of The Law of Sukuk: shari’a compliant securities, published by Sweet and Maxwell in June 2017.
Such facilities – and the knowledge and legal infrastructure necessary to their effective formation and use – comprise a card that the government has been wise to play; and it has done so strategically for over a decade. The legal community would be well advised to follow suit and develop familiarity with financial services purporting compliance with Islamic law (Shari’a) – that is, Islamic finance and banking (IFB). Here lie fertile fields for transactional and contentious work through dispute resolution and, to a lesser degree, in litigation and the courts.
The first Islamic bank in the United Kingdom, licensed by the FSA in 2004, was the Islamic Bank of Britain (IBB). It was purchased by a Qatari bank and renamed Al Rayan in 2014. About the same time a series of amended Finance Acts and statutory instruments provided for reliefs making Islamic mortgages viable. In competition with the largest European home of Islamic funds (Luxembourg), in a bid to attract listings to the London Stock Exchange (LSE) and a reputation as western centre of Islamic finance, the government floated a sukuk worth £200m in 2014. It was oversubscribed ten-fold.
As compared with other EU states, according to Pew Research Centre figures (published July 2016) Germany has the second highest proportion of Muslims in the EU (5.8%), France the highest (7.5%), with Britain possessing the third largest (4.8%). These statistics demonstrate the efficacy of regulatory action. It is apparent that the government-led growth of IFB in the UK comprises a decisive, successful policy intervention – not the relative size of the Muslim population. However, a jointly necessary contribution has been made by other factors: this country’s legal and judicial system, human capital, location and time zone – among other factors.
A sukuk, or Islamic bond, is a structured capital market overlay or instrument that combines features of an equity and a bond. Underneath it may be any one (or combination) of 14 contract types that are widely accepted by scholars and schools of Islamic commercial jurisprudence. From the Shari’a perspective, the underlying contract or contracts should have as their subject matter tangible, physical assets (subject to some exceptions) which are themselves lawful; for instance the asset(s) must not involve gambling, alcohol, tobacco, pork, or pornography. Sukuk should be used to raise funds for specific projects and investment activity, not for generalised financial needs.
Sixty-five sukuk have been listed on the LSE, with a combined value of USD$48bn (LSE data, April 2017). The Bank of England’s ongoing consultation concerning establishment of a liquidity facility for Islamic financial institutions (IFIs) is evidence of a continuing government policy of fostering IFB.
The high end of the London property market, rendered still more attractive to foreign buyers (especially those holding currencies pegged to the US dollar, such as those of several GCC states) with the weakening of the pound sterling, is an element accorded special importance by IFB. This is a result of IFB’s orientation towards asset-based means of financing, as exemplified by the now most popular form of sukuk: one based on a sale and leaseback arrangement of interests in land or other tangible assets – as with the sovereign sukuk issue (three government buildings) and a second issue in 2015 (based in aircraft) made possible by means of a sovereign guarantee.
Due to the perceived weakness or relative novelty (or both) of the jurisdictions in which international IFB contracts are performed or the nationalities of the parties (legal or human), English law is frequently adopted for choice of law provisions, rather than any law with a connection to performance or parties. A sukuk for instance may have as its core assets interests in land in Dubai. Lex situs is inescapable with regard to those assets. However, the transaction documents in relation to the capital market instrument, those setting out the rights and duties of obligor and the obligee, would often nevertheless be English law.
There is both a pull, exercised by features of this jurisdiction; and a push – away from civil legal systems (which recognise neither the trust nor beneficial title) and the weak insolvency laws of, for example, the UAE. Insolvency regimes are generally either non-existent or weak in the Gulf Cooperation Council countries, although there is recent evidence of efforts aiming at improvement.
A succinct explanation for the pull, the favour with which global IFB treats this jurisdiction, is: confidence in the impartiality of English legal system, augmented with the settled position that an English judge will not adjudicate Islamic law except insofar as Islamic law is incorporated into a contract (Shamil Bank of Bahrain EC vs Beximco Pharmaceuticals Ltd and others [2004] EWCA Civ 19), therefore falling to be constructed under the established principles of English contract law. Further reasons for the choice of English law and courts are past (based in colonialism) and present: commercial ties with Muslim majority societies – members of the Commonwealth, and the Gulf Arab states.
Regardless of the extent to which litigation and court dispositions of IFB disputes increase, with the local and global growth of the industry, the scope for dispute resolution out of court certainly will. In this respect as well the UK and IFB hold out the promise of a symbiotic relationship. Between the Arbitration Act 1996 (AA 1996), the Civil Procedure Rules, and the existing magnitude of alternative dispute resolution (ADR) cases and providers, this is manifestly a jurisdiction that sees value in promoting ADR.
Because of the religious element of IFB, and the importance accorded expertise in Islamic commercial law, arbitration agreements incorporated into IFB contracts may stipulate the religious or sectarian identity of the arbitrator or members of the arbitral tribunal. Section 19 of the AA 1996 places a duty on the court to have regard to arbitrator(s)’ qualifications as agreed by the parties; these may include expertise in Islamic law. Jivraj v Hashwani [2010] EWCA Civ 712 establishes that selecting an arbitrator on the basis of religious or sectarian identity does not violate employment law, rendering the UK a more attractive juridical seat for arbitration agreements between IFB counterparties, and clearing the way for more IFB disputes to be arbitrated here. It is also true that since IFB has developed inside the modern system of banking, finance and markets, the knowledge of conventional variants of these possessed by professionals in London and regional centres such as Birmingham is highly facilitative to increasing the sophistication of innovative and credible IFB products and practices. In this regard the work of the Bank of England and its dialogue with IFB participants in creating a shari’a compliant credit facility is an example of the flexibility and entrepreneurial spirit of the central banking authority and its predisposition to support IFB, among other forms of alternative finance.
The secular approach of the material authorities (FCA, PRA, HMT, HMRC etc), like that of the English court, represents an incentive rather than a deterrent to the use of this jurisdiction for the formation, performance and enforcement of IFB contracts and for IFI growth. Admittedly this approach created difficulties in the licensing of the IBB. Principal among these challenges were the requirements under EU/UK rules of deposit insurance, and lender of last resort provisions. Due to the ingenuity and determination of both IFB professionals and the licensing authorities these challengers were overcome. This was an auspicious precedent for the development of innovative new products which may – as IBB did – attract inward investment from the Gulf, or from the other major regional centre of IFB, Southeast Asia. The same point may be made still more forcefully regarding the debut sovereign sukuk.
British business and law schools with MBA and LLM offerings in IFB help to attract and shape the next generation of industry personnel who – whether staying on or returning to their countries of origin – may be predisposed towards this jurisdiction and the regulatory framework with which they will have become familiar. Magic and silver circle, as well as some of the largest US firms operating in London, have deemed IFB of sufficient importance and profitability to develop IFB units and to name some London-based partners (in addition to those based in offices in Africa, Asia and the Middle East) specialist in IFB. Opportunities await.
Contributor Scott Morrison is the Director of IDRAK Ltd, an Islamic banking and finance consultancy based in London
The fertile fields of Islamic finance and banking in Britain have a growing relationship with English contract law and ADR. By Scott Morrison
Shari’a-compliant financing made possible the construction of London’s Shard and the purchase of Chelsea Barracks by a Qatari sovereign wealth fund (Project Blue Ltd v Commissioners for Her Majesty’s Revenue and Customs [2016] EWCA Civ 485).
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