Islamic Finance: Issues Surrounding Islamic Law as a Choice of Law under German Conflict of Laws Principles

By Junius, Andreas | Chicago Journal of International Law, Winter 2007 | Go to article overview
Save to active project

Islamic Finance: Issues Surrounding Islamic Law as a Choice of Law under German Conflict of Laws Principles

Junius, Andreas, Chicago Journal of International Law

Two years ago, in the matter of Shamil Bank of Bahrain EC v Beximco Pharmaceutical Ltd,1 the English Court of Appeal ("English Court") decided for the first time questions of the validity, interpretation, and breadth of a choice of law provision in a murabaha agreement. The judgment is of far-reaching significance in the fields of Islamic finance and Shar'ah-compliant investments.2 This is because the English Court evaluated the agreement solely under English law, even though the disputed choice of law provision stated that English law was only to be applied "[s]ubject to the principles of the Glorious Sbaria'a."3 The English Court qualified this clause as a nonbinding statement of purpose. As Islamic investments and Islamic financial transactions become increasingly relevant in the US and continental European countries, the decision is likely to be considered by other courts in the future, and it is worth examining how German courts may react. To be sure, the decision was made under English law.

The Beximco decision may nonetheless influence courts in other countries and not only those within the Anglo-American tradition.



Factors driving the growing demand for Islamic finance products and Shari'ah-compliant investment opportunities for both borrowers and investors include the ongoing high price of oil, near-peak capacity oil production, and a growing commitment to religious codes of conduct in the Muslim world. This has led to the introduction of Islamic principles to broad reaches of economic activity. Recent years have seen the establishment of increasing numbers of Islamic financial institutions worldwide. A specifically Islamic capital market is now emerging and solidifying alongside conventional capital markets.4 The central characteristic of the Islamic financial system, apart from the prohibition of a number of trades considered religiously objectionable and illegal,5 is a comprehensive prohibition against the charging of interest (riba).6 Obviously, this prohibition is diametrically opposed to the essential importance of interest in modern banking. Muslim enterprises and Islamic financial institutions are required to do business on a wholly Shari'ah-compliant basis including their cross-border dealings and global investments. In this context, a widespread financing concept is the murabaha.7 This method of financing was also the basis of the decision of the English Court.

The murabaha is a short-term business financing, often referred to as "costplus financing" or "mark-up sale." In this sort of financing, the bank, acting for a customer, buys a commercial good from a supplier and then resells the good to the customer at a contractually specified mark-up (either a percentage or a lump sum). This entails two different contractual relationships: a purchase agreement between the bank and the supplier and an additional purchase agreement between the bank and the customer. Though the bank pays the purchase price immediately to the supplier, it defers receipt of the resale purchase price from the customer. In lieu of interest, the bank then charges a "mark-up" or "cost plus" as payment for extending the purchase price in advance. Through the use of two purchase agreements and no credit agreement in the classic sense, the bank receives-from a legal standpoint-no interest, only profits from a sale. This is viewed as permissible in Islam.8 At times, agency agreements under property law are reached pursuant to which the customer takes possession of the goods direcdy from the supplier on behalf of the bank.9 The rules, like those in all areas of business, are not uniform because no single codification of the Shari'ah exists. Differences between regions and even between individual Shari'ah scholars are not uncommon.

It would be wrong to characterize the murabaha as circumvention of the interest prohibition. As Bälz notes, the murabaha is an alternative financing form with its own risks.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Islamic Finance: Issues Surrounding Islamic Law as a Choice of Law under German Conflict of Laws Principles


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?