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

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.

I. INTRODUCTION

A. INTRODUCTION TO THE MATTER IN DISPUTE: ISLAMIC FINANCE

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. …

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