Legal Uncertainty in Islamic Finance

Trevor Norman, Volaw's Director of Islamic Finance and Funds Group, considers the legal implications of Islamic financial institutions entering into transactions that are found not to comply with Shari'a law.

In a recent decision by the High Court in England, an Islamic financial institution established in Kuwait successfully argued that a wakala contract it had entered into with a customer did not comply with Shari'a and because the institution was prevented by its constitutional documents from entering into agreements that did not comply with Shari'a, the contract was void. The facts of this case will be discussed below, but following on from the much publicised Sukuk crisis in Dubai, and other less publicised similar defaults on Sukuk issued by companies established in the GCC over the past few years, a large question mark hangs over the future of Islamic finance and legal documentation of Shari'a-compliant structured finance transactions.