<p>Islamic financing has made a major breakthrough in the financial world and  over the past few years and has now proven to be a major contender to  conventional financing in the UAE.<br /><br />Still in its infancy compared to the  established conventional banking system, stumbling blocks on structuring Islamic  financing products such that they are competitive with their conventional  counterparts, are slowly being overcome. One of these is the interplay between  the laws of the UAE and Shari&rsquo;a concepts.<br /><br />The Shari&rsquo;a is an abstract form  of law derived from Islamic principles and is capable of adaptation, development  and further interpretation. It is not a codified law in the UAE. The Shari&rsquo;a  does not prescribe general principles of law, but rather, purports to deal with  and cover specific cases or transactions and sets out rules that govern  them.<br /><br />Among the most important teachings of Islam for establishing  justice and eliminating exploitation in business transactions, is the  prohibition of all sources of unjustified enrichment and the prohibition of  dealing in transactions that contain excessive risk or speculation. Accordingly,  Islamic scholars have deduced from the Shari&rsquo;a three principles that form the  benchmark of Islamic economics and which distinguish Islamic finance from its  conventional counterpart. Briefly, these are:<br /><br />(a) &nbsp;The prohibition of  interest<br />(b)&nbsp;The sharing of profits and losses <br />(c)&nbsp;The prohibition  against uncertainty and excessive speculation (being speculation over and above  that which is necessary and unavoidable in a normal business  transaction)<br /><br />The UAE is governed by a civil law system, which means that  all relevant underlying commercial and banking laws are, to a large extent  codified. There is no separate legislation within the UAE which codifies Shari&rsquo;a  law for commercial transactions. There are also no separate Shari&rsquo;a courts to  hear disputes arising out of Shari&rsquo;a financing transactions.<br /><br />However, as  many aspects of Shari&rsquo;a rulings have been incorporated into the civil law, it  can be said that large portions of the UAE commercial laws are underpinned by  Shari&rsquo;a elements and are therefore compatible with Shari&rsquo;a principles. The  courts are also permitted to refer to the Shari&rsquo;a in the absence of clear  legislation and established customary business practices. This is reflected in  the approach taken by the UAE Federal Law No. 5 of 1985 Concerning Civil  Transactions (the &lsquo;Civil Code&rsquo;), which, together with the Federal Law No. 18 of  1993 concerning the Commercial Transaction Law (the &lsquo;Commercial Code&rsquo;), sets out  the main provisions for civil and commercial transactions in the  UAE.&nbsp;<br /><br /><strong>Applicability of Shari&rsquo;a principles in the  UAE<br /><br /></strong>The main challenge in structuring and offering Islamic  compliant products in the UAE is to bridge the occasional mismatch between the  laws of the UAE and the principles of Shari&rsquo;a.<br /><br />In many instances, the  provisions of the UAE law are reflective of Shari&rsquo;a principles, such as the  pre-requisites relating to capacity to contract, the requirement for clarity of  contractual terms, the absence of duress and the specific conditions governing  sale and purchase transactions. In these instances, such transactions are fully  compliant with both Shari&rsquo;a elements and UAE law from the outset.<br /><br />In  other cases, the provisions of the UAE laws are inconsistent with Shari&rsquo;a  principles. For example, the charging of interest is generally permitted under  UAE law as long as it is not unduly excessive (this being reflected by the  flourishing conventional banking system in the UAE). However, interest is  strictly prohibited under Shari&rsquo;a, no matter how nominal the amount. Similarly,  while it is not illegal under UAE law to deal with certain items such as pork  products and the entertainment industry, these are prohibited under Shari&rsquo;a. In  such cases, it is best that these restrictions and prohibitions are eliminated  from the financing structure and, where applicable, removed from the relevant  agreements in order to ensure Shari&rsquo;a compliance.<br /><br />Less clear are  transactions falling within grey areas, where UAE laws are silent and customary  practice offers little guidance. An example is the legally untested area of  derivatives transactions. From a Shari&rsquo;a perspective, there are concerns that  the speculative and uncertain nature of derivatives may breach Shari&rsquo;a  provisions. However, UAE laws are silent on this issue, and market practice has  not developed to such an extent as to provide conclusive guidance. As the courts  are permitted to refer to the Shari&rsquo;a in the absence of clear legislation and  established customary business practices, it is likely that courts will rely on  the Shari&rsquo;a criteria in analyzing the legality of a derivatives  transaction.<br /><br /><strong>The role of Shari&rsquo;a  pronouncements<br /><br /></strong>It is standard practice for each Shari&rsquo;a product  to be structured and certified as Shari&rsquo;a compliant by Shari&rsquo;a scholars or  experts (who are usually appointed by the Islamic financial  institutions).<br /><br />Once a product is offered to the public by a licensed  financial institution in the UAE, it would be reasonable to assume that such  product has undergone legal and Shari&rsquo;a analyses before approval was granted for  such product to be made available to the public.<br /><br />However, while such  pronouncements formalizes the approval from the Shari&rsquo;a perspective, they have  no binding effect. The UAE courts are not compelled to take the Shari&rsquo;a  pronouncements into consideration when determining a case, and will most likely  simply rely on the terms of the contract.<br /><br /><strong>Disputes under Shari&rsquo;a  financial transactions<br /><br /></strong>Should a dispute be brought to a UAE  court, the court is unlikely to apply a different treatment to the dispute  solely on account of the transaction being Shari&rsquo;a compliant. The dispute will  be subject to the same processes and procedures as a conventional financing  counterpart.<br /><br />The courts will also apply the laws of the UAE in  determining the case. Notably, if a document purports to be governed by Shari&rsquo;a  law, courts will likely disregard such choice of law, and will instead apply the  applicable UAE laws.<br /><br />To maintain the legal enforceability of an  agreement, it is prudent that all the elements necessary for Shari&rsquo;a compliance  purposes are contractually provided for within the body of the agreement itself.  Notably, under the Civil Code, where the intention of the parties is clear from  the language of the contract, the courts will not imply any further meaning or  additional terms to the contrary. Save in the cases where the contract was  unclear and the provisions of the law and customary practice are silent on an  issue, the UAE courts are unlikely to examine the Shari&rsquo;a aspects of a  document.<br /><br /><strong>Shari&rsquo;a products offered in the UAE<br /><br /></strong>The  Islamic financial institutions within the UAE offer many mainstream products  that one would expect to find, such as ijarah, murabaha, mudaraba and istisna.  These are both from the loan and deposit aspects, and are fully supported by the  normal ancillary services such as the provision of chequebooks, internet banking  and Shari&rsquo;a compliant credit cards.<br /><br />It is a Shari&rsquo;a requirement that all  Shari&rsquo;a structures must comply with the laws of the jurisdiction in which it is  made available. For that reason, due to legal limitations, certain products such  as those which involve trust arrangements or beneficial ownership over land, are  not offered in the UAE, as their structures are incompatible with UAE land  laws.<br /><br /><strong>Security arrangements for Shari&rsquo;a  financing<br /><br /></strong>Security arrangements for Shari&rsquo;a compliant products  are similar to their conventional counterparts, with modifications to remove  elements of interest. One can therefore expect to find the standard security  documents such as mortgages, assignments over assets, pledges and guarantees.  While the suitability of such security arrangements depends on the underlying  Shari&rsquo;a structure, such security documents will be enforced by the UAE courts  provided that they have been duly perfected under UAE law.<br /><br />As a general  overview, the UAE Civil Code has a strong Shari&rsquo;a foundation which supports the  proper regulation of Islamic financial mechanisms. Due to economic realities,  certain mismatches between UAE laws and Shari&rsquo;a principles exist, however, such  incompatibilities are minimal compared to other major financial  jurisdictions.</p>