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Malaysia, the world’s largest market for sukuk plans to improve its legal system to become an alternative location to Britain for resolving international Islamic finance disputes.

The goal is to position Malaysian “laws as the law of choice for Islamic finance transactions globally,” the central bank has said.

Disputes about compliance with Shariah principles were a risk to the industry’s expansion, it said.

Persian Gulf companies have traditionally based cross-border contracts on British law to take advantage of the country’s developed legal system and neutrality, according to Unicorn Investment Bank BSC in Bahrain.

“Whilst there is nothing wrong with the Middle Eastern legal systems, many of them are archaic in their procedures,” said Nida Raza, senior vice president of capital markets at Unicorn, an Islamic investment bank in Manama.

Malaysia could be “an alternative jurisdiction” as it had sukuk expertise and a system based on British common law.

The Islamic finance industry, with assets of more than $1 trillion expanding 15 percent annually, needs to develop services that can win global investor confidence while taking into account different interpretations of the Koran.

UK courts lack the expertise to decide on religious matters, according to Hussain Hamed Hassan, chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirates, and Mohamed Azahari Kamil, the head of Qatar Islamic Bank’s Malaysian unit.

Investment Dar Company, the Kuwait-based owner of half of luxury carmaker Aston Martin, had an appeal thrown out of a UK court this year in a case where the company argued that financing from a bank breached Islam’s ban on interest payments.

Muhammad Ibrahim, deputy governor at Bank Negara Malaysia, said last month that the government had set up a committee in July to improve legislation.

The Law Harmonization Committee is headed by the former Chief Justice of Malaysia Abdul Hamid Mohamad, who is also a member of the Shariah Advisory Council.

Potential changes could range from amendments to bankruptcy legislation to ensuring interest-free damage awards, Madzlan Mohamad Hussain, a partner at Zaid Ibrahim & Co, Malaysia’s biggest law firm, said.

Priya Uberoi, director of Islamic derivatives and structured products at law firm Clifford Chance, said the challenge would be to gain acceptance in the Middle East because of different religious interpretations in various jurisdictions.

“Malaysia has a very good model,” Uberoi said. “It’s very robust and very sophisticated, but you can’t take one law and impose it in another country because a product that’s run in Malaysia doesn’t mean that it will be automatically acceptable in Saudi.”

Global issuance of Islamic debt has dropped 12 percent to $10.3 billion this year. Malaysia accounted for more than half of the sales in the first half.

Malaysia practices a dual legal system, with a civil court system and an Islamic one to govern marriage, inheritance and other family matters for Muslims.

Disputes arising from Islamic finance contracts are tried by the civil court. A central bank act issued in 2009 makes the National Shariah Advisory Council at the central bank and the Securities Commission the highest authority in such rulings.

A group of scholars in Kuala Lumpur is helping to set up a committee to prepare the first global certification for Shariah experts, Aznan Hasan, the president of the oversight committee, said.


Bloomberg