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The Challenges and Prospects of Islamic Finance in Australia: A Case Study of Murabaha Contract

Hassan, Abdulwahid (2020) The Challenges and Prospects of Islamic Finance in Australia: A Case Study of Murabaha Contract. PhD thesis, Victoria University.

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Abstract

Islamic finance has become global: Islamic financial institutions and their customers from multiple jurisdictions are jointly participating in this international shift. Such financial institutions commonly use a Murabaha contract for financial operations. Consequently, as the foundation of Islamic financial transactions is the application of Islamic financial principles, such principles are being espoused in financial agreements and integrated into non-Islamic legal environments that may not give credit to Islamic principles. Parties to Murabaha may include a clause that states the contract should be governed by Islamic legal principles alongside domestic laws. However, the requirement of Murabaha to simultaneously comply with different legal systems may create disputes over interpretation and application, posing both regulatory and financial risks. Within this context, this thesis employs a qualitative methodological approach to explore the feasibility of using Shariah compliant Murabaha in Australia. By examining Islamic and non- Islamic legal texts, academic journals and Murabaha dispute cases, the first objective of this project was to examine whether the different legal systems create any additional legal or financial risk to Murabaha. The second objective was to investigate how Murabaha disputes are settled in common law jurisdictions through an analysis of Murabaha cases in the United Kingdom and Malaysia, as there have not yet been any Murabaha legal disputes in Australian court history. The third objective of the thesis was to study different aspects of dispute resolution, litigation and arbitration to determine the most suitable dispute resolution system for Murabaha in Australia. The thesis concluded that Islamic financial institutions’ practice closely resembles Murabaha transactions with conventional financial practices. This allows them to enjoy similar economic advantages and receive the same legal treatment as conventional financial institutions. However, such close resemblance with the conventional financial system may risk diverting Murabaha from Islamic finance theory towards Shariah non-compliance. Moreover, the thesis found that Malaysia has established a regulatory financial system for Islamic finance that has eliminated Shariah non-compliance risk. On the other hand, the study demonstrated that even though the UK recognises Islamic finance system, it does not accept Shariah as a system of law capable of governing a contract. The UK treats Murabaha transactions as credit contracts that receive the same legal protection as conventional credit contracts. Similarly, Australia, a Commonwealth country, takes the same position as British courts with regards to the Murabaha transactions. Furthermore, the study revealed that the arbitration is the most appropriate dispute resolution forum for Murabaha because it can accommodate Shariah law within domestic legal systems. The arbitration system obliges arbitral tribunals to decide disputes with reference to either the national law chosen by the parties or any considerations agreed upon, such as Shariah law. This flexibility closes the gap between Shariah principles and arbitration law and stabilises international commercial relationships in Australia. Therefore, the study recommends that Australia should incorporate the Islamic rules governing Murabaha into its legal and regulatory system and consider adopting the Malaysian model because of its success in integrating Islamic banking and finance in a common law system. The study also recommends that the Islamic finance industry in Australia should adopt arbitration as an alternative dispute resolution forum for Murabaha disputes. For guidance, the study suggests that the Islamic finance industry implement AAOIFI Shariah Standard on Arbitration and the KLRCA Arbitration Rules. This would make Murabaha legally compliant and commercially desirable while also maintaining Shariah compliance within Australian law.

Item Type: Thesis (PhD thesis)
Uncontrolled Keywords: Islamic finance; finance; Murabaha; Islamic law; Shariah law; financial regulatory system; Riba; contracts; common law; dispute resolution; arbitration; Australia
Subjects: Current > FOR Classification > 1801 Law
Current > Division/Research > College of Law and Justice
Depositing User: VUIR
Date Deposited: 22 May 2020 06:31
Last Modified: 22 May 2020 06:31
URI: http://vuir.vu.edu.au/id/eprint/40458
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