Is The Islamic Finance Ship Headed For Dangerous Waters?


Oliver Agha is a Partner in the Abu Dhabi office

Islamic finance is growing by leaps and bounds. However, while growth appears unabated is all truly well? Oliver Agha of Holland & Knight shares his expertise through an article on the challenges the industry faces and suggests imperative measures to fill in the legal gaps.

Islamic finance has, to date, sailed past the debt crises that affected the conventional industry largely unscathed. This is because (i) Islamic banks are precluded by mandate from investing in interest-bearing debt instruments and bifurcating assets from receivables (and unbundling and selling risk) and (ii) the industry was nascent and not fully vested in the global economy and so avoided the general conflagration.

However, Islamic finance faces challenges. A core concern relates to the legally deficient structures that have been used to construct many Islamic finance products and resulting documentation. If remedial action is not taken to address the legal gaps in documentation and legal lacunae in the structures, the industry risks declining morale among stakeholders who suffer adverse legal judgments and consumers. This article addresses some core issues and suggests remedial measures going forward.


Concepts that are permissible by themselves are applied broadly resulting in illogical and undesirable effects.


Islamic insurance (takaful) is being built on structures that suffer from egregious enforceability issues. 'Uncertainty' and 'speculation' are said to exist in insurance. To avoid these twin perils, the customer 'gifts' the premium and the insurer gifts back the 'insurance proceeds' upon the occurrence of an insurance event. However, it is doubtful if the 'uncertainty' and 'speculation' are correctly attributed to an Islamic insurance contract in the first place. Furthermore, to effect the contract through an alternate structure does not (i) solve the identified issues (assuming they were problems in the first place) (ii) help in the proper development of the industry.

Uncertainty confusedly attributed to Islamic Insurance

Some suggest that Islamic insurance suffers from 'uncertainty' (gharar) because of not knowing when or whether an insurable event shall. They point, analogously, to a contract for the delivery of an unborn calf and attribute the same 'uncertainty' in an insurance contract. However, this analogy fails under critical analysis. The prohibition of gharar in its classic sense prevents transactions for which the subject matter does not exist (e.g., sale of an unborn calf) - as the calf may never be conceived, it is unfair on the prospective buyer to be a counterparty to a future sale. Insurance on the other hand has a defined subject matter that is very...

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