Dispute management in Islamic financial institutions: a case study of near sukuk defaults

Author:Umar A. Oseni
Position:Department of Civil Law, International Islamic University Malaysia, Kuala Lumpur, Malaysia
Pages:198-214
SUMMARY

Purpose - The purpose of this paper is to examine the vital importance of dispute management in cases of both near and outright sukuk defaults. With the case studies, this study examines the vital importance of dispute management in cases of both near and outright sukuk defaults. With a number of case studies, the study shows how debt restructuring can play a significant role as a... (see full summary)

 
FREE EXCERPT
Dispute management in Islamic
nancial institutions: a case
study of near sukuk defaults
Umar A. Oseni
Department of Civil Law, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
Abstract
Purpose – The purpose of this paper is to examine the vital importance of dispute management in
cases of both near and outright sukuk defaults. With the case studies, this study examines the vital
importance of dispute management in cases of both near and outright sukuk defaults. With a number of
case studies, the study shows how debt restructuring can play a signicant role as a dispute
management procedure recognized in Islamic law.
Design/methodology/approach – The study uses the case study methodology to determine the
impact of debt restructuring in instances of near and outright sukuk default and the process taken to
reach a win-win settlement among the parties. Due to some sensitive nancial information, the study
has fully anonymized the sukuk companies examined.
Findings – The paper nds that for a more sustainable and stable and resilient Islamic nance
industry, the role of law through dispute management cannot be ruled out, as appropriate dispute
management mechanism facilitates the underlying contracts.
Research limitations/implications This study limits its focus to near and outright sukuk
defaults and the need to come up with Shari’ah-based mechanisms for dispute management when
things seem to have fallen apart.
Practical implications – The study proposes an integrated regulatory-cum-remedial framework
which may serve as sustainable mechanism for handling circumstances involving near and outright
sukuk defaults with a view to protecting the rights of all the stakeholders.
Originality/value – Though few studies have been conducted on sukuk defaults in cross-border
transactions, there has not been much focus on dispute management of cases involving such defaults.
This study seeks to ll such an important gap, which has the potential of streamlining dispute
management practices in the sukuk industry.
Keywords Islamic nancial institutions, Dispute resolution, Debt restructuring, Islamic investment
certicates, Sukuk defaults
Paper type Research paper
This study was carried out under the general purview of the Fundamental Research Grant Scheme
(FRGS) with the ID No.: FRGS13-003-0244 awarded by the Ministry of Education (MOE),
Malaysia. The author acknowledges MOE and the International Islamic University Malaysia for
their immense nancial support. The author also thanks the two anonymous reviewers as well as
the Editor of the Journal of International Trade Law and Policy for their valuable comments which
have improved the paper tremendously.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1477-0024.htm
JITLP
13,3
198
Received 5 December 2013
Revised 19 April 2014
Accepted 13 July 2014
Journal of International Trade Law
and Policy
Vol. 13 No. 3, 2014
pp. 198-214
© Emerald Group Publishing Limited
1477-0024
DOI 10.1108/JITLP-12-2013-0034
Introduction
There is a global surge in the amount of Shari
ˉ‘ah-compliant notes or sukuk in 2012, with
an estimate of about US$138 billion according to the Standard and Poor’s report. It is
expected that global sukuk issuance may exceed US$100 billion in 2013. According to
Ernst & Young forecast, global sukuk demand would be in excess of US$600 billion by
2015 (Ernst & Young, 2012, p. 11). There is a great deal of sukuk issuance across the
world, which has mainstreamed Islamic nance practices in the world economy (Shaikh,
2012). “Once largely restricted to the Middle East and Southeast Asia, Islamic nance
and investment now permeate markets throughout Europe, Asia and even the USA”
(Abdel-Khaleq and Richardson, 2006, p. 409). However, amidst these promising
successes are some legal and regulatory challenges that are often shrug off until the
chips are down. Rather than being reactive, which usually does not produce sustainable
results, it is better to be proactive, particularly in multi-million dollar transactions that
are debt-based (Oseni, 2013).
While the Shari
ˉ‘ah-compliant debt certicates have benetted from the thawing debt
market, the downside of such success calls for much concern. It goes without saying that
the global Islamic nance industry has witnessed a number of sukuk defaults and near
defaults (Elmalki and Ryan, 2010). For the purpose of this paper, sukuk default occurs
when the sukuk issuer has failed to meet its debt obligations under the underlying
contract in accordance with the certicates issued to the investors. When such a sukuk
issuer cannot make repayments to the sukuk holders, a situation of a looming default
sets in. But when reasonable steps have been taken to forestall such default through debt
restructuring or an outright bailout, it can simply be referred to a situation of near sukuk
default. While the focus of this paper is instances of near sukuk defaults and how they
can be properly managed to avert a multitude of litigated cases, references are made to
situations of actual defaults.
Against the above backdrop, this paper is organized into six major sections. Besides
the introduction, the second section gives a brief explanation on the research
methodology. The third section examines the inextricable nexus between dispute
management and debt restructuring in Islamic nancial transactions, particularly when
the underlying commercial relationship is premised on debt-based transactions.
Furthermore, the fourth section presents four case studies of near sukuk defaults and the
way they were handled, with a view to developing a framework for handling related
cases. The fth section briey examines the Rome Convention 1980, cross-border sukuk
and the treatment of Shari
ˉ‘ah in the English Courts in matters involving Islamic nance.
The sixth section focuses on Islamic nance regulation and the need for a more
sustainable global industry through a proper dispute management framework for near
sukuk defaults. This seeks to protect the investors, and ensure certainty in Islamic
nance transactions. Finally, the seventh section gives the conclusion, summary of
ndings and some policy recommendations.
Research methodology
A brief explanation of the methodology used in this study to justify the central
hypothesis may be essential to set the tone of the discussion. The study uses the case
study methodology to determine the impact of debt restructuring in instances of near
sukuk default and the process taken to reach a win-win settlement among the parties[1].
The case study method seems to be more appropriate for complex issues that are
199
A case study of
near sukuk
defaults

To continue reading

REQUEST YOUR TRIAL