Currently, English law is the most common choice of law for the governing of disputes arising under agreements purporting to adhere to Islamic principles. Some of these contracts contain no references to Islamic law and may even include a waiver of Shariah defense, implying that in case of a dispute the parties agree to waive any argument that the agreement is invalid under Shariah law. Such stipulations attempt to rectify the Sharia risk, which is a term that became known in the industry as the term associated with the risk that one party will fail under its contact obligations and then state the entire agreement is void for being invalid under Islamic law. This risk exists despite the fact that multinational law firms have created entire divisions dedicated to Shariah-compliant financial transactions. However, the current culture of Islamic finance is liberal, with parties beginning with the assumption that a deal is Shariah-compliant, and contracting parties are not necessarily knowledgeable of Islamic law.
Hence, the principles of Islamic finance have to be synchronized within the macro-structure of the English Law in order to maintain concord between the jurisdictions. Further, it can be perceived that financial services environment of the United Kingdom does not prevent the Islamic financial industry from simultaneously developing an alternative financial market. For instance, the government’s abolition of double stamp duty in 2003 had ushered in a range of new Islamic financial activity like permitting financial institutions to offer home ownership plans based on a murabaḥa contract. Earlier, these transactions had incurred double stamp duty; first when the property was purchased by the bank and then when the property was subsequently sold to the client with a profit.
The English government also facilitated the operation of mudāraba partnerships and profit & loss investment partnerships. An important feature for the Mudaraba contract lies in the fact that it places equal importance on both financial and knowledge-based investment. In these partnerships, the parties providing the ideas and ongoing training for the business venture are viewed as equally important to the venture. The profit share arising from these transactions would normally not be tax deductible by the Islamic Financial Institutions as the dividends were subject to a disadvantageous tax treatment. The government resolved this issue by authorizing mudāraba dividends to be treated as interest paid on loans by validating tax-deductibility on these dividends through an amendment of the Finance Act of 2005.[4]
Further, the legal systems can be reconciled by standardizing the Islamic financial contracts. However, the issue of standardization is closely related to the controversial debate concerning the codification of the Sharia in any nation state. A partial solution to this problem can be achieved by encouraging the industry to incorporate specific provisions, such as the Auditing and Accounting Organization for Islamic Financial Institutions (AAOIFI) sharia standards into Islamic finance contracts. As long as these provisions are sufficiently specific, they can be construed to operate as a set of contractual terms agreed upon between the parties. Further, the English courts will refer to incorporated standards in their interpretation of English law contracts so that the legal substance of contracting parties’ objectives is achieved. Therefore, the determinacy of such norms and standards would permit for a serene judicial interpretation.