The court’s adjudication role in Islamic finance is reinforced by the support from the SAC in its capacity as a consultative body to the Malaysian judiciary system. Under the law, the Central Bank of Malaysia Act 2009 prevails, if a question concerning a Shariah matter arises in any proceedings relating to Islamic financial business, where the court or the arbitrator shall take into consideration any published rulings of the SAC or refer the matter to the SAC for its ruling. The SAC’s rulings are binding on the courts and arbitrators. This referral system preserves and enhances the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles in Islamic financial transactions. To complement the court system, specific arbitration rules for Islamic banking and financial services have also been developed, enabling disputes for both domestic and international cases to be dealt with by the Kuala Lumpur Regional Centre for Arbitration (KLRCA). Such comprehensive legal infrastructure for Islamic finance is unique to Malaysia and essentially reflects the support and dedication by the legal fraternity in keeping abreast with the development of Islamic finance. Adding to the strength of the institutional and legal framework in Malaysia is our continuing emphasis on human capital development. Various measures have been implemented to ensure that our market players, including the judges and lawyers, are well-trained in Islamic finance.
An efficient and authoritative adjudication system helps create certainty and establishes the legitimacy of Islamic financial contracts. Islam places great importance on contracts and on parties to a contract. The ability of parties to enforce a contract is thus critical as it constitutes the core of maintaining the confidence of the public at large. Therefore, there is a crucial need for a dispute settlement mechanism that is able and competent to dissect in a judicious manner Shariah matters in contracts, so that issues of dispute in Shariah interpretation could be resolved and enforced accordingly. Whilst it is neither practical nor desirable to change the entire court system, a potential solution is to create a special Islamic bench that deals with financial transactions undertaken in accordance with the Shariah. This could be a viable option particularly for Muslim majority countries, as is the case in Malaysia. The use of market discipline is another option to ensure the sanctity of Shariah via mandating sufficient check and balance in adherence to Shariah matters including a minimum disclosure requirement, certification by the Shariah committee or an external audit done on the Shariah compliance aspects of an institution’s operations. In Malaysia, we have taken the approach in ensuring that the sanctity of contracts is always paramount and enforceable in our court of law. For adjudication purposes, a dedicated judge in the commercial division of the High Court in Malaysia has been assigned to preside over litigations relating to Islamic banking and finance.