Islamic funding gets English court assent

A landmark judgment by an English court upheld a central principle of ancient Islamic funding after a unique challenge was made against it. The significance of the case is heightened as Islamic financing is becoming an increasing feature of large-scale deals in the Middle East, carried out alongside Western banks.
Also, business finance company Datamonitor reported recently that Islamic Sharia-compliant financing is increasingly popular in the UK, where there are estimated to be more than 5,000 Muslim millionaires.
Clyde & Co, which handles a lot of Islamic funding issues, brought a case for the Islamic Investment Company of the Gulf (Bahamas) (IICG), in the firm's first test of a Morabaha financing under English law. A Morabaha is an Islamic's bank purchase of goods it then sells to a customer at a pre-agreed price. In conventional banking, a bank advances money to a borrower.
The dispute arose because a large amount of diamonds for which Clyde & Co's client had advanced £15m to a third party, never passed to the purchaser, Symphony Gems.
IICG sought repayment from Symphony through the English courts, which had to determine if the Morabaha, which is used worldwide in 66 per cent of all Islamic investment transactions, was a straight financing or a purchase and on-sale.
If it was the latter, the bank would be prevented from recovery on the basis that no goods had passed.
A Morabaha is described as the sale of a commodity for cash or a deferred price rather than a loan given on interest. Islamic banks have established safeguards against the risks of defective goods being supplied or a supplier failing to supply the goods. The court ruled in the bank's favour.
Acting for IICG, Clyde & Co partner David Bennet said: “If it had gone against, the bank would have had to reconsider the way they do Islamic financing.” Adam Greaves of Steptoe & Johnson acted for Symphony.