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Shari'ah Non-compliance Risk Management and Legal Documentations in Islamic Finance by Ahcene Lahsasna

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Chapter 8

Legal Documentations in Islamic Finance

8.0. INTRODUCTION

Legal documentation is an important aspect of Islamic finance industry. Islamic financial institutions use the legal documentation on a daily basis, each product is attached to legal documents, either in the stage of design and approval or in the stage of implementation and execution. Lawyers and legal firms are engaged in legal work that is needed to determine the rights, liabilities, and obligation of the contracting parties. By ensuring a sound legal documentation, a Sharī`ah non-compliance risk will be mitigated and managed. Conversely, weak legal documentations that have gaps and loop holes will have a potential Sharī`ah non-compliance risk.

8.1. INTRODUCTION TO LEGAL DOCUMENTATION

The first step in legal documentation is to understand Sharī`ah requirements in contractual agreements, which are understood within the theory of contracts in Islamic commercial law. The Sharī`ah requirements are presented in the form of legal documentation clauses in order to determine the rights and obligation of the contracting parties based on mutual consent. Sharī`ah requirements will be incorporated in the agreement and presented to the contracting parties as legal documentation. After being documented, they will be implemented and enforced, and then they represent the point of reference in case of dispute.

8.2. LAW RELATED TO ISLAMIC BANKING

Islamic banking in Malaysia is operating under a dual banking system in which ...

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