Islamic finance is often taught through contracts and standards. Some of its most useful lessons, however, come from real events: court cases, market controversies and failures that tested how Islamic contracts work in practice. This article looks at six well-documented public cases. For each, it summarises what happened, the challenge it shows and the lesson for practitioners.
The summaries are short and simplified, based on publicly reported facts. They describe what parties argued and what courts held; they do not judge anyone's conduct.
1. Shamil Bank of Bahrain v Beximco Pharmaceuticals (2004)
What happened. Shamil Bank of Bahrain provided financing to companies in the Beximco group of Bangladesh under murabahah agreements. The agreements contained a governing law clause that referred both to the principles of Shari'ah and to English law. When the borrowers defaulted and the bank sued in England, the borrowers argued that the agreements were in substance interest-bearing loans and therefore invalid under Shari'ah, so they should not have to pay.
What the court held. The English Court of Appeal ruled for the bank. It held that English law governed the agreements and that a contract can be governed by the law of a country, not by a body of religious principles. The reference to Shari'ah was treated as a statement of the bank's religious approach to business rather than a second system of law the court would apply.
The challenge. Shari'ah compliance and legal enforceability are different questions. A court applying national law will not decide whether a contract is Shari'ah-compliant just because the contract mentions Shari'ah.
The lesson. Choose the governing law clearly, and make sure Shari'ah compliance is secured before signing through the SSB's review, not left for a court to decide afterwards.
2. The Investment Dar v Blom Developments Bank (2009)
What happened. Blom Developments Bank placed funds with The Investment Dar, a Kuwaiti investment company, under a wakala arrangement. When The Investment Dar did not repay, Blom asked the English High Court for summary judgment. The Investment Dar argued that the wakala was not in fact Shari'ah-compliant, and that since its own constitution allowed only Shari'ah-compliant business, it had lacked the capacity to enter the contract.
What the court held. The judge decided that this argument raised an issue that should go to a full trial, so summary judgment was refused at that stage.
The challenge. A party can try to use its own Shari'ah commitments as a defence. The case caused concern in the market because it showed that a Shari'ah argument might at least delay enforcement.
The lesson. Contracts should include clear representations by each party that it has reviewed the structure and accepts its Shari'ah compliance, and that it will not raise non-compliance as a defence. Strong governance at both counterparties reduces the risk.
3. Dana Gas sukuk (2017)
What happened. Dana Gas, a UAE-listed energy company, had issued mudarabah sukuk of roughly USD 700 million. In 2017, ahead of the sukuk's maturity, the company announced that, in its view and based on legal and Shari'ah advice, the sukuk were no longer compliant because interpretations of Shari'ah had evolved, and that they had therefore become unlawful under UAE law. It began proceedings in the UAE courts. Some of the transaction documents, including a purchase undertaking, were governed by English law, and proceedings were brought in England too.
What the court held. The English High Court held that the English-law documents were valid and enforceable, and that the Shari'ah argument did not affect them under English law. The company and sukuk holders later agreed a restructuring.
The challenge. Mixed governing laws can split a transaction, and a Shari'ah argument raised late can unsettle investors across the market.
The lesson. Consistency across documents matters, as does clarity on which law governs each part. Investors also value strong, published Shari'ah opinions and an issuer's commitment not to challenge them later.
4. The sukuk purchase undertaking debate (2007-2008)
What happened. In late 2007, Sheikh Muhammad Taqi Usmani, then chairman of AAOIFI's Shari'ah board, was widely reported as saying that a large majority of sukuk in the market (a figure of about 85 percent was cited in press coverage) did not meet Shari'ah requirements. A central concern was that many musharakah and mudarabah sukuk included a promise by the originator to buy back the assets at face value, which effectively guaranteed the investors' capital. In early 2008 AAOIFI issued a statement on sukuk that, among other points, stressed that sukuk must represent real ownership of assets and that the manager in partnership-based sukuk should not undertake to repurchase the assets at their nominal value.
The challenge. Market practice had moved ahead of Shari'ah scrutiny. Structures that gave bond-like certainty risked losing the risk-sharing that the underlying contract required.
The lesson. Structures should be tested against principles, not only against precedent. Following the debate, the market made more use of ijarah-based structures and of repurchase at market or agreed value where partnership contracts are used.
5. Ihlas Finans and deposit protection in Turkey (2001)
What happened. Ihlas Finans was one of Turkey's special finance houses, the institutions that later became known as participation banks. During Turkey's financial crisis in 2001, it was closed by the banking regulator. Unlike conventional bank deposits, funds held with special finance houses were not covered by the state deposit insurance scheme at that time, and many depositors faced long delays in recovering their money.
The aftermath. The episode damaged confidence in the whole sector. Turkey later created a protection arrangement for these institutions and, under banking legislation adopted in the mid-2000s, brought participation banks under the same regulatory framework as other banks, with their funds covered by the national deposit insurance fund.
The challenge. Profit-sharing accounts are not guaranteed in the way conventional deposits are, but customers often see them as safe deposits. A failure without protection can destroy trust.
The lesson. Islamic banks need clear regulation, strong supervision and deposit or fund protection designed to fit their accounts, together with honest disclosure about the risks of investment accounts.
6. The end of LIBOR as a benchmark
What happened. For decades many Islamic contracts, including murabahah, ijarah and sukuk, used the London Interbank Offered Rate (LIBOR) as a reference for pricing. Islamic scholars generally accepted using an interest rate as a benchmark, provided the contract itself was compliant. After manipulation scandals, regulators decided to retire LIBOR. Most settings stopped being published at the end of 2021, and the main US dollar settings ended in mid-2023.
The challenge. Replacement rates such as SOFR and SONIA are overnight rates often compounded over a period and known only at its end. That is a problem for contracts such as murabahah, where the price must be fixed at the outset. Legacy contracts without fallback clauses also had to be amended.
The lesson. Islamic contracts need robust fallback provisions, and benchmarks must be compatible with each contract's rules, for example using rates known in advance or fixing the rental for each ijarah period before it begins.
Cross-cutting lessons
- Governing law: national courts apply national law. Shari'ah compliance must be built into the structure and approved before signing.
- Shari'ah governance: strong SSB review, documented opinions and a culture of compliance reduce the risk of later challenges, by either party.
- Liquidity: Islamic institutions and their customers need reliable liquidity tools and safety nets, especially in a crisis.
- Disclosure: investors and depositors should understand the risks they bear, whether in investment accounts or in sukuk.
This article is educational material by ifSPACE. It is not a fatwa or legal advice.