Concerns are rising over an Abu Dhabi Federal Supreme Court ruling that foreign exchange dealings that are 'purely speculative' constitute gambling and are illegal under Islamic law.
The court issued its ruling towards the end of 1996, but the decision has only begun to generate debate within banking and government circles following the recent publication of an English translation of the ruling.
Implications for business
The ruling is unlikely to have a significant impact on the operating environment for foreign businesses in the Emirates. The government is fully committed to developing the country as the commercial and banking hub of the Gulf and will work to prevent strict interpretations of Islamic law undermining this project. Countries with far stricter interpretations of Islamic law have operated effective currency markets. Moreover, the ruling was made by the Abu Dhabi court and has no impact on banks in Dubai, where the courts have supported the legality of currency dealing in similar cases.
However, the case underlines some of the difficulties that foreign companies may face when dealing with an Islamic-based legal system. The case centred on an investor who took a bank to court after he sustained losses of some $400,000 on currency transactions made on the investor's behalf. The investor argued that, though he had empowered the bank to act on his behalf, the bank had acted illegally by purchasing currency futures. The investor's lawyers argued that this violated the contract between the investor and the bank and meant that he was not liable for the losses made. The court upheld the argument and ruled in the investor's favour.
Foreign firms working in the UAE should be aware that there may be hidden risks associated with activities considered standard in their normal operating environments. These risks arise not only from trade in the futures markets, but also from other areas of business, particularly those that could be linked to interest, which is also illegal under the Islamic legal system.
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