Kuwait's The Investment Dar (TID) is arguing in a London court that it does not have to pay back $10.7 million to Lebanon's Blom Bank because the deal, inked in 2007, was not Shariah compliant. TID, the troubled investment firm that owns half of the high-end car maker Aston Martin and is close to a $3.5bn debt restructuring, is an Islamic company guided by Shariah principles that forbid collecting or charging interest, among other strictures.
The story is alarming on a number of levels, not least of which is what such a legal argument could mean for Islamic deal-making in the future. If banks and investors have to worry that their Shariah-compliant bonds and loans might later be declared un-Islamic by the borrower, thus nullifying the whole contract, they might not be so ready to enter into such deals. Indeed, as Sheikh Muddassir Siddiqui, a Shariah scholar, said in the article, "This is a very dangerous defence. For people dealing with Islamic financial organizations,
it adds sharia risk to all the other common risks out there."
Unfortunately perhaps, it's just the sort of defence that we're likely to see more of. Companies around the region - including Islamic financial institutions - are going through some tough times at the moment. If questioning the validity of loan contracts on Shariah-compliance grounds becomes a successful way to wriggle out of financial obligations, others will certainly try the tactic. And investors and banks will think harder before they sign off on big Islamic deals, thus threatening the industry's rapid pace of growth.
It will be interesting to see how receptive the London court is to TID's claim. How seriously it is treated could have broad implications for the Islamic finance industry as it seeks to take a more central place in the Gulf's financial firmament following the financial crisis.