SECP to introduce Alternate Dispute Resolution for Islamic finance contracts

March 14, 2025 (MLN): The Securities and Exchange Commission of Pakistan (SECP), under its strategic action plan 2024-26 for the development of Islamic finance in the non-bank financial sector, intends to introduce an Alternate Dispute Resolution (ADR) mechanism for Islamic finance contracts.

This initiative aims to promote the concept of out-of-court settlements through mediation, arbitration, and neutral evaluation.

The primary objective is to propose a specialized ADR mechanism that aligns with Shariah principles and rules, providing a Sharia-compliant, efficient, and effective means of resolving disputes, thereby enhancing stakeholder confidence in the Islamic finance sector.

Islamic finance, a significant part of Pakistan's financial system, is a driving force behind economic growth and ethical investments, according to the press release issued today.

However, this growth necessitates the development of effective dispute resolution mechanisms.

Contracts like Musharakah, Modaraba, Murabaha, Ijarah, Wakala, and Istisna are unique in their alignment with Islamic jurisprudence. Traditional litigation may not always align with Islamic principles, necessitating the need for ADR mechanisms tailored specifically for such contracts.

The foundational framework for Islamic finance contracts is Maqasid al-Shariah, which aims to promote human well-being and uphold security.

The Enforcement of Shariah Act, 1991, established the supremacy of Shariah within Pakistan's legal framework, declaring it as the supreme law and overriding all other laws, customs, and usages.

Accordingly, a concept paper has been issued to seek feedback and comments on the proposal for the introduction of an ADR mechanism for Islamic finance contracts in Pakistan.

To address the identified gaps, this paper proposes the integration of Islamic finance-related principles and conditions into a dedicated ADR mechanism for Islamic finance contracts.

This mechanism will be available in regulated sectors of SECP, including mechanisms under section 276 of the Companies Act, 2017, the Arbitration Act, 1940, and the Alternative Dispute Resolution Act, 2017.

The ADR framework should include clear guidelines for Islamic finance contracts, covering the scope and mandate of the Mediation and Conciliation Panel, as well as eligibility criteria for arbitrators and mediators.

It should also specify the number of references for mediation and arbitration, along with provisions to preserve confidentiality and maintain relationships.

Additionally, the framework should integrate with existing mechanisms to streamline processes and enhance awareness of the ADR system tailored to Islamic finance contracts.

Copyright Mettis Link News