Islamic finance contracts: SECP to introduce alternate dispute resolution mechanism

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) will introduce an alternate dispute resolution (ADR) mechanism for Islamic finance contracts to promote the concept of out-of-court settlement which shall include mediation, arbitration, and neutral evaluation.

Senior SECP officials told media on Friday that the move is a part of strategic action plan 2024-26 to develop Islamic finance in the non-bank financial sector.

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

“Traditional legal systems and courts may not always fully align with Islamic principles, potentially leading to outcomes that are not acceptable under Shariah. An ADR mechanism designed for Islamic finance contracts can ensure that dispute resolutions adhere strictly to these principles,” officials explained.

ADR mechanisms such as mediation and arbitration can often resolve disputes faster and at a lower cost compared to traditional litigation. This efficiency is particularly important in the fast-paced financial sector, the SECP officials said.

They said that the Islamic finance, a significant part of Pakistan’s financial system, is a driving force behind economic growth and ethical investments. 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 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 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 ADR guidelines for Islamic finance contracts, including the scope and mandate of Mediation and Conciliation Panel for Islamic finance contracts, eligibility criteria for the constitution of a panel of arbitrators and mediators, number of references for mediation and/or arbitration for Islamic finance contracts, provisions for preservation of confidentiality and relationships, and integration with other existing frameworks to streamline processes and enhance awareness of the Islamic finance contracts-specific ADR mechanism.

The concept paper is available on the SECP website, and feedback on the same may be provided at the latest by April 11, 2025.

Copyright Business Recorder, 2025