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Developments of the Legal Systems of the Gulf Arab States Author(s): Ahmed Al-Suwaidi Source: Arab Law Quarterly, Vol. 8, No. 4 (1993), pp. 289-301 Published by: BRILL Stable URL: http://www.jstor.org/stable/3381723 Accessed: 07-09-2015 10:19 UTC

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DEVELOPMENTS OF THE LEGAL SYSTEMS OF THE GULF ARAB STATES

Dr. Ahmed Al-Suwaidi*

HISTORICAL BACKGROUND

In the rural areas of the Arabian Peninsula, adjudicative filnctions were performed when necessary, by tribal elders and the law was composed largely of tribal custom. In coastal communities law was administered in a system of courts and after the spread of Islam the law based, to a great extent, on Shan'a (Islamic law),l which became the source of ultimate authority in the region.2

Sha7i'a is based primarily on the Qu'ran and S>nnah (the Prophet's traditions) as well as Ijma (the consensus of Muslim jurists) and Qiyas (judgment upon juristic analogy).

Supplementary sources of Islamic law include Al-IstShsan, Al-Istislah and Al-Urf. As a divine law it is regarded by Muslims as the perfect) eternal and just law) designed for all time and characterised by universal application to all mankind, just as natural law is regarded in the West as the ideal legal order consisting of the general maxims of right and justice.3

The intrusion of British political influence in the coastal Gulf countries, beginning in the late eighteenth century, has greatly affiected the legal system operating in the region todayv Extra-territorial jurisdiction was given in Bahrain, Qatar and the TruciaI Coast and began with the protection agreements from 1880.4

However, British jurisdiction did not supplant local jurisdiction, but instead was introduced parallel to it, governing non-Muslim foreigners resident in the Gulf countries while Muslim residents remained subject to the jurisdiction of the local authorities. Under British influence much of the lepslaiion adopted by local authorities was borrowed from the common lavv codes of India and final appeal from decisions taken in the court lay to the Privy Council in England.5

Prior to 1971 the British Crown still exercised extra-territorial jurisdiciion over the Gulf region with the exception of Kuwait and Oman, which had gained their inde- pendence in 1961 and 1967 respeciively? and the regularisation of the commercial atmosphere could be undertaken in the area against a background of a uniform legal

* Dr. Al-Suwaidis book on Fanance of Irztenzatwral Trade in the Gug wiX be published shortly by Graham & Trotman.

1 Nicholas B Angell, "Impact of the GCC on the Developing Legal Systems of the Gulf Countries", in 77ze Gulf Cooperation Council, Moderatiots and Stability in an Indepffldent World edited by John A. Sandwick (Colorado: Westview Press, 1987) p.108.

2 S. H. Amin, "Legal Systems in the Gulf States", Lloyds Maratime Commercil LQW Quarerly (Feb. 1983), p.73

3 Ibid., p.72-3- 4 W. M. Ballantyne, Commeraal Law in the Arub MiddZe Esst Se G>yStates (London Lloyds of London

Press Ltd., 1986), pp.13-14. 5 Nicholas B. Angell Op. Cit.e p.108.

289

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290 ARAB LAW QUARTERLY

system based broadly on Enghsh legal principle.6 However, all Gulf States have devel- oped their own codified legal systems since attaining independence.7

Kuwait set a very important precedent, following the withdrawal of British extra- temtonal jurisdiciion in 1961, by nlrIiing not to British common law but to an emeryng body of Arab civil law as a source for new legis}aiion. This example was widely fol- lowed by Oman when it gained independence in 1967, and Bahrain, Qatar and the Trucial Coast States (UAE) a few years later in 1971.8

However, Saudi Arabia, unlike the other Gulf States) never fell under the extra- temtorial junsdiciion or becarne a sphere of inSuence of Bnt or any other European powerv As a result the Saudi Government has been less willing to adopt legislation from the more Westetnised and secularised Arab countries and the influence of the Islamic Shan'a legal System remains especially strong.9

LAWS RELATING TO BANKING AND COMMERCIAL T R A N S A C T I O N S

Saud; Arabia

Abdul Aziz Ibn Saud (1880-1953) passed new legislation with a view tO unifying the Saudi Arabia Iegal system. The administrative structure was established by "The Organic Instructions of the Hijazi Kingdom of 1926', as amended in 1932 and 1958, which state that the main source of law in Saudi Arabia is the Hanbali school of Islamic jurssprudence and the Kingdom and its subjects are bound by the Shan'a.l° In practice, however, there is no written constitution and the posiiion regarding the ShariXa in commercial transactions is very unclear.ll

However, the King can issue Royal Decrees to supplement the Shan' law when new situations arise to reconcile the corlflict between presentZay socibeconomic requirements and the Islamic tradiiions, aiming to achieve an acceptable balance between the two.l2

As a result of increased development in Saudi Arabia, legal problems have ansen. Consequently, there has been a considerable growth in legal decrees and a tendency to codify the areas of business law in general and laws dealing with investment and foreip trade in parecular.l3 liese include Royal Decrees promulgaiing the Law of Commerce (1954), Order 10311957, establishing the Saudi Arabia Monetary Agency (equivalent to the Central Bank), the Compariies Law (1965, as amended in 1978) and the Banldng

6 W. M. Ballantyne, Legal Deuelopment in Arabias A Selerion of Articles and Addresses on the Arabian Gug(London: Graham & Trotrnan Ltd., 1980), pp.31-2.

7 S. H Amin, "lwgal Systems in the Gulf States", op. cit., p.71. 8 Nicholas B. Angell, Op. C:it., p.109. 9 Ibid.

W M Ballantyne, Commercial Law in the Arab Middle East, the Galf States, op. at. pp.27-8. 11 W. M. Ballantyne, The Shan'a: A Speech to the IBA Conference in Cairo on Arab Comparaiive and

Commercial Law, 15-18 Febmary 1987, published in the Arah Law Qtlarterly, [,1987] ALQ 14. 2 S. H. Amin, Middle East Legal Systems (Glasgow: Royston Ltd., 1985)? pp.31F15. 3 Ibid., p.316.

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291 THE LEGAL SYSTEMS OF THE GULF ARAB STATES

Control Law (1966),l4 drawn up as a result of massive capital outflows in 1965 which

caused a number of banks to go bankrupt and threatened financial stability in the

Kingdom. The Banking Control Law forbids interest because it is prohibited in the

Shari'a law. However, the banks do charge commission for services, of between seven per cent and 8.5 per cent, on loans and pay a commission rate of between 3.5 per cent

and five per cent on time deposits and savings accounts respeciively. As yet, very few

Saudi individuals have such an account and many who do refiuse to accept the com-

mission because of their relipous beliefs.l5 The written constitutions of the Gulf Arab States prescribe the Shan'a as the, or

one of de, principal sources of law where there are no other specified sources. However,

the application of the Shari'a is often not clear, especially (as previously mentioned) for commercial transactions.l6

Kuwait

In 1961, British jurisdiction came to an end and the Constitution of Kuwait was drawn

up. Article 2 of the Constitution provides that: "The religion of the State is El Islam,

and the Islamic Shari'a is a principal source for legislation.".l7 The taking and paying

of interest in Islamic Shan 'a is expressly forbidden but despite this, Kuwait has passed legislation perrnitting the charging of interest on commercial loans. In this, it has

adopted the device of preserving the Shari'a principle in its Civil Code (No. 67 of

1980), whilst qualifying this basic position in its Commercial Code, first drawn up in

1961 and revised in 1980 (Law No. 68). Article 547 of the Civil Code provides:

(1 ) Loans shall be without interest. Any condition to the contrary shall be void, without prejudice to

the loan agreement itself.

(2) Any benefit siipulated by the lender shall be considered interest.

However, Article 102 of the Commercial Code provides:

(1) The creditor has the right to interest in a commercial loan unless the contrary is agreed. If

the rate of interest is not specified in the contract, the interest due shall be the legal interest of

seven per cent.

(2) If the contract contains agreement on the rate of interest and the debtor delays in payment,

then interest for delay shall be calculated on the basis of the agreed rate.

And Article 115 provides:

Interest may not be paid for a frozen interest and in any case whatsoever, the total interest

received by the creditor may not exceed the capital fiand, except for the cases provided for in this

law, but without prejudice to the commercial customs and rules, and without prejudice to any

regulations laid down for the long-tenn loans.l8

14 fibid ., p.3 15 and also W. M. Ballantyne, Commercial Lazo in the Arab Middle East, the Gulf States, op. cr., p.114.

s N. A. Shilling, Dolng Business in Saudi Arabia and the Arab Gulf States, pp.349-51. 16 W. M. Ballantyne, Legal Development in Arabia, A Selection of Articles and Addresses on the Arabian

Sulf, op. cit., pp.97-8. 7 Ibid., p.110.

18 W. M. Ballantyne, Commercial Law in the Arab ldiddle East, the Galf States, op. cit., pp.128-9 and Kuwait New Commercial Law No. 68 of 1980, translated by M. A. Mursi, pp.32-5.

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292 ARAB LAW QUARTERLY

From Articles 102 and 115 ofthe Commercial Code it will be seen that the principle of interest-bearing transactions is recognised and limited under Kuwaiti Law. How- ever, it is strictly regulated by the Central Bank of Kuwait according to Law 32 of 1968, amended by Law 130/1977. Banks must also comply with the Commercial Code and Commercial Companies Laws in so far as they do not conflict with Law 32. The Law provides that the Central bank may issue any instructions to banks which are considered necessary to implement its credit or currency policies or to ensure the sta- bility of banking. It controls banks' loan operations, specify the amount of capital to be deposited with the Central Bank or invested in the local market, and specify interest rates and commission.l9

Bahrain

Following World War II Bahrain became the centre of the British army, navy and air force and as a result was exposed to the English legal systern more than any other Gulf State.20

However, the First Order in Council came into effect in 1925, and from then until 1959 only Bahrainis and some other Muslim Arabs were subject to the jurisdiction of the local Shanfa courts, which always existed in parallel with the British courts. Irom 1959 until 1971, there was gradual transfer of jurisdiction to the local Bahraini courts either by Order in Council or Regallation.21

Aher independence the Bahrain Government promulgated many new laws, such as the Law of Civil and Commercial Procedure (1971), the Law on the Establishment of the Bahrain Monetary Agency (1973), the Companies Registration Act (1983)22 and the Commercial Law (107 of 1987) which is based on the Egyptian and Kuwaiti codes.

Before this latter Law was issued, there was a dearth of commercial legislation and if the Shan'a had been applied strictly, many ofthe commercial and baring transactions, such as interest, would have been illegal.23 However, Article 76 of the Commercial Law of 1987 perrnits the paying and taking of interest according to the legal stipulated rate by the Bahrain Monetary Agency unless otherwise agreed by the parties. An agreed rate must not in any event exceed the legal rate.24

The Bahrain Monetary Agency (Decree No. 23 of 1973) performs all the finctions of a central bank. It is responsible for the supervision, control and development of banks and also acts as a regulatory authority in matters of currency and foreign exchange and banking affairs in general.25

19 W. M. Ballantyne, Commercaal Law in the Arab Middle East, lhe Gulf States, op. cir., pp.112-13, and Kuwait New Commercial Law No. 68/1980, translated by M. A. Mursi, p.35.

20 S. H. Amin, Middle East Legal Systems, op. cit., p.21. 21 W. M. Ballantyne, Commercial Lazs in the Arab Middle East the Galf States, op. cit., p.l5. 22 S. H. Amin, Middle East Legal Systems, op. cit., p.22. 23 W. M. Ballantyne, Commercial Law in the Arab Middle East, the G>lf Stales op. cil., p.57. 24 Secretariat General of GCC, Legal Balletizz (in Arabic), No. 20 (July 1987), p.38. 25 S. H. AIIiin, Middle Evst Legal Systemss op. cit. p.23 and Secretariat General of GCC, Legal Bllllerin

(in Arabic), No. 6 (hlarch 1984), pp.51-88.

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293 THE LEGAL SYSTEMS 0F THE GULF ARAB STATES

United Arab Emirates

The Provisional Constitution of 1971 carefilly preserved the internal autonomy of each Emirate and this is exercised by its hereditary ruler.26

It states in Article 148 of the Constitution that all existing local laws in the different Emirates shall remain in force unless repealed or amended by Federal laws. In any conflict between local laws and Federal laws) the latter take precedence. In the event of disagreement the matter should be submitted to the Federal Supreme Court for decision.27

The Federal Supreme Court, which began its existence as the constitutional court in the tJniona was established by Federal Law No. 10/1973, and provides in Article 75:

llle Supreme Court shall apply the provisions of the Shari'a, Federal Laws and other laws in force in the member Emirates of the Union, conforming to the Islamic Shari'a. Likewise it shall apply those rules of custom and those principles of natural and comparative laws which do not conflict with the principle of the Shari'a.28

Federal Law No. 6/1978 set up the Federal Courts of First Instance and Appeal and transferred to these courts the jurisdiction of the local judicial bodies of Abu Dhabi, Sharjah Ajman and Fu jeirah and prescribed the following sources of law in Article 8:

The Federal Courts shall apply the provisions of the Islamic ShariX, Federal Laws and other laws in force, just as they shall apply those rules of custom and general legal principles which do not conflict with the provisions of the Shan'a.29

However, it states in Article 12 that without prejudice to the Articles of Law No. 61 1978 the Federal Courts should, at this time, perform the procedure and enforce the principles and regulations of the existing judicial body until the Federal Civil Procedure Law is promulgated.30

Consequently) the Constitutional Division Bench of the Supreme Court decided in one case,3l that Articles 61 and 62 ofthe Civil Procedure Law of Abu Dhabi, No. 3/ 1970, concerning the payment of interest (not exceeding, in any event, whether agreed by the parties in the contract or decided by the courts, 12 per cent on a commercial loan and nine per cent on a non-commercial loan) were unaffected by Article 7 of the Constitution, which states that the religion of the State is Islam and the ShariX is the principal source of legislation. Therefore, according to Ariicle 148) these Articles were to be considered constitutional and everyone should adhere to their judgments because they were in existence before the application of the Constitution dated 2 December 1971 and had not been repealed or amended since.32

However? the majority of the Civil Appeals Court of Abu Dhabi has taken the view

26 S. H. Amin, Legal Systems in the Gulf States8') op. cit., p.85. 27 Ministry of Jusiice,)dicial Gazetre (in Arabic), No. 28/1981, Federal Supreme CourtJudgment, Case

14, Year 9 fl981), pp.65-9. 28 A Collection of Issues ofthe United Arab Emirates Official Gazette (in Arabic), vol. 1 (1971-76), p.105. 29 W. 1%. Ballantync, Commercial Law in the Arab Middle East, the Guly States, op. cit., pp.57-8. 30 A Collection of Issues of the Un2ted Arab Emirates Official Gazette (in Arabic), vol. 5 (1978), p.4409. 31 No. 14, Year 9 (June 1981). 32 The Judgment of the Consiitutional Division Bench of the Supreme Court, No. 14J Year 9 (1981), p.4.

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294 ARAB LAW QUARTERLY

that Articles 61 and 62 have been validated by Federal Law 6/1978. Consequently, in Civil Appeal Case No. 5/1979, the bank concerned failed to recover delay interest on a loan because the majority of the Court held interest to be illegal under Shank law. However, the Supreme Court held the opposite view and overturned the decision for the same reasons as in Case No. 14, Year 9, (1981).33

Article 62 has since been amended by Law Nos. 3 and 4 of 1987) allowing interest tO be paid at the rate agreed by the pariies or as was in practice before Litigation. Following liiigation, however, the rate of interest should not exceed nine per cent, calculated on a simple basis and in all cases the interest must not exceed the principal amount of the debt.34 It is uncertain how the Law will apply to overdraS lending where interest is added to principal to form one running debit balance. In addition) it is very difficult to establish what the principal amount of the debt will be fiom iime to time. Subsequendy, since promulgaiion of the above Laws, there has been conflict of opinion in the First Instance Court and Appeal Court of Abu Dhabi regarding interpretation of the expression "principal amount of the debt". However, this conflict has been somehow solved by decisions of the Federal Supreme Court35 which appear to be that Principal Debt will be considered to be the amount of the funds actually advanced tO the Debtor in his account with the Bank, without taking into account the deposit paid by the Debtor or the interest charged in the account.

In a separate criminal case published in the UAE Gazetle 135/1984, the Consiituiional Division of the Supreme Court referred expressly to Article 7 of the Corlseitution and faced squarely the question: Is the Shan'a the sole officiaI source of law, superior to legislation, or are there other sources as well? Referring to Article 75 of Federal Law 10/1973, the court said that the desire ofthe State was clearly expressed in the Consti- tution that its legislation be Islamic, and fiurthermore the legislator has chosen that the law (Sha7i'a) of God is the principal source fbr all legislation and who can be better than God at law. This judgment, in the opinion of Ballantyne, constituted a weighty precedent in criminal, cilril and commercial matters and accordingly the judgment of Case No. 14, Year 9, concerning interest was not in accordance with Article 7 of the Constituiion.36 In my respectful subssion, the above view of Mr Ballantyne is cotTect and should be followed.

In Dubai the Law of 1970 constituting the courts and Law No. 2/1979 and Law No. 1/1988 establishing the Supreme Court pve jurisdiction to the Shan'a in all but a few specific matters, for example banking and financial transactions and the legality of interest, which by Decree have been granted to the civil courts. In the absence of any Dubai legislation on banking, the civil judge finds himselfdirected towards the Shan'a by Ariicle 14 of the Dubai Courts' Law 1970. Yet, in praciice, the I)ubai courts have in the past taken the view that interest is not illegal.37 For example in one case38 it

33 W. M. Ballantyne, Commercial Law in the Arab Middle Esst, the Glllf Slates, op. cit., p.59. 34 Abu Dhabi Official Gazette (in Arabic), No. 8/1987, p.166 and No. 10/1987, p.203. 35 Case Nos. 146, Year 10 (March 1989); 246, Year 10 (>ne 1989) and 247, Year 10 (7une 1989). 36 W. M. Ballantyne, Commercial Law in the Arab Middle East, rhe Gulf States, op. cit., pp.59-60. 37 Ibid. 38 Supreme Appeal Court of Dubai Case No. 122/1985.

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THE LEGAL SYSTEMS OF THE GULF ARAB STATES 295

used its discretionary powers, in the absence of settled law on the issue to perrnit interest which the parties had agreed upon or to applying the current market rate in practice in the absence of such agreement) and the court allowed a rate of nine per cent from the date of filing the case until payment. It seems to me that in I:)ubai, on the basis of this judgment, there is no limit to the amouxlt of interest permissible, as is the case in Abu Dhabi, according to Law Nos. 3 and 4 of 1987 (amending the Civil Proce- dure Law No. 3 of 1970).

In Raw Al-Khaimah the situation is broadly similar to Dubai? with the Shari'a courts having residuary jurisdiction (Court Law 1971) Article 9) and the civil courts having jurisdiction in banking matters (Decree 9/1971, Article 1(2)). The sources of law are identical to those prescribed in Dubai as they are for the Civil Court of Appeal, formed by lDecree 14/1971.39 However, the civil courts in Umm Al-Quwain have juris- diction in all matters except the cases relating to Shari'a (Courts Law 2/19713 Article S(a)) and the Ruler has the right, according to Article 14, to issue an order transferring cases from the civil court to the Shari' court or vice versa.40

Abu Ohabi, Shanah, Ajman, Fujeirah and Umm Al-Quwain, as prelriously men- tioned, have transferred the jurisdiction of the local judicial bodies to the Federal Courts of First Instance and Appeal (Federal Law 6 of 1978). Article 12, however, allows those local judicial bodies to still apply their original procedure, rules and regu- lations until a new Federal Civil Procedure Law is promulgated.41

Following Kuwaitts example, the UAE has enacted a detailed Civil Code (Federal Law No. 5/1985).42

Article 714 did not allow any excess above the original loan to be paid and this caused considerable concern and uncertainty among the banking commuriity for several months.43 However, the amended Federal Law (No. 1/1987) provided that the Civil Code would apply to civil transactions only, but that commercial transactions will be governed by existing laws and regulations until the Federal Commercial Law is prom- ulgated.44 From this amendment it would seem likely that the UAE Commercial Law will follow the Kuwait Commercial Code in respect of the paying and receiving of interest.

Federal Law No. 1011980 concerning the Central Bank, the Monetary System and Organisaiion of Banking which replaced Federal Law No. 2/1973 establishing UAE Monetary Council, regulates banks and other financial institutions in the UAE. The Central Bank of the UAE directs the monetary and credit policy, promotes banking and supervises and ensures the effectiveness of the banking system. It may control bankXs lending operations and specify the amount of capital to be deposited with the

39 W. M. Ballantyne, Commercial Law irz the Arab Middle East, the G>gStates, op. cit., p.60. 40 Mehammad Abd al-Khalak Omar, Summary ofthe Lsturcs to the Students of Shali'a and Law College in

the UAE University, of "Emirates' Civil Prosedure Code", 1982-83) pp.57-8. 41 lbid., pp.48-9 and 65. 42 Nicholas B. AngeH, Op. C1t., pp.120-21. 43 UAE Official Gazette (in Arabic), No. 158 (December 1985), p 147. 44 UAE Official Gazette (in Arabic), No. 172 (February 1987), p.9.

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296 ARAB LAW QUARTERLY

Central Bank or invested in the local market. It also helps support the national economy and the stability of the currency.45

Federal Law 6/1985 deals with Islamic banks, financial institutions and investment companies. Article 2 states that these institutions are subject to Law No. 10/1980 and the Commercial Companies Law No. 8/1984 (suspended by Decree No. 6 of 1986) and other laws, regulations and customs in operation in the country, unless otherwise stipulated in Federal Law 6/1985.

Article 3 of this Law states that Islamic banks have the right to perforsn all or some of the services and activities of banking, commerce, finance and investment according to Shan 'a law.

Article 4 exempts these institutions and similar foreign banks which are established in the UAE from (a) and (b) of Article 90 and (e) of Arlicle 96 of Law No. 10/1980, allowing them to acquire and trade in goods and property and exempting them from the payment of interest on deposits to their customers, which is forbidden in Shan'a law.

Article S states that the Shan'a Supreme Committee should be formed by Decree from the Cabinet, including Shan'a, Legal and Financial Members to direct and supervise the activity of the Islamic institutions and give its opinion on cases presented tO it. The opinion of this Committee is final to these institutions.46 However, this Committee has not been formed yet and the Dubai Islamic Bank has its own Religious Supervision Committee.

Qatar

Qatar's first Provisional Constitution which was set up on 2 April 1970, having existed in name for two years, was replaced by the Amended Provisional Constitution of 19 April 1972.47 Article 7 ofthe new Constitution declares that the religion ofthe State is Al-Islam and that the Islamic Shan'a is the principle source for its legislation.48

In 1971, Qatar enacted the Qatar Law No. 16/71, amended by Law No. 10/X2 of Civil and Commercial Matters, based on the old Kuwait Commercial Code (1961), with some modifications. As in Kuwait, there is contradiction in Qatar between the civil and commercial codes and the Constitution.

Article 4 of the Civil and Commercial Code states that Shan'a law shall apply in the absence of express legislation provision or custom, while in the Constitution the Shan 'a is prescribed as the main source of law. Consequently, if the Civil and Commercial Code was applied, many of its provisions would be illegal.49 However, since 1960 the Shari'a courts jurisdiction has been confined to traditional and personal matters, such as mauTiage, divorce, will and succession.50

45 OffiaS Gaeae (m bi; No. 8; 2S ^ (AuSt 19, p.3 md W. x BSmpt m

Aw in the Arab Middle , je G<Sr=a o at.} p.119. 46 Seuetanat General iGCC:> Legal Balitn (in Arabic)) No. 10 YEar 4 (1986) pp.12-14 and UAE

O£icial Gazette (in Arabic)} No. 82 (August 1980) pp.3S8. 47 S. H. knin, Middle Ear Lqal 8 qp. cit., p.298. 48 WL M. Bilarlve Commuil Law in e Arab Middte Vty the Cvlf Statr) op. at. p.31. 49 «bid. pp 545

50 S, . } 2 1 @. t:. p.3@.

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THE LEGAI SYSTEMS OF THE GULF ARAB STATES 297

The infrastructure of the banking system was laid down in 1971 and as a result of intensive efforts, the Qatar Monetary Agency was established on the basis of Law No. 7 of 1973 (amended by Law No. 7 of 1975) and it was granted the powers of a central bank. At the end of 1979 the Qatar Monetary Agency replaced the Association of Commercial Banks which regulated the banks operations in Qatar, especially with regard to interest rates on deposits and loans. The upper and lower limits of interest rates were now fixed by the Agency at 4.5-5 per cent and 5-7 per cent per annum respectively. The Qatar Monetary Agency also has other powers similar to those ofthe Kuwait's Central Bank and Bahrain Monetary Agency as previously mentioned.5

Sultanate of Oman

Oman does not have a written constitution but inter-tribal agreements and treaty pro- visions constitute the formal constitutional instruments prevailing in Oman.52

Oman was under British jurisdiction until 1967 and non-Muslims were, at that time, under Briiish extra-territorial jurisdiction.53 The Omani legal system is now based on the Shari'a law on the one hand, and the State law of the country on the other.54

This State legislaiion has been inspired by Western laws, and admiriistrative tribunals have been set up to hear cases under the terms of these laws.55

Oman developed its legal structure later than other Gulf States because, until 1970, the former Ruler kept his territory in absolute isolation from the modern world. How- ever, since 1970, Oman has adopted certain codes of law which provide internationally acceptable legal frameworks, preparing the country for modern institutionalised govern- ment and international commerce.56 Reference can be made to the Banking Law No. 7 of 1974 (as amended in 1977, 1978 and 1983),57 the Commercial Companies Law 1974 (as amended in 1975), the Commercial Register Law 1974, the Commercial Agencies Law 1977 (as amended in 1978), the Insurance Companies Law 1979, the Income Tax Law 1981)58 and Oman Commercial Law promulgated under Royal Decree No. 55/ 90059

The Omani Banking Law No. 7 of 1974 (as amended) covers a much wider field than any other banking legislation in the Gulf Arab States60 and is broadly based on the Uniform Commercial Code of the United States.6l It created the Central Bank

51 Qatar Monetary Agency, lle Banking and Financial System in Qatar (December 1985), pp.24-6. s2 W. M. Ballantyne, The Shari's: A Speech to the IBA Conference in Cairo on Arab Comparative and

Commercial Law, 15-18 February 1987, p.14 and S. H. Amin, Middle East Legal Systems, op. cic., p.294. 53 S. H. Amin, ibid. 54 S. H. Amin, "Legal Systems in the Gulf States", op. cit., p.84. 55 S. H. Amin, Middle East Legal Systems, op. cit., p.294. s6 Ibid., pp.286-7. 57 W. M. Ballantyne, Commercial Law in the Arab Middle East, the Gulf States, op. cit., p.l 19 and Secretanat

General of the GCC, Legal Bulletin (in Arabic), No. 7, Year 2, 1984, p.89. 58 S. H. Amin, Middle East Legal Systems, op. cit., p.287. 59 Oman Chamber of Commerce and Industry, Oman Commercial Law, Royal Decree 55/90 (Muscat:

Oriental Printing Press, 1990). 60 W. M. Ballantyne, Commercial Law in the Arab Middle East, the Gulf States, op. cit., p.119. 61 S. H. Amin, Middle East Legal Systems, op. cit., p.292.

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298 ARAB LAW QUARTERLY

which took over the filnctions of the Currency Board and was assigned some addi- tional responsibiliiies. These include currency policy and regulation and supervision of banking and commercial activities.62 The Central Bank also has power to regulate interest rates and during 1985 it lowered the interest rate on deposits from 9.5 per cent to 8.5 and on loans from 11.5 per cent to 10.5.63

The Banking Law also makes a clear attempt to adopt general principles of law and contains provisions to avoid conflict between the Shari'a law and state legislation. Paragraph (b) of SuSarticle 1.4(1) allows the parties to a contract the right to choose not only the law to govern their written contract, but also the jurisdiction or authority to which disputes are to be submitted without prejudice to Omani Law in transactions involving local banks or Omani nationals.64

From the previously mentioned laws relating to banking and commercial transactions it can be seen that there is a clear conflict between the constitutions of the Gulf Arab States, which recognise the Shari'a as the principle source of law and the banking and commercial laws which pennit the paying and taking of interest. However, pious Muslims refiuse to deal in interest and they have been looking for legally permissible means of finance, saving and investment according to the Holy Qu'ran and the Sunnah (the teaching and practices of the Prophet Mohammad, peace be upon him).

Usury was not prohibited exclusively in Islam but in all monotheistic religions. However, the Old Testament prohibits the Jews from receiving interest or profits from loans granted to Jews while permitting them to non-Jews. In the Medieval Roman Catholic Church usury was originally completely forbidden. However, due tO an increase in financial transactions between people, a distinction arose between interest which was permitted and usury which was forbidden.65

In Qu'ran, usury was prohibited gradually, in four stages: the first stage is descnbed in Surat Ar-Rum, Verse No. 39:66 (39) That which ye lay out for increase through the property of (other) people, will have no increase with God: But that which ye lay out for charity, seeking the Countenance of God, (will increase): it is these who will get a recompense multiplied.

This was advice to the Muslims, showing that usury has no reward from God. How- ever, it did not say that God had prepared punishment for those people trading in usury.

The second stage is described in Surat An-Nisa, Verses 160-161:67 (160) For the inequity of the Jews We made unlawful for them certain (foods) good and whole- some, which had been lawfill for them-in that they hindered many from God's way. (161) lEat they took usury, though they were forbidden; and that they devoured men's substance wrongfully. We have prepared for those among them who reject Faith a pevous punishment.

62 N. A. Shilling, op. cil., p.226. 63 journal of Arab Banks (in Arabic), Special Issue, vol. 7, No. 73, 1987, p.81. 64 W. aM. Ballantyne, Commercial Law in the Arab Middle East, the Gulf States, op. cit., p.163-4. 65 T. W. Taylor and J. W. Evans, "Islamic Banking and the Prohibition of Usury in Western Economic

Ehouffit", Nalional Westminster Bank Qzlarterly Review (Nov. 1987), pp.lS-18. 66 A. Yusuf Ali, The Holy Otl'Tan, Translation and Commentary, op. cit., p.1062. 67 Ibid., p.231.

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THE LEGAL SYSTEI4S OF THE GULF ARAB STATES 299

In the above verses a lesson is glven concerning the JewsX who were forbidden to deal in usury but coniinued to do so and were consequently severely punished by Allah (God).

The third stage is described in Surat Al-Imran, Verse 130:68

(130) O ye who believel Devour rlot USUry7 doubled and multiplied; but fear God; that ye may (really) prosper.

At this stage although usury was prohibited, it was still not categorically forbidden. It is asking them not to deal with usury in order to earn more and more money.

In the above verse usury with pariicular reference to compound interest is absolutely forbidden for the first eime.

The fourth and final stage is described in Surat Al-Baqra, Verses 275-276 and 278- 280:69

(275) Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. lshat is because they say: 4'Trade is like usury8', but God hath permitted trade And forbidden usury. Those who aSer receiving direction from their Lord desist7 shall be pardoned for the past; their case is for God (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever).

(276) God will deprive usury of all blessing, but will give increase for deeds of charity: for He loveth not creatures ungratefial and wicked ....

(278) O ye who believel fear God, and give up what remains of your demand for usury, if ye are indeed believers.

(279) If ye do it not, take notice of war from God and His Apostle: But if ye turn back, ye shall have your capitaI sums: Deal not unjustly, and ye shall not be dealt with unjustly.

(280) If the Vebtor is in a difficulty) grant him iime till it is easy for him to repay. But if ye remit it by way of charityz that is best for you if ye only knew.

The above verses distinguish between trade, which is perniitted by Allah, and usury, which from this time is completely forbidden; those dealing in it being companions of the fire of hell Some people argue that Riba (usury) refers to excessive interest. How- ever, the Hadith (sayings of the Prophet Mohammad, peace be upon him) makes it clear that Riba is any increase in money or in kind that the debtor is asked to pay over the amount originally borrowed. The Prophet is reported to have said ". . . loan Riba is absolutely void. You own only your principal without oppressing or being oppressed" (narrated in Sahih Muslim).70

Participants of the Second Conference of the Islamic Research Convention, the first International Conference for Islamic Economics and conferences of the Islamic Bank 1979, 1983 and 1985, agreed that all kinds of loan at interest, whether for consumpiion or production purposes, and regardless of the amount of interest, whether high or low,

68 Ibid., p.l 56. 69Ibid*p.l 11-13- '° Ahmed A. El Ashker, op. cit s p.39 and S. H. Hamoud, Islamic Banig, Ne Adaptation of Baning

Practice to Conform with Islamic Law, op. cit., pp.80-81.

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300 ARAB LAW QUARTERLY

are absolutely forbidden.7l By contrast) trade is encouraged in Islam (Allah has per- mitted trading and forbidden usury- Al-Baqara, Verse 275). The difference being that trading involves a risk or loss factor, while interest guararltees a fixed return for the use of money, with no possibility of loss and accordingly time does not justify payment.72 For the above reasons the major motive behind the emergence of Islamic banks in the GulfArab States is to establish a banking system based on profit and loss pariicipaiion instead of the debtor and creditor basis. Sescondly, it is to attract and put into circulaiion the filnds of those who for religious reasons do not deal with conventional banks, and also to finance entrepreneurs who have the experience but do not have money.73 Consequently, a number of Islamic banks were established in the Gulf Arab States with similar objectives) which are to conduct all banking operations and services) investments, purchase or finance projects for its own account, or for the account of third parties, without practising usury, whether in the form of interest or in any other form. The first Islamic bank was established in the UAE by Decree from the Ruler of Dubai in 1975 with no special regulations from the Central Bank.74 However, in 1985 new legislation was promulgated, as previously mentioned, allowing any Islamic bank or institution to be established, while in the other Gulf States new Decrees from the Rulers must be issued for each Islamic financial insiitution:75 for example, Oecree No. 72/1977 issued by the Emir of Kuwait establishing lhe Ku^vait Finance House; Decree No. 2/1979 issued by the Emir of Bahrain concerning Bahrain Islamic Bank; Decree No. 45/1982 issued by the Emir of Qatar concerning Masraf Qatar al-Islami,76 and I:)ecree No. 52/1990 regarding the establishment of Qatar International Islamic Bank (QIIB).77

CONCLUSION

Islamic law was the only source of law prevailing in the region before the protectorate treaties were made with Greal Britain in the late eighteenth century. Since then the British applied the extra-territorial jurisdiction to non-Muslim residents in the Gulf Arab States, except Saudi Arabia, based on the common law system. Following the independence of this region, several laws were introduced, some of them being based on the civil law system combined with Islamic principles.

71 Mashal Dakheel Al-Mashal, op. ., p.37 and Kuwait Finance House, Al-Noor3rosrnal tin Ambic), No. 36 (Kuwait, Sept. 1986), pp.8-10. 72 T. W. Taylor and J. W. Evans, Op. C*t., p.20. 73 Mashal Dakheel Al-Mashal, op. cit., p.60. 74 Qasim hS. Qasim, "Islamic Banking, New Opportunities for Cooperation Between Western and Islamic Financial Institutions", Islamic Banlging and Finance, edited by Buttenvorth Editonal Staff (London: Butterworth, 1986), p.24. 75 Jamal Al-Dein Attiah, Islamic Banks: Between Irtdependerze ans:l Manctgetr; Precedence and cA&J2istry; Neory and Practice (in Arabic) (Qatar, 1986), p.51. ?6 lbid., pp.26 and 31 and A Collection of Booklers, issued by Kuwait Finance House p.5. 77 Qatar Internaiional Islamic Bank (QIIB), hlemorandum and Articles of Association (Qatar: IDoha Modetn Printing Press Lti, l990); and also see Al Mailla, "File of Islarnic Banks?', No. 565 tS-l 1 December 1990), pp.34-47.

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THE LEGAL SYSTEMS OF THE GULF ARAB STATES 301

The banking laws, however, were based on the civil and common law systems adopted by the conventional banks in Europe, allowing interest, and forbidding those banks to deal in commercial, industrial and immoveable properties except for their own account. However, the Islamic banks were allowed to deal in the above-mentioned business activities for their own account or for their customers, but were forbidden to charge interest. lMose Islamic banks are performing their activiiies according to special regulations issued by the rulers, except the UAE which introduced Law No. 6 of year 1985, allowing any Islaniic bank or financial insiitution to be established in the country. This Law and regulations were not adequate enough in specifying the obligations and responsibilities of the banks and their customers. Therefore the Arab Gulf States are under an obligation to promulgate laws conceg the Islamic banks in order to reap the economic benefits by applying the Islamic methods of conducting business transaciions.

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