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Customers' perceptions on the dispute resolution clauses in Islamic finance contracts in Malaysia

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  • Umar A. Oseni
  • Abideen Adewale
  • Nor Razinah Binti Mohd Zain

Abstract

This empirical legal study examines the perceptions of retail customers on the dispute resolution clauses contained in the governing law and jurisdiction clauses in Islamic finance contracts in Malaysia. Since Islamic financial institutions and their customers are more likely to opt for litigation in the event of a dispute, this study explores ways of providing for unambiguous dispute resolution clauses that are well understood by the parties. Such clauses are expected to incorporate effective dispute resolution processes such as mediation and arbitration through a multi‐tiered mechanism. Primary data collected through survey questionnaire administered on 160 Islamic bank customers is analysed using both factor analysis and structural equation modelling. The empirical legal study reveals that there is a statistically significant direct effect of dispute resolution clauses in Islamic finance contracts on the legal awareness and understanding of the customers and indirect effect on the customers' dispute resolution channels. It therefore follows that there is a need to provide for more effective clauses that allow for mediation and arbitration in the governing law and jurisdiction clauses of Islamic finance contracts in Malaysia. Such alternative dispute resolution processes can be structured in a multi‐tiered manner that will only allow for litigation as a last resort. This will allow Islamic financial institutions and their customers to make informed decisions about the best option for effective dispute management.

Suggested Citation

  • Umar A. Oseni & Abideen Adewale & Nor Razinah Binti Mohd Zain, 2016. "Customers' perceptions on the dispute resolution clauses in Islamic finance contracts in Malaysia," Review of Financial Economics, John Wiley & Sons, vol. 31(1), pages 89-98, November.
    • Handle: RePEc:wly:revfec:v:31:y:2016:i:1:p:89-98
    DOI: 10.1016/j.rfe.2016.05.004
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    References listed on IDEAS

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    1. Ruzian Markom & Noor Yaakub, 2015. "Litigation as dispute resolution mechanism in Islamic finance: Malaysian experience," European Journal of Law and Economics, Springer, vol. 40(3), pages 565-584, December.
    2. Umar Oseni, 2015. "Dispute resolution in the Islamic finance industry in Nigeria," European Journal of Law and Economics, Springer, vol. 40(3), pages 545-564, December.
    3. Ruzian Markom & Noor Yaakub, 2015. "Erratum to: Litigation as dispute resolution mechanism in Islamic finance: Malaysian experience," European Journal of Law and Economics, Springer, vol. 40(3), pages 585-585, December.
    4. Hanudin Amin & Abdul Rahim Abdul Rahman & Dzuljastri Abdul Razak, 2014. "Consumer acceptance of Islamic home financing," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 7(3), pages 307-332, July.
    5. Ruzian Markom & Sharina Pitchay & Zinatul Zainol & Anita Rahim & Rooshida Merican, 2013. "Adjudication of Islamic banking and finance cases in the civil courts of Malaysia," European Journal of Law and Economics, Springer, vol. 36(1), pages 1-34, August.
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