MANAMA, May 18 (Reuters) - The Islamic finance industry is still searching for a stance on to what extent conventional international law should be accepted in arbitration cases, Islamic scholars said on Monday.
Many Islamic finance products and contracts are being scrutinized in courts for the first time during the current global economic downturn, after the industry got caught up in last year's global liquidity freeze and now feels its exposure to slumping real estate markets in the Gulf Arab region.

"We have to find a solution, this should be discussed in terms of legal needs and necessities, this hasn't been discussed by Islamic financial institutions collectively," Islamic scholar Sheikh Saleh Abdulla al-Haidan said during a conference held in Manama.
Islamic law, or sharia, in principle does not accept human-made law besides those derived from Islam unless Muslims have no choice, for instance when living in countries without Islamic law.
But conservative scholars argue that non-Muslim courts and non-Muslim courts should not be written into contracts as a reference for arbitrations.
Al-Haidan said contracts, in which both parties agree that British law should be reference for the contract and therefore any arbitrations, violates Islamic law.
On the other hand, Western businesses partners are often reluctant to use sharia as a legal reference for contracts, as they are not familiar with it, he said.

The Islamic finance industry is governed by a patchwork of standard-setting industry bodies, scholar rulings interpreting Islamic law and national regulations particularly in its most important centres, the Gulf Arab region and South East Asia.
But some Middle Eastern countries also have elements of the legal systems of former colonial rulers France and the United Kingdom in their legislations.
Islamic banks are also increasingly eying Muslim communities in Western countries where sharia law is not accepted in courts.
A British court in 2004 refused to consider Islamic law in its ruling on a dispute between Bahrain-based Shamil Bank and a customer of the bank.
"We need solutions that are a transition and not permanent ones until we reach the ideal and refer to the rulings of Islam," Muddassir Siddiqui, Islamic scholar and head of Islamic finance at law firm DentonWildeSapte said.
Scholars said contract parties should include arbitration centres compliant with sharia law as reference in contracts.
But industry practitioners in so far have preferred long-established international arbitration courts.
The Dubai-based International Islamic Centre for Reconciliation and Commercial Arbitration, established in 2005, has not seen a single case, Siddiqui said.
He said in particular certain Islamic loan instruments, for which the bank buys assets on behalf of the borrower to comply with the need to base transactions on underlying assets, are controversial.
These transactions are based on the relationship between a buyer and a seller of a good rather than between a borrower and a lender, which leaves room for different legal interpretations, he said.
"So long the deal goes through, nobody cares, but when there is a contestant situation, then two parties go and one asks the judge to go into substance of the contract and the other party wants to focus on the form," he said.

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(Reporting by Frederik Richter; Editing by Andy Bruce) Keywords: ISLAMIC BANKING/ARBITRATION

(frederik.richter@thomsonreuters.com; +973 1750 2031; RM: frederik.richter.thomsonreuters.com@reuters.net)

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