Kuwait-based Investment Dar may be prevented from using sharia as a defense in a lawsuit filed by Lebanon's Blom Bank over a disputed investment, after its sharia board said the deal was compliant with Islamic law.

Blom Bank sued Dar in a British court last year to recover $10.7 million it invested in the company in 2007, as well as a 5 percent return promised in the terms of the Islamic contract.

Dar, however, refused to pay, arguing the deal was not sharia-compliant.

Dar said the fixed 5 percent return could be seen as interest, which is forbidden under Islam, and Dar's charter prohibits it from entering into non-Islamic transactions.   

However, Dar's fatwa and sharia supervisory board, after meeting on May 22, said the wakala, or agency, contract was a valid Islamic contract and asked Dar to not use sharia as a defence in any ongoing or future litigation with Blom.

In addition, the board asked that Dar not use sharia as a defence in any future litigation without conferring with the sharia board first to determine the legitimacy of an Islamic contract.

'This statement really shows the confusion this defence had created,' said Sheikh Muddassir Siddiqui, sharia scholar and partner at law firm Denton Wilde Sapte.

'TID [Investment Dar] defense implied that the sharia scholars didn't do their job right. I can understand why the sharia board felt very strongly about this.'    

A spokesman for Investment Dar said the company would not be issuing any comments on the statement.   

In the London ruling, a judge sided with Blom in part, saying that while Dar should repay the principal sum, it had an arguable defence regarding the extra profit.   

While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done.   

Industry experts said the defence raised fears among potential investors over the long-term risks associated with entering a sharia-compliant deal.   

Ratings firm Moodys issued a research note last month saying that the battle between Investment Dar and Blom had raised sharia risk in the Islamic finance industry and legal opinions surrounding the case could form part of its ratings analysis of Islamic institutions and instruments.

'This was not a very healthy episode for the Islamic finance industry to witness,' said Siddiqui. - Reuters