islamic banking 4
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1
Introduction……………………………………………………………………………….…2
Fundamentals of Islamic Banking……………………………………………………………3
Common Islamic Banking Products…………………………………………………….…….5
United Kingdom Laws and the growth of Islamic Banking ………………………………….5
The Financial Services and Markets Act 2000...........................................................................9
Promotion of Islamic Financial Products.................................................................................10
The Role KPMG.......................................................................................................................12
Regulation of Islamic Banking……………………………………………………………….13
Specific Cases Involving Islamic Banking………………………………………….………..14
Contrast with a Muslim Country..............................................................................................17
The role of Islamic Scholars………………………………………………………………….17
Criticism of Islamic Banking...................................................................................................19
Latest developments in the industry………………………………………………………….19
Conclusion……………………………………………………………………………………20
List of References…………………………………………………………………………….22
Appendix: Abbreviation...........................................................................................................27
2
Introduction
Since the first Islamic Bank, Mit Ghamr Saving Bank was set up in Egypt in 1963,
Islamic banking has grown considerably over the last few years (at 15-20% per annum). It
has taken root in over 75 countries worldwide. With over 1.3 billion Muslims worldwide,
even the largest banks in the world will respond if even one percent of them demand Islamic
compliant financial services. This paper seeks to explore how the world and specifically the
United Kingdom have responded legislatively to the growth in Islamic Banking and how
these Legislations have influenced Islamic financial services. Background information on
Islamic financing is explored to paint the differences that exist between Islamic financing and
conventional methods and the fresh challenges they present.1
Islamic finance institutions exist in an environment where Sharia law co-exists with
national laws. Therefore, the documents involved in financial transactions must comply with
both national and Sharia laws. In countries such as Saudi Arabia where Islamic law is the
ultimate law, this may not be a challenge at all. However, in western countries like the UK,
where the environment is non-Islamic, complications arise if parties involved are of different
jurisdictions (Muslim and non-Muslim). In the past, certain rulings have sparked uncertainty
amongst investors and other participants in the financial sector as regards the security of their
investments. For these purposes, this paper also looks at some landmark rulings involving
such disputes.2
1 ? M. Ayub, Understanding Islamic Finance. (New Jersey: John Wiley & Sons, 2007),
12.
2 S. Zubair, Islamic Finance. (New Delhi: Markazi Maktaba Islami Publishers, 2009),
18.
3
Fundamentals of Islamic Finance
The financial sector in any country is made up of deficit financial units (borrowers)
and surplus units (savers). There are also the firms that play the intermediary role including
deposit taking financial institutions. Savers give up current consumption and are
compensated through interest on their savings. Borrowers pay interest on the amount they
borrow which is used to compensate savers as well as forming part of the intermediary’s
revenue. The longer the period allowed for payment the higher the returns involved. This is
referred to as the time preference theory of interest.3
The Islamic financial system differs with the just described one in that Islamic laws
do not allow taking of usury/interest on loans. Islamic banking, which is sometimes referred
to as participant banking is consistent with Sharia laws, which prohibit taking and collection
of riba or interest. The Islamic laws also prohibit investment in ventures involving goods
considered haraam like alcohol, pork, armaments and pornography. The laws do not permit
getting involved in contracts where the ownership of commodities depends on uncertain
events. Speculative businesses too are unlawful since the high risk and as such encourage
unethical behaviour. Sharia law also requires Muslims, to donate a part of their income-
Zakat, to charity. Islamic principles also insist that the investor and investee must share risk,
profit and losses fairly. Tangible assets must also back all financial transactions. These laws
form the basis of the Islamic financial system.4
3 ? I.Warde, Islamic Finance in the Global Economy. ( Edinburgh:Edinburgh University
Press, 2000), 22.
4 Qudeeer. Latif, ‘Islamic finance’. Journal of International Banking and Financial
Law, 21/1 (2006), 10-13.
4
The Islamic financial system has been accepted worldwide, and even accountants
have been trained accordingly. A good example is the Institute of Chartered Accountants of
Pakistan, which offers Islamic Financial Accounting Standards (IFAS). In most countries
where banks offer Sharia compliant services, these banks are expected to have an advisory
and somewhat oversight board. There are also firms coming up whose sole role is advising on
Islamic compliant financing. The Worldwide Database for Islamic Banking and Financing is
one such database, which stores information on all banks, which deal with Sharia compliant
financing.5
It is used globally as a benchmark prerequisite for professionals dealing in Islamic
Finance. The Advisory Council administers the test for Islamic Finance, which draws
members from the Middle East and the UK. The assessment mainly tests the candidates on
Islamic banking and Islamic law of contracts including Mudaraba, Murabaha, Ijara and
Musharaka. The test also emphasizes the need to understand Islamic financial statements,
which differ slightly with conventional statements. Aimed at existing and new employees in
law firms and banking industry, the test aims at boosting candidates understanding if Islamic
Financing. The continued administering will also increase the number of experts in the
nascent field.6
5 ? Taqi Usmani, ‘Islamic Finance: Musharakah & Mudarbah’. Journal of Islamic
Banking and Finance, 25/3 (2008), 41-53.
6 Rahail Ali, Islamic Finance: A Practical Guide. (London: Globe Business
Publishers, 2008), 34.
5
Islamic Banking Products
Some of the common Islamic Banking products available in the United Kingdom
include Murabaha. This product, which replaced conventional inter-bank deposits, involves
the sale and subsequent re-purchase of a commodity traded on a major exchange. Its structure
is such that it is similar to a loan by the seller to the buyer. The return for the seller is the
difference between sales and re-purchase price. Ijara is another product, which is an
agreement where the bank buys and leases a commodity asset to a customer for
predetermined money consideration instalments over a stated length of time. The bank may
preserve the right to vary the rental charges in line with changes in the cost of financing. This
arrangement can be used for purposes of "Islamic compliant mortgages". This usually entails
the customer making two payments types, capital payments and rental charge. Ownership
passes to the customer once all payments are completed. Other common products are
mudaraba and musharaka.7
The United Kingdom Laws
As mentioned, Britain hosts the largest value of assets in a non-Muslim country. This
success stems from deliberate collaboration between the government and Islamic finance
providers. Despite that, the United Kingdom has its own established churches, separation of
the roles of the state and the church is seen to be an important condition to uphold. This is
known as the doctrine of separation of powers in legal terms. Thus, the law does not
discriminate individuals or institution because of their religion. In addition, the state cannot
be an arbiter in religious matters. The government has no role in determining whether a
7 Babacar Mbengue, ‘Islamic Finance, Law, Economics and Practices’. Journal of
Islamic and Culture, 12/2 (2010), 183-185.
6
business is Sharia compliant. 8Individuals have a right to establish any business as long as it
is dispenses in the legal context irrespective of their religion. This is because the legal
enforceability of a contract is not dependent on Sharia compliant. Scholars who interpret the
law establish standards of Sharia compliancy. The explanation known as ‘Fiqh’ may differ
between scholars depending on the method of reasoning used.
As earlier highlighted, when the laws governing the financial services sector were
made, the environment was such that everything was conventional. However, the UK has
supported the development of the Islamic compliant products over the last few decades for
two major reasons. First is because it seeks financial inclusion of all people, Muslims or
otherwise. Developing of products suitable for all is important no matter their religious
affiliation. The British government has other interests like maintaining London as a leading
financial services center since it comes with great business benefits. 9To achieve this, Islamic
financing is almost inevitable. The support to this kind of banking has come in two ways:
financial and legislative means. The British government has continually given financial
support to Islamic Finance mainly for promotional activities. However, the greatest impact
has been felt in legislative efforts. The main purpose is to ensure tax laws do not treat Islamic
Banking products any worse or better than conventional products. The efforts are aimed at
removing any barriers to Islamic Banking in the UK.10
8 ? Kilian Balz, Murabaha Transaction in English Court, Islamic Law and Society, 11/1
(2004), 117-134.
9 ? Muhammad Marjan, ‘The Implementation of Ibra’ in Islamic Banking and
Finance: An Analysis in Terms of Banking Operations and Maqasid Shari’ah’. ISRA
International Journal of Islamic Finance, 2/1(2010), 157-160.
7
Some of the major Legislations that have affected greatly in the promotion of Islamic
Banking Services are:
i). The Finance Act of 2003
ii). Finance Act of 2005
iii). FSMA 2000 Regulated Activities Amendment No. 2 Order 2006:
iv). Finance Act 2006:
v). FSMA 2000 (Regulated Activities) Order 2006
vi). Finance Act 2007
vii). Finance Act 2009
The main laws affecting Islamic to Islamic banking involve taxation on profits and
interest. Specifically, the Finance Act of 2005 clarified the tax treatment of payments made
under Murabahah and Mudarabah contracts. The government legislated for murabahah
(purchase and subsequent re-sale) where the returns are equated to returns on normal
investment and taxed as such. In 2006, the government legislated ‘ijara’ or diminishing
musharaka, which is a form of asset financing as described earlier.11
In the past, tax laws have created uncertainties in the Banking Sector where some
sectors were subject to double taxation. HM treasury has championed for enactment of
10 Jonathan Ercanbrack, ‘The Regulation of Islamic Finance in the United Kingdom’,
Ecclesiastical Law Journal, 13/1 (2011), 69-77.
11 Ali Tarek, ‘Micro Credit in Western European: Case Study of the U.K.’.
International Review of Business Research papers, 6/4(2010), 168-188.
8
legislation to iron out the uncertainties. In addition, some taxation might be a hindrance to the
development of Islamic Banking. These are identified and countered through new legislation.
A good example is the Finance Act of 2003. This Act removed the levying of stamp duty on
land for home financing based on Murabah and Ijarah. Murabah is used by banks in asset
financing and in import and export of commodities. The legislation enabled easier marketing
of Sharia compliant mortgage products by avoiding multiple payment of SDLT. The law was
then extended to companies and arrangements involving equity sharing. Double taxation
could arise in a situation whereby an institution purchases a property, pays stamp duty and
later sells it to the individual.12
It is also worth noting that the legislation refers to Islamic financial instruments as
alternative financial instruments rather than Sukuk, which is the Arabian term for such
instruments. This is a deliberate effort to entrench Islamic banking as a substitute product
even for non-Muslims. There have been situations whereby the Islamic products are used as a
means of hedging against risks rather than simple compliance with Islamic laws. The non-
speculative nature of the products makes them ideal for risk avoiding investors. In
conclusion, the government aims to guarantee that dealings that involve Islamic transactions
are neither severely taxed nor leniently treated.13
The finance act of 2007 sought to streamline the issuance of alternative financial
instruments. Although technical issues still lie in Stamp Duty Land Tax, it was seen as a step
12 Ali Tarek, ‘Micro Credit in Western European: Case Study of the U.K.’.
International Review of Business Research papers, 6/4(2010), 168-188.
13 I.Warde, Islamic Finance in the Global Economy. ( Edinburgh:Edinburgh
University Press, 2000), 35.
9
in the right direction by recognising ‘sukuk ’as alternative investment bonds which ought to
be governed by the same tax laws.14
The Financial Services and Markets Act 2000
This is the law that governs registration and operations of financial firms in the UK
and all firms must meet the requirements of the Act before receiving a nod to start operations.
The installation of Financial Services Authority was a move to ensure equity in the financial
industry. The Act stipulates out five conditions that must be fulfilled before a permit, to carry
on business is granted. For example, the firm must have adequate financial resources to carry
on the business type it has applied to engage. The conditions depend on the firm and the
business type it intends to carry. The capital requirements of an insurance company are
different from those of a deposit-accepting firm.15
The most attention-grabbing one is that an institution’s ‘mind and management’ or
rather head office must also be in the United Kingdom. Although the intention of the clause
has no negative connotations, it may pose as a hindrance for Islamic Institutions with offices
elsewhere in the world but want to start up in the UK. It may be viewed also as wanting to
exercise excessive power over financial institutions. Prospective investors may opt for other
countries with relaxed regulations.16
Promotion of Islamic Financial Products
14 ? M. Choudhury , Islamic Economics and Finance: An Epistemological Inquiry.
(Bingley: Emerald Group, 2011), 45.
15 Umer.M Chapra and Habib Ahmed., Corporate Governance in IFIs, (Jeddah: IRTI,
2002).
16M. El-Gamal, Islamic Finance: Law, Economics, and Practice. (New York:
Cambridge University Press, 2006), 23.
10
The Financial Services requires that all advertising be fair, clear and should not
provide misleading information to its clients and the public. This is extremely important
given that Islamic Banking products are new, and customers know little about them. Their
protection ought to be guaranteed by the regulator. This guarantee obviously increases
consumer’s confidence and willingness to accept the products.
The Issue came up in the commissioning of Islamic Bank of Britain in 2004. The
deliberations with the FSA took about two years, and the definition of ‘deposit’ was a
contentious issue. According to British laws, a deposit comes with a guarantee of repayment
to the depositor on demand or under circumstances specified by the parties. However, in
Islamic financing, risk sharing is an obligation the depositor and the bank ought to share.
Therefore, the Islamic Bank of Britain had proposed a savings account where the depositor
was required to accept a risk of loss of original capital. This was in contradiction to FSA
regulations and definition of ‘deposit’. This was risky since unsuspecting consumers would
accept losses that they were not aware. The issue was resolved when the Islamic Bank of
Britain agreed to make the clause optional. Customers can choose to accept the risk on
religious grounds.17
The UK now has five banks, which are fully sharia compliant and an additional 17,
which have branches or subsidiaries to cater for Muslim customers. The UK ranks eight
amongst top Sharia compliant bankers with over $18 billion in Sharia compliant assets, the
highest among western countries.18
17 ? Ibid., 32.
18 ? FSA, Islamic Banking in the UK, [Online] 2006
<http://www.fsa.gov.uk/pages/About/Media/notes/bn016.shtml>, accessed 15
December 2012).
11
Apart from legislation, there are factors that explain the success. One is the marketing
skills and financial innovativeness in London. It has one of the most applied exchanges rates.
This coupled with the large pool of accountants, financial engineers, and marketers have
brought about new products suitable for the advance in Islamic Banking. Moreover, the
industry has grown considerably in other countries as well with hundreds of institutions
offering these products. This has obviously influenced the UK to follow suit. The Middle
Eastern countries have experienced excess liquidity in the past few years prompting a
demand for financial assets, which local markets are unable to quench. Therefore,
international markets have become a prospect and have preferred UK for its flexible financial
laws. The 9/11 incident in the United States also compelled the Muslim Population in the
world to seek new places to invest their funds. The UK jumped on this opportunity by
creating a business environment for these investors through the aforementioned means.19
The Role KPMG
KPMG was significant in the establishment of IBB as the first independent retail
Islamic Bank in the UK. KPMG did most of the documentation of the banks regulatory
framework. IBB profited from the long working affiliation of KPMG with the FSA, which is
the regulator. Moreover, KPMG has a good understanding of the regulators requirements.20
19 Islamic Bank of Britain-IBB Report, Unique service for Masjids and Madrasahs,
[Online] November 2005, <www.islamic-bank.com/media/news/2005/nov/islamic-bank-britain.html>, accessed 15 December 2012
20 ? Bill Maurer, ‘Anthropological And Accounting Knowledge In Islamic Banking
And Finance; Rethinking Critical Accounts’, Journal Of The Royal Anthropological
Institute, 8/3(2002), 645-667.
12
KPMG continues to play a key role in the industry by offering tax advisory services to
clients. Moreover, KPMG consults with treasury, to allow legislation of laws that ensure
financial institutions put forward regulated products but at the same time are not brow beaten
by the laws. A good example is the Finance Act of 2005. The company gives advice on the
implications of Sharia law compliance and on the optimum ways to produce goods for VAT
tax purposes. This together with the auditing and accounting services they offer have helped
their Sharia compliant clients comply with International Financial Reporting Standard.
The creation of the FSA as the only financial regulator in 1997 has eliminated the
previously existing problems where there were eleven regulatory authorities in the financial
industry. There were cases where the regulators offered to contradict opinions. This also
contributed in attracting investors to the UK in the Islamic Banking Sector.21
It is interesting to note that all individuals no matter their religion can access Islamic
banking. The success of Islamic banking is a plus for all since more economic activity means
increased tax revenue for the government Non-Muslim individuals can enjoy a wider range of
products to choose from while the Muslims are not locked out because of their faith. A major
signal of the government’s dedication to this success is the establishment institutions such as
Islamic Financial Experts Group and TTWG. These two are charged with naming priority
areas and openings where the government can get involved in the sector. The two also
identify laws that need amendment to smoothen the operations involving Islamic Banking.22
Regulation of Islamic Banking
21 Wazir Karim, ‘The Economic Crisis, Capitalism And Islam: The Making Of The
New Order’. Globalizations, 7/1(2010), 105-125.
22 ? M. El-Gamal, Islamic Finance: Law, Economics, and Practice. (New York:
Cambridge University Press, 2006), 45.
13
The nature of Islamic Banking is such that it is young and involves a lot of cross-
border funding coupled with technological sophistication. This poses a major challenge in
terms of regulation. This is further complicated by the fact that Islamic law restricts usury,
certain business ventures and the use of certain financial instruments: this has led to the
development of new alternative products, which also pose problems to regulators when it
comes to their classification and treatment. The Financial Services Authority (FSA) is the
sole regulator in the industry and has the mandate to license practitioners in the industry.23
The main independent Islamic Banks are the Islamic Bank of Britain commissioned in
2004 and the European Islamic Investment Bank authorized in 2006. The main independent
banks include the Bank of London and the Middle East authorized in 2007. In 2007, the FSA
released its first publication regarding Islamic Banking. The paper touches on the regulators
approach to authorisation, risk assessment and control and the main challenges plaguing the
industry. The publication enabled the listing of sukuk-Islamic Financial instruments, in the
London exchange. In 2004, regulations were made to regulate Home Purchase Plans
compliant with Sharia law. Apart from the regulatory role, the FSA also takes an advisory
role through initiatives like Money Made Clear. Consumers are of the opinion that FSA is
unbiased and guarantees accurate information on Islamic Banking products. In the end, the
same principals as conventional products govern Islamic financial services.24
Specific Cases Involving Islamic Banking
Investment Company of the Gulf Limited Vs Symphony Gems N.V. and Ors (2002)
23 ? Ibid., 48.
24 John Taylor, Global Financial Warriors: The Untold Story of International Finance
in the Post-9/11 World. (New York: Norton, 2007), 26.
14
This case involving the validity of the murabaha deal was the first case involving
Islamic Finance presented in UK courts. The investment company had agreed to finance the
defendant via a murabaha (revolving facility) so that they would purchase gems. The
defendant defaulted prompting the case to be brought to court. The main issues discussed
were the effect of the murbaha agreement on the risk of the failure to deliver, whether the
Sharia issue could be used as a defence and the doctrine of ultra vires regarding such cases.25
The defendants argued that the contract contradicted Sharia law and was not a valid
Murabaha contract. They further argued that the contract was invalid. Experts were called to
shed light on the validity of the contracts as murabaha. The two scholars Dr. Yahya Al
Samaan (Saudi Law Firm of Salah Al Hejailan) and Dr. Martin Lau of the School (Oriental
and African Studies) said the contracts were not true murabaha contracts. However, they
were valid contracts under English law. The courts accepted the scholar’s views and decided
on the case in favor of the plaintiff.26
Shamil Bank of Bahrain Vs Beximco Pharmaceutical and others in 2004
Bexico pharmaceuticals and the co, the defendants entered into a murabah agreement
with Shamir Bank but ended up defaulting payments severally. When the case was brought to 25 Moghul Umar and Ahmed, Arshad, ‘Contractual Forms in Islamic
Finance Law and Islamic Investment Company of the Gulf (Bahamas) Ltd v
Symphony Gems NV & Ors: A First Impression of Islamic Finance’. Fordham
International Law Journal, 27/1(2003-2004), 5-18.
26 ? Moghul Umar and Ahmed Arshad, ‘Contractual Forms in Islamic
Finance Law and Islamic Investment Company of the Gulf (Bahamas) Ltd v
Symphony Gems NV & Ors: A First Impression of Islamic Finance’. Fordham
International Law Journal, 27/1(2003-2004), 5-18.
15
court, they argued that the murabaha agreements were void since they were disguised loans
charging interest. The contracts were Sharia-non complaint and unenforceable according to
the defendants. The High Court and later the Court of Appeal refuted the argument and
awarded judgment in favour of the plaintiff.27
These rulings underlined the fact that the Sharia laws that applied in Islamic financing
were not meant to replace English laws that existed before, but their primary purpose was
simply reflecting the business’s form. Despite court ability to listen to the expert’s views on
the validity of contracts, it dismissed experts’ opinion because of literal wording in both
contracts. This relies on the common law of literal meaning when interpreting commercial
contracts. As seen, Islamic Financial institutions are under the laws of a nation in which they
operate.28
The English courts seem to have embraces the Rome Convention of 1990 on the
choice of law whereby at least two laws contradict each other. The resolve of the convention
was that parties could choose which laws to govern them. However, this could not be
beneficial since English courts will continue to dismiss the advice of Islamic scholars by
validating contracts, which are purport to be Sharia compliant but are not as enforceable
under English law. Given that these rulings have set a judicial precedent, this could stunt the
growth of Islamic Financing in the United Kingdom.29
27 Kilian Balz, Murabaha Transaction in English Court, Islamic Law and Society,
11/1 (2004), 117-134.
28 ? Ibid., 121.
29 Mersadi Tabari, ‘Islamic Finance and the Modern World: The Legal Principles,
Governing Islamic Finance in International Trade’. Company Lawyer, 31/8(2010),
249-254.
16
It is remarkable that in both cases when defendants failed to pay payment, they
resulted to the validity of the contract as a defence. This is a challenge that could scare away
investors from Islamic Financial Institutions (IFI’s). However, the rulings can be heralded as
appropriate since they relied on the meaning under the contract. In addition, there exists a
Sharia board, which interprets the Sharia aspects of such contracts. The separation of the
interpretation duty between the courts and Sharia board is necessary for the growth of the
sector. This ensures fairness, eliminates overlap of authorities, and gives contradictory
opinions and inconsistencies in rulings.
Contrast with a Muslim Country (Malaysia)
In Malaysia, previous court cases involving Islamic banking have been published in
the Malayan journal of Law since 1987. Though some judges have relied on the classic
common law in giving judgments, there are instances where judges have critically examined
the underlying Islamic Law principles.30 An example is Affin Bank Berhad v Zulkifli
Abdullah [2006] 3 MLJ 67. Judges criticised previous rulings where judges ruled by relying
heavily on common law. In this particular litigation, it was ruled that the Islamic financial
facility by the bank was similar to a normal loan and under Islamic law was not allowed to
fetch or claim unearned profits since that would amount to interest.
The Role of Islamic Scholars
30 Mersadi Tabari, ‘Islamic Finance and the Modern World: The Legal Principles,
Governing Islamic Finance in International Trade’. Company Lawyer, 31/8(2010),
249-254.
17
All major contracts involving Sharia compliant transactions must obtain ‘Fatwa’- a
clean bill of health from a Sharia scholar. However, there are just over 100 scholars in the
UK, and this creates a problem due to their workload. They also sit on many boards across
the UK, and this can create conflicting priorities. Therefore, there is need to train scholars out
of the two million British Muslims who form the market for the retail products.31
The role of Islamic scholars has been presented a challenge for the regulator in that
they are religious leaders, but the FSA is a not a religious body. The question of whether they
are executives in the boards they sit or advisers remains ambiguous. Normally, persons sitting
on boards must be vetted using the FSA approved persons guidelines. One of the guidelines is
that such persons must possess relevant experience and skills to enable them sit on such
boards. Scholars of religious matters do not possess such skills.32
Another major challenge in issues involving Islamic financing is that most if not all
judges have been trained in English. Therefore, they are susceptible on over relying on their
understanding of common law. In most case and in most countries, it is rare for judges to call
allow Islamic scholars to testify or give their opinion on Islamic financing. This
unwillingness may be interpreted in some quarters as uneasiness to recognize Sharia law as a
source of law. This contradicts the situation in countries such as Malaysia where the courts
are requirements rely on previous Sharia rulings in their interpretation of terms in contracts.
Another challenge is the fact that most lawyers who draft these contracts in the UK are
heavily influenced by the common drafting techniques they are used. Again, the defences
raised by lawyers in cases involving Sharia law are because of their weak understanding of
31 Umer Chapra, ‘The Case against Interest. Is It Compelling? Thunderbird
International Business Review, 49, 1(2007), 161-186.
32 , Mohammad El-Gamal and Elias Tuma, ‘Book Reviews-Islamic Finance, Law,
Economics and Practice’. The Middle East Journal, 61/1 (2007), 175.
18
Sharia. It is as well rather morally wrong for defendants to evade their liabilities in contracts
and argue that contracts are not valid by virtue of being Sharia non-compliant.33
In addition to training more scholars, there is a necessity to have a legal fraternity of
judges and lawyers with a clear understanding of Sharia law and Islamic Finance. This
training will enable them to interpret traditional Islamic principles in the context of modern
financial issues. As the market continues to grow sophisticated products, contracts and cases
will continue to come up hence the need to grow the capacity of the judges and lawyers. New
and appropriate laws need to be made with time for the healthy development of the industry
Criticism of Islamic Banking Acceptance as a Source of Law
Conservative non- Muslims have faulted the continued acceptance of Sharia law
compliant banking as a way of slowly introducing extremist ideas to the west. The argument
is that those who want to use these products must conform to the Sharia law unconditionally.
A major talking point is the ‘Zakat’, which is a portion of incomes to charity. Some people
argue that it could be a cover to finance criminal and extremist activities. In addition, only
few Islamic authorities have a right to make decisions on whether banking policies adopted
by financial institutions are Sharia compliant. The ECFR and the FCNA are two of such
institutions. However, leaders in these organisations have been linked with terrorist groups.
This perhaps explains the skepticism of some people towards the acceptance of Sharia
compliant banking in the West.34
33 Mersadi Tabari, ‘Islamic Finance and the Modern World: The Legal Principles,
Governing Islamic Finance in International Trade’. Company Lawyer, 31/8(2010),
249-254.
34 Abdul K. Aldohni, ‘The Challenge of Islamic Banking Disputes in the English
Courts: The Applied Law’, Journal Of International Banking And Financial Law,
19
Latest Developments in the Industry
Discussions between Muslim Council of Britain and stakeholders in the financial
sector, has seen the design of bank accounts for kids, which are Sharia compliant. The
government seeks to address and enact legislation in new and upcoming areas such as takaful,
which is Islamic insurance. Though the current rules are considered okay by both Muslims
and non-Muslims, the government has stated its readiness to enact laws where need arises.35
Home Purchasing plans (HPP) which using diminishing musharaka are an example of
plans, which allow people to buy homes without paying interest. Islamic scholars accept it.
The agreement between the buyer and seller stipulates the length of the contract and the
payments. The payments buy a portion of the property, and these progresses until the whole
property passes to the buyer. The agreement also allows people to live in the homes.36
Conclusion
The Islamic Banking and Other financial services sector have great potential to grow.
The Muslim population accounts for three percent of Britain’s population and 1.3 billion
people out of the total world population. They should not fail to enjoy financial services by
virtue of their religious background. Governments and banks worldwide must invest in
research of new products, which suit the needs of these people. However, proper regulation is
24/6 (2009), 350-52.
35 Khan Akram, ‘The Federal Court Judgment on Riba and the Unresolved
Issues’. Review of Islamic Economics, 3/3(1994), 19-27.
36 Taqi Usmani, ‘Islamic Finance: Musharakah & Mudarbah’. Journal of Islamic
Banking and Finance, 25/3 (2008), 41-53.
20
necessary through legislation and training of more people in the sector. All legal impediments
to proper banking must be removed. As more users come into play, complex legal issues will
simultaneously arise. Hence, there is the need for a competent legal society. Laws that
hamper smooth carrying of transactions should be tackled. The sector is definitely set for
greater prospect touchwood.
Presently, the main obstacle barring Muslims from taking up facilities such as Islamic
mortgages is the huge fees charged by Sharia councils. Protectively, the number of councils
grows it will see this cost will decrease. The government has done its part in costs reduction
by enacting fair tax laws. The recent increase in world oil prices has increased liquidity in the
Middle East, which has made investors look for alternative investments and demand for
alternative financial markets. This is an opportunity for Western countries to create an
atmosphere for such investors. The future of Islamic Banking greatly depends on
technological advancements. Half of the Muslim population in Britain is under the age of
twenty-one. Technology will greatly reduce transaction and product distribution overheads.
Integration of internet banking, which is already, a part of conventional banking, will help
Islamic banking compete favourably with conventional banks.
Although risk management has been a sticky issue in Islamic Finance due to the
stance held by Islamic Scholars, the recent ascension to an agreement between the ISDA and
the ISFM will assist in the development of Sharia compliant risk management derivatives.
21
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Appendix: Abbreviation
ECFR - European Council for Fatwa Research
FCNA - Fatwa Council of North America
ISDA - International Swap and Derivatives Association
IIFM - International Islamic Financial Market
IFQ- The Islamic Finance Qualifications
IFAS- .Islamic Financial Accounting Standards
TTWG -Tax Technical Working Group
SDLT -Stamp Duty Land Tax
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