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.......................................................... .............................................................1 2 Regulation of Islamic Banking……………………………………………………………….13 Specific Cases Involving Islamic Banking…………………………………………. ………..14
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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
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.