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Introduction.2 Fundamentals of Islamic Banking3 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 Conclusion20 List of References.22 Appendix: Abbreviation...........................................................................................................27

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 Fundamentals of Islamic Finance
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.

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 intermediarys 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 incomeZakat, 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 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
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.

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

Islamic Banking Products

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.

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 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
7

Babacar Mbengue, Islamic Finance, Law, Economics and Practices. Journal of

Islamic and Culture, 12/2 (2010), 183-185.

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

Kilian Balz, Murabaha Transaction in English Court, Islamic Law and Society, 11/1 (2004), 117-134.

Muhammad Marjan, The Implementation of Ibra in Islamic Banking and Finance: An Analysis in Terms of Banking Operations and Maqasid Shariah. ISRA International Journal of Islamic Finance, 2/1(2010), 157-160.

10

Jonathan Ercanbrack, The Regulation of Islamic Finance in the United Kingdom,

Ecclesiastical Law Journal, 13/1 (2011), 69-77.

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 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.

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.

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 nonspeculative 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 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
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.

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 institutions 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 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

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).
16

M. El-Gamal, Islamic Finance: Law, Economics, and Practice. (New York:

Cambridge University Press, 2006), 23.

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protection ought to be guaranteed by the regulator. This guarantee obviously increases consumers 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 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
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).

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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 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
19

Islamic Bank of Britain-IBB Report, Unique service for Masjids and Madrasahs,

[Online] November 2005, <www.islamic-bank.com/media/news/2005/nov/islamicbank-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.

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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 governments 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 The nature of Islamic Banking is such that it is young and involves a lot of crossborder 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,
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.

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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) 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
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.

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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 scholars 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 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

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.

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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 businesss form. Despite court ability to listen to the experts 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 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
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.

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investors from Islamic Financial Institutions (IFIs). 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 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

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.

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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.

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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,

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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 Britains 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.

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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.

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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