Application of Shariah based Islamic Banking/ Finance rules in the UK: A critical analysis

Transcription

1. Application of Shariah based Islamic Banking / Finance rules in the UK: a critical analysis. Md Mahmudul Hasan LLM in Islamic Finance and Business Law, MSC in International Business and Human Resource Management Abstract: Islamic banking refers to a modern banking system that is very common in the New World. It has become a very hot topic in the Western marketplace at present, particularly among the Muslim community in the United Kingdom. According to their philosophy, laws and ethics, approximately 2 million Muslims have received their code of life from Sunnah, Holly, and Quran. Islamic banking system complies with Shariah or Shariah law and four concepts such as Haram refers to preventing certain transactions on the job, Gharar refers to preventing speculation practises, Riba refers to interest-free banking system and Zakat refers to various tax systems. The Muslim group supports the United Kingdom's good financial position and that is the reason why this Muslim banking sector is more respected by the UK government. As the Muslim population expands rapidly in the UK, where Shariah law is fully practised by Islamic banks, on the other hand, investment services are provided between the two banking systems according to Shariah law rules and ethics. Due to the increasing population of the Muslim community and bank policies that provide acceptable financial solutions and are more ethical to the general public, the Islamic banking system has achieved outstanding popularity and growth in the UK. The introduction of these banking rules is intended to overcome the challenges generated by common public and conventional financial policies in the banking sector. Here, due to many Shariah rules compliant, there are several obstacles to the implementation of this banking in western states, besides this, there are many factors that create problems such as FSA and English Government. The Muslim financial system is in its initial place right now, so it may take little time to achieve economic prosperity, growth and development on a large scale in England and across European countries. Overview Not only is Islamic banking limited to Islam, it has wide acceptance across the globe and even in Europe. Throughout the UK, it is especially followed. The United Kingdom has shown a positive financial market growth rate over the last five years and is seen as the sector where Islamic banking shows a bright chance to develop. Some Islamic countries such as Pakistan, Iraq, Sudan etc have adopted Islamic financial laws and other countries have conservative Islamic banking, some of 1
2. which are like Bangladesh , Egypt etc. Islamic banking in the United Kingdom follows the norms of the Shariah Rule. On sound and feasible land, other banks deliver and operate. Introduction The advent of Islamic banking provides an idea of the evolution of Islamic banking and of its related activities. The functionality of Islamic banking across the globe and within the UK is also introduced in this chapter. There has been a long-term traditional system of rules concerning Islamic banking and finance, but the Islamic banking and finance industry starts with the value of capital and is monetarily feasible in 1963, which was due to the company of Egypt.1 Since 1980, financial services and funds have been arranged at a great rate. Islamic banking has been implemented in wide areas of banking and finance, such as insurance, risk management, wealth management, asset management, etc.2 It has always shown tremendous growth since its launch, which has led to an increase in the rate of development. As high as the rate of 12 to 16 per cent, the rate of growth is increased.3 Dubai Islamic Bank, which was founded in 1975, was the first ever Islamic bank to be established. The strong success rate came to the fore. This bank is well known for its high rate of return relative to 1 Iqbal M, Molyneux P, History and Growth of Islamic Banking and Finance 2 Platt G. Islamic Financial Institutions Awards, Global finance. 2008. 3 Siddiqi M. Problems and Prospects of Islamic banking and finance, 2001 4 Hussain M, Shahmoradi A, Turk R, IMF working paper, An overview of Islamic Finance 2015. other traditional banks. It is now possible to find this bank in 48 other countries. 4 Islamic banking refers to a modern banking system that is very successful in the new World. It has become a very hot topic in the Western marketplace at present, particularly among the Muslim community in the United Kingdom.5 According to their philosophy, laws and ethics, approximately two million Muslims have received their code of life from Holly Quran and Sunnah.6 Islamic banking system complies with Shariah or Shariah law and four concepts such as Haram refers to preventing certain transactions on the job, Gharar refers to preventing speculation practises, riba refers to interest-free banking system and Zakat refers to various tax systems.7 The Muslim group supports the United Kingdom's good financial position and that is the reason why this Muslim banking sector is more respected by the UK government. As the Muslim population expands rapidly in the UK, where Shariah law is fully practised by Islamic banks. On the other hand, investment services are provided between the two banking systems according to Shariah law rules and ethics. This needs a high degree of creativity for consumers, such as a variety of new products, which is why this area is highly competitive. Because of its interest- 5 Kevser M, Dogan M, Islamic Finance in the Framework of Financial Crisis and the Evaluation of Islamic Finance. 6 Mufti Muhammad Taqi Usmani, An Introduction to Islamic Finance, Kluwar Law International, 2002 7 ibid 2
3. free existence of this banking system , this banking got more popularity because riba is strictly prohibited in Islam because interest charges often lead to credit crises and most countries face the same problem due to interest taking.8 is growing with a fast growth rate, according to the Home Secretary. There has been a rise in Muslims in the UK in just seventeen years and estimates have reached 3.50 million, consisting of 5.02 percent of the total UK population. 11 However, due to the increasing population of the Muslim community and bank policies that provide acceptable financial solutions and are more ethical to the general public, the Islamic banking system has achieved outstanding popularity and growth in the UK. The introduction of these banking rules is intended to overcome the challenges generated by common public and conventional financial policies in the banking sector. Here, due to many Shariah rules compliant, there are several obstacles to the implementation of this banking in western states, besides this, there are many factors that create problems such as FSA and English Government.9 The Muslim financial system is in its initial place right now, so it may take little time to achieve economic prosperity, growth and development on a large scale in England and across European countries.10 Before 2000, no facilities were open to the Muslim community, but the Muslim population wants to spend their lives in accordance with their religion. Islamic teaching interests are strictly forbidden in Islam and according to Islamic Shariah law they want to take over banking services such as saving accounts, current accounts, home finances, insurance and loans. The United Kingdom is a non-Muslim nation and favours traditional banking by all its financial laws and regulations. Since the Muslim community is an active part of the UK economy, a system that is appropriate to these people must be started. Islamic banking, with the authorization of the Financial Services Authority, began in the UK in 2003.12 Problems There were 1.6 million (2.8%) Muslims living in the United Kingdom, according to estimates from the Office for National Statistics 2001, but the Muslim population There was ample change and growth in the Islamic banking system from 2003 to 2008. Two big traditional high street banks and one wholly Islamic bank are currently involved in Islamic banking services. However, Islamic banking institutions are still at the stage of development and infancy, and Islamic banking faces numerous challenges in Western society, 8 11 Hans Visser, Islamic Finance Principles and Practice, 3rd edition, December 2019, Edward Elgar Publishers, ISBN: 978 1 78643 349 7 9 Ainley M, Mashayekhi A, Hicks R, Rahman A, Ravalia A, Islamic Finance in the UK: Regulation and Challenges, November 2007. 10 ibid Muslim population in the UK, Available from: https://www.ons.gov.uk/aboutus/transparencyan dgovernance/freedomofinformationfoi/muslimpo pulationintheuk/ 12 Ainley M, Mashayekhi A, Hicks R, Rahman A, Ravalia A, Islamic Finance in the UK: Regulation and Challenges, November 2007. 3
4. such as socially , politically, fund management and regulation.13 There are some difficulties in the way of Islamic Shariah rule, the Islamic banking system as well as the position of the Financial Services Authority and the UK Government are the critical issues with the increasing popularity of Islamic banking in Western countries, especially in the UK. The possibilities for the development and growth of Islamic banking in the UK need to be identified, and Islamic banking is facing major challenges.14 Introduction of Islamic banking More than two decades ago, Islamic banking emerged on the global forum as a prominent participant. But indeed, for centuries rather than decades, many Islamic banking system values have usually been accepted all over the world. 15 Depending on the time situation, the Islamic financial system operates in various shapes in the Muslim world. In fact, the Islamic financial system has the capacity to fulfil the requirements of society in a respectable way. With its diversity in various segments and scope, Islamic banking is a rising industry. In Muslim cultures, as well as in countries where Muslims are a minority, it caters to religious Muslims. It is however a broad standard: Islamic banking has also been drawn to non-Muslim individuals and 13 ibid ibid 15 Hassan, M.K. (1999). Islamic banking in theory and practice: The experience of Bangladesh, Managerial Finance, 25(5), pp. 60. 16 Ghannadian, F.F. and Goswami, G. (2004) Developing economy banking: the case of Islamic 14 societies seeking ethical financial solutions. It is evident from banking experience that in all cultures, Islamic banking is equally common. 16 From the above claims, it is clear that Islamic banking is not just Islamic or particular banking but is also a mechanism that offers a more ethical and moral definition of financial problems, as well as a stable, economically prosperous and welfare society that is very helpful. The Organization of the Islamic Conference (OIC) described Islamic banking as a financial institution whose laws, regulations and procedures expressly state its commitment to the Islamic Shariah Principles and to the prohibition of receiving and paying interest on any of its operations."17 According to this argument, it is clear that interest in Islamic law is absolutely forbidden because of its detrimental effects on human beings and further detrimental effects on culture and the economy as a whole. There is a trend in an interest-based economy where rich people build strategies to raise their wealth by influencing the middle and lower classes. The middle class does not contribute positively to the economic system in an interest-based economy, then the economy is increasingly going towards financial problems such as a credit crunch. banks. International Journal of Social Economics, 31(7/8), pp. 740. 17 Mohieldin, Mahmoud & Iqbal, Zamir & Rostom, Ahmed & Fu, Xiaochen, The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries, 2011. 4
5. With the exception that it shares profit and loss with its depositors , an Islamic bank is an intermediary and trustee of the money of others. In fact, most Islamic banks have a very close and equivalent operational set-up to their traditional counterpart banks. "Islamic banking is phenomenally profitable because while its underlying funding mechanism is the same as conventional banking, its experience with defaults is better and its fees are higher and less transparent." It is concluded that the Islamic financial system is not a recent phenomenon, according to these statements. Its origins belong to the early days of Islam and all state financial matters solved by Islamic financial law were available in a disciplined form in the age of Hazrat Umer. 18 The Islamic financial system has gradually improved, and many Muslim countries, as well as some non-Muslim countries, particularly the UK, the USA and Australia, are now recommending and exercising it. 19 The Principles of Islamic Banking Islamic finance is a method of funding that must comply with Sharia law. Investments that are appropriate under Sharia can also apply to the definition. Along with the establishment of Islam, the common traditions of Islamic finance and banking 18 Iqbal M, Molyneux P, History and Growth of Islamic Banking and Finance, Thirty years of Islamic Banking, Palgrave Macmillan, London, 2005 19 ibid 20 Islamic Financial Services Industry Stability Report 2019, Available from: www.ifsb.org.com 21 Ayub M, Understanding Islamic Finance, 1st edition, 2007, John Wiley & Sons Ltd. 22 ibid came into being. However, only in the 20th century did the establishment of structured Islamic finance occur. The Islamic finance sector is now rising at 15%25% annually, with Islamic financial institutions overseeing more than $2.05 trillion.20 The key difference between traditional finance and Islamic finance is that Sharia law specifically bans some of the practises and concepts that are used in conventional finance. Prohibition of Riba Many Muslim scholars and some Western ideas assume that only interest-free banking is like Islamic banking, and still consider it. At the very beginning, it is important to remember that there is no difference of opinion between Muslims regarding the prohibition of Riba, and all Muslim sects consider indulgence in transactions based on Riba a serious sin. 21 This is because Riba is firmly opposed by the key sources of Shariah, i.e., the Holy Quran and Sunnah. There have however been disagreements as to the definition of Riba or what constitutes Riba, which must be avoided in order to ensure that economic practises adhere to the principles of Shariah.22 In Islam, which is confirmed in the Qur'an 23 and Sunnah24, interest is actually completely forbidden. In the sight of Allah, 23 Surah al-Nisa’, verse 161, Surah Al-e-Imran, verse 130, Surah al-Baqarah, verses 275–281 24 The Prophet Mohammad (PBUH) announced the prohibition of Riba in express terms at the occasion of his last Hajj, which was the most attended gathering of his Companions. The Prophet said: “Every form of Riba is cancelled; capital indeed is yours which you shall have; wrong not and you shall not be wronged. Allah has given 5
6. the interest you give in order to increase the wealth of the people does not increase ; and the Zakat you pay to obtain the approval of Allah, its payers do not increase their wealth." 25 It is a beautiful and powerful Quran statement that illustrates that interest is forbidden by God because it can only increase individual wealth, not society.26 Gharar and Maysir Transactions must prevent uncertainty (Gharar)28, speculation (Maysir) 29 or anything that could lead to the undue enrichment or abuse of one of the contracting parties. The major capitalists and industrialists, in the event of speculation, turn the economic financial system for their own and personal gains. The absence of interest from financial transactions does not necessarily mean that the financial institution is unable to make a profit. Where financing is intended for a commercial purpose, it may be based on the principle of the sharing of income and losses for which musharakah and mudarabah have been intended since the very beginning of Islamic commercial law.27 The idea of the operation of the Islamic banking system is incorrect and misunderstood in society, but Islam offers an alternative system where everybody contributes their investment share and earns profit. The Islamic financial system is only effective if according to Islamic financial law, all financial operation is carried out. Unethical businesses Transactions involving banned goods or practises, such as alcohol, illegal drugs and tobacco, cannot be carried out because Islam aims to create a socially ethical and friendly environment. 30 His Commandment totally prohibiting Riba. I start with the amount of Riba which people owe to my uncle Abbas and declare it all cancelled”. He then, on behalf of his uncle, cancelled the total amount of Riba due on his loan capital from his debtors. 25 Surah Al-Rome No. 39 26 Shafi, M. Taqi Usmani, M. (1997) The Issue of Interest, Pakistan, Darul Ishaat 27 Taqi Usmani, M, an Introduction to Islamic Finance, Maktaba Ma’Ariful Quran, (2005). 28 “Gharar” means hazard, chance, stake or risk. Gharar is found if the liability of any of the parties to a contract is uncertain or contingent; delivery of one of the exchange items is not in the control of any party or the payment from one side is uncertain. In the legal terminology of jurists, “Gharar” is the sale of a thing which is not present at hand or the sale of a thing whose “Aqibah” (consequence) is not known or a sale involving hazard in which one does not know whether it will come to be or not, e.g., the sale of a fish in water, or a bird in the air. 29 Maisir refers to easily available wealth or acquisition of wealth by chance, whether or not it deprives the other’s right. “Maisir”, derived from “Yusr”, means wishing something valuable with ease and without paying an equivalent compensation (‘Iwad) for it or without working for it, or without undertaking any liability against it, by way of a game of chance. 30 Kunhibava S, Rachagan S, Shariah and Law in Relation to Islamic Banking and Finance, Banking and Finance Law Review, volume 26, 2011 The Basic products of Islamic Banking and Finance Currently, Islamic commercial law is based on four fundamental principles. Profit and loss sharing is the basis of the first Islamic business concept and the second is focused on fixed service rates and charges and the third is based on cost-free and no fees. The other values change with the market situation and its working. 6
7. Musharakah Musharakah is a contract under which the bank and the industrialist jointly contribute to the profit making of the resources of a business or project . Benefit and expenses on the negotiated terms and conditions of the contract are shared between the parties.31 Diminishing Musharakah Providing for the possession of the asset to transfer in phases is an alternative to a traditional mortgage. The Islamic bank or finance house buys 99% of the building on day one, while 1% is purchased by the individual seeking finance. Under the arrangements, an immediate right of exclusive ownership under a lease is given to the ultimate owner. The ultimate owner acquires the 99 percent share of the bank in instalments and at expense over time. Thus, payments over the transaction duration will be a variable combination of payments for the transfer of ownership tranches and rent payments.32 Mudarabah In this arrangement, Mudarabah is a contract that provides all the resources to the bank, while the partner contributes commercial activities, technical skills and experiences. Finally, a fixed proportion of the income is earned by the bank. The bank absorbs all financial costs in the event of a failure, while the producer goes unrewarded. It is concluded that this system enables the individual to engage in 31 Taqi Usmani, M, an Introduction to Islamic Finance, Maktaba Ma’Ariful Quran, (2005). 32 ibid 33 ibid economic activity and to prove himself to be an active member of society.33Among the principles within the category of fixed charges, the third principles and free charges are: Murabahah The Murabaha is a contract in which the bank tells the industrialist about the cost of purchasing a good and negotiates the profit margin with him. It is one of the most common methods used in various countries to facilitate interest-free transactions in the Islamic banking system.34 Bai-muajjal-jal Bai-mua'jjal is a deferred sale deal for payment that is traded at no extra cost.35 Ijara The Ijara is a leasing arrangement under which it is rented to another party by the owner of the products. After that the latter will buy it and the rent is decreased before the good becomes the client's possession. Home finance and Islamic mortgages are now based on the Ijara principle and are a very popular instrument in the Islamic financial system.36 Sukuk A bond is an interest-bearing debt instrument issued by and usually exchanged on a stock exchange by a company or government body. Due to the prohibition of Riba, it is a paradox to refer 34 ibid ibid 36 ibid 35 7
8. to an Islamic bond , but this word is often heard. Such methods are aptly called Sukuk. An instrument entitling the holder to the benefit resulting from an asset belonging to the government or company is the most common type of sukuk. 37 Quard Hassan Customers facing financial crises or unpredicted spending banks get welfare loans in the Islamic financial system without paying any fees or interest. Islamic banks will collect funds through the selling of public shares and further through three key deposit accounts, such as savings deposits, saving deposits and current deposits, according to Rob.38 Background of Islamic Banking In Muslim countries, Islamic banks face conventional banks side by side. The influence of Islamic banks is that with the aid of Islamic banking, Muslim people are becoming well educated. People want work and some capital must be spent in Islamic banking.39 Islamic banking has experienced so many problems linked to financial circumstances, investment, financial support, finance, and operates under the rule of the Sahara. They work under pressure, and the demand of the law of the Sahara is that only Muslims work in this bank. Islamic banking has been rising steadily for almost a few years now.40 37 ibid ibid 39 Iqbal M, Molyneux P, History and Growth of Islamic Banking and Finance, Thirty years of Islamic Banking, Palgrave Macmillan, London, 2005 40 ibid 38 Islamic banking in other Countries In other words, Islamic banking is responsible for all and all the development in the banking sector. They have more and more profits because people want to invest in other funds, and they have some benefit. Then Dubai, the UK, and other countries are interested in investing in these countries.41 Most people believe in superstitions, for the most part. If certain individuals believe in superstition, it results in their failure. If some people do not believe in superstition, some individuals are those who are good in life. When citizens in Islamic countries become autonomous, they become increasingly prosperous individuals. In the whole world, people work in Islamic banking, then people grow their own interests, and then they have more and more opportunities in their lives.42 Although, knowing that Islamic banking is really promising for the future. In Islamic and Islamic countries, people have more and more opportunities. The future of Islamic banking is very bright, and in the future, it will be very useful. Islamic Banking's Marketing Strategy is really successful. Islamic banking also comes on the stock market, and then for those people who work in Islamic banking they have become more and more popular. 43 Islamic banking's marketing plan is really successful, and finance is good for those people who work in Islamic banking, too. 41 Haron S, A Comparative Study of Islamic Banking Practices, Journal of King Abdul Aziz University: Islamic Economics, Vol. 10, 1998 42 ibid 43 Karimi F, Why Islamic banking is growing so fast and dramatically? 8
9. Islamic banking is very beneficial and there is a promising future for it . Consistency of Islamic banking with Conventional banking With the exception of Islamic banks operating in compliance with Shariah rules, Islamic banking has the same function and practise as traditional banking. The sharing of benefit and loss between contracting parties and the very strict prohibition of the Riba are the fundamental principles of Islamic 44 banking. In fact, Islamic banking and traditional banking are not distinct. The two banking structures have the same aims and the only discrepancy in interest execution is exercised because interest in Islam is totally prohibited. Islamic banking falls within the domains of traditional banking; Islamic banking aims to ensure that all its financial matters are covered by Islamic financial law, as well as by the laws and regulations of a specific state such as the United Kingdom's Financial Services Authority (FSA). Islamic finance, such as current accounts, savings accounts, insurance, mortgages and investment opportunities in society, offers exactly the same services as traditional banking.45 44 Farida Abdalla F, An investigation into the compatibility of Islamic Banking with conventional banks: A study of two commercial banks in Nairobi City, 2015. Available from: http://erepository.uonbi.ac.ke/bitstream/handle/ 11295/94976/Fatuma_An%20investigation%20int o%20the%20compatibility%20of%20Islamic%20ba nking.pdf?sequence=4 Hence, Islamic banks provide facilities with more or less the same segment of the economy as traditional banks in accordance with the welfare theory of Islam. Practices and circumstances are not so different from traditional banking, as the cost of funds is closely linked to interest rates and guarantees in Islamic banks are just as relevant as in conventional banks.46 The Islamic banking functions are balanced with traditional banking systems as conventional banking fee interest against Islamic banking offers these services with service fee charges and mortgage rates are most likely the same in both banking systems, but the only difference is that Islamic banking complies with the Ijarah rules in which the payment is measured.47 Scope for new product development Product development in financial institutions is an area of intense competition. IFIs mostly use product development as an entry strategy because they are an emerging sector. They present themselves as an innovative break from conventional finance. Their focus is on implementing better Shariah compliant procedures for the same products. IFIs may prefer to be less Shariah-compliant to gain more market share at the cost of undermining its Islamic identity and ignoring the additional set of rules for financial intermediation compared to conventional finance such as the ban on 45 Johnes J, Izzeldin M, Pappas V, Alexakis C, Performance and Productivity in Islamic and Conventional Banks: Evidence from the Global Financial Crisis, 2018. 46 Sole J, Introducing Islamic Banks into Conventional Banking Systems. Available from: https://www.imf.org/external/pubs/ft/wp/2007/w p07175.pdf 47 ibid 9
10. interest /usury. This characteristic plays an essential role in the performance of IFIs.48 The new product creation modelling proposed is similar to conversion modelling with extra processes. A key factor tends to be competition in financial services. In terms of providing competitive advantage and dominance to IFIs, developing innovative goods, translating new concepts into corporate benefits, looking at ways to increase consumer loyalty and interest are important. In this sense, financial institutions have to use systematic and scientific approaches to organise their new product development departments.49 However, flexibility of the legal system and the essence of the legislative structure that has been implemented. In terms of flexibility, it is noted that, under British common law, the existence of trust laws and equity principles has given the UK government ample space to deal with the ownership issues that occur in the frameworks of most IF instruments. In terms of legislation, Norton Rose, a key advisor to many Islamic transactions, noted that the measures taken by the United Kingdom authorities played a crucial role in the development of the IF in this country in this regard: "For the past few years, the HMRC has been very receptive to representations made more expensive than conventional finance for the tax treatment of Islamic finance." These reforms should ensure that no UK 48 Dinc Y, Product development in Islamic finance and banking Islamic finance and banking in secular economies, Available from: https://www.emerald.com/insight/1759-0817.htm 49 ibid tax barriers to the issuance of sukuk backed by UK land are now present.50 Islamic Banking and Finance in the UK In 1982, the United Kingdom allowed Geneva-based Dar Al-Mal-Al-Islami (DMI) to open a London office and mobilise investment funds for the Luxembourg Investment Company and the Luxembourg takaful Company. In 1981, DMI was founded by an indenture under the laws of the Commonwealth of the Bahamas with its headquarters in Geneva (Switzerland) to conduct business in accordance with Islamic law, principles and traditions and to provide a broad range of Islamic financial services. It has an extensive network covering four continents, with wellintegrated regional subsidiaries enabling it to adapt to the needs and conditions of local business. The DMI Group and its associates serve as a financial bridge between the world's leading financial centres and Islamic countries on the basis of this geographic framework. 51 In Britain, Islamic financial services have been initially available for more than thirty years, Directed towards international financial institutions via purchases. Bolton-based 1stethical was founded in November 2001 to help Muslims collect financing for house purchases through ethical investments and leasing-based financing rather than paying interest. In July 2003, HSBC became the 50 ibid Belouafi A, Chachi A, Islamic Finance in the United Kingdom: Factors Behind its Development and Growth, Islamic Economic Studies, May 2014. 51 10
11. first UK high street bank to offer shariacompliant mortgage options using a shariacompliant model in which the bank took the property title and rented it back to the customer for 25 years , who then paid rent plus purchase price payments.52 Islamic Bank of Britain, headquartered in Birmingham, opened the first UK shariacompliant high street bank in London in September 2004.53 It was founded by the Bank of England and, in particular, by its then Governor, Eddie George, and the Financial Services Authority. Gulf investors, including members of the Qatari Al Thani ruling family, and British Muslims, were responsible for the bank's £ 14 million seed capital needed to obtain a British banking licence. Its first president was formerly the head of the Islamic Bank of Abu Dhabi. Sharia-compliant current accounts, debit cards, consumer finance plans and mortgages were included in the services provided. Within three years, the bank also intended to extend its operations to mainland Europe.54 Subsequent government legislation was enacted to provide sukuk (Islamic bond) issuance and sharia-compliant mortgages with capital gains tax and stamp duty relief. In 2005, Lloyds TSB began providing high-street Islamic financing, which had become available nationwide through its 2000 branches by June 2006.55 In March 2006, Gordon Brown announced changes 52 Lescher R, Islamic Finance in the UK, Copyright by: Laytons LLP 53 ibid 54 ibid 55 Harrison M, Islamic Finance and the UK, Global Economic Report Series, May 2018. Available from to the UK Finance Act - abolishing double stamp duties on Islamic commercial property deals and fixing irregularities in leasing transactions complying with Sharia. He told the Islamic Conference on Finance and Trade in London in June 2006 that the city could be a gateway to emerging markets, including Muslim countries. London now has more banks offering services according to Islamic values than any other financial hub in the West.56 The Islamic Finance Expert Group, comprising members from industry, the Financial Services Authority, and Muslim community organisations, was founded in 2007 by the UK Treasury. In July of the same year, the Bank of London and the Middle East opened its doors 20% owned by Kuwait's Boubyan Bank with £ 175 million in funds at the time of its launch. Other shareholders included members of the ruling family of Kuwait's Al Sabah, teachers, pension funds, and investment firms. BLME has provided European, Middle Eastern, and North African companies with wholesale banking services. Gatehouse Bank became the fifth Islamic bank in the United Kingdom in April 2008, joining Islamic Bank of Britain; European Islamic Bank, founded in 2005 as the first Islamic investment bank in Europe; Bank of London and the Middle East; and European Finance House, launched in January 2008 and operated by Qatar Islamic Bank.57 https://www.lancaster.ac.uk/media/lancasteruniversity/contentassets/documents/lums/golcer/IslamicFinanceUKR eport_VP.pdf 56 ibid 57 ibid 11
12. HSBC announced in October 2012 that it was scaling back its global Islamic finance operations in the United Kingdom , Bahrain, Bangladesh, Mauritius, Singapore and the United Arab Emirates, instead of concentrating these services in Malaysia, Saudi Arabia and Indonesia. In 1998, the bank formed its Islamic finance division, Amanah. The decision by HSBC was seen as a response to increasing demands for traditional banks to keep separate Islamic financial services. By February 2011, the Qatari central bank had granted the closure of Islamic finance operations to traditional banks operating in the emirates until the end of that year. Some Islamic scholars argued that the attempts of conventional banks to distinguish their Islamic and non-Islamic operations were ineffective, while some Islamic banks believed that the size of conventional banks placed them at a commercial disadvantage.58 Prime Minister David Cameron declared in October 2013 that Britain would be the first Western nation to adopt an Islamic bond, or sukuk. Addressing the World Islamic Economic Forum in London, he said: "I don't just want London to be a major Islamic finance capital in the Western world, I want London to be one of the great Islamic finance capitals anywhere in the world alongside Dubai and Kuala Lumpur." The London Stock Exchange also announced plans to launch an Islamic 58 Development of Islamic Financial Institutions in the UK, UK Excellence in Islamic Finance, Available from: https://assets.publishing.service.gov.uk/governme nt/uploads/system/uploads/attachment_data/file Index identifying companies according to Islamic principle. Britain launched a sovereign sukuk in June 2014, becoming the first non-Muslim country to sell bonds purchased by Islamic investors and receiving offers worth more than £ 2 billion, of which about one-third went to Islamic banks based in the UK. HSBC arranged the sukuk contract, with Barwa Bank of Qatar, CIMB of Malaysia, National Bank of Abu Dhabi, and Standard Chartered also involved. George Osborne, the UK Chancellor of the Exchequer, said that supporting industry could help Britain become "the undisputed centre of the global financial system" at the time of the sovereign Sukuk launch.59 In February 2016, the Bank of England announced a structure for shariacompliant deposit facilities in Britain, having been just the second Western central bank to join the Islamic Financial Services Board in Kuala Lumpur as an Associate Member in December 2015. In doing so, it became the first major Western central bank to allow Islamic banks, as would usually happen, to access its deposit facility without receiving interest. "A Bank of England statement noted that the creation of sharia-compliant deposit facilities was the area "of greatest demand, given that Islamic banks have a more restricted range of liquid market instruments compared to other banks." /367154/UKTI_UK_Excellence_in_Islamic_Finance _Reprint_2014_Spread.pdf, Accessed on: 18 December, 2020 59 ibid 12
13. The British Bankers ' Association welcomed the consultation of the Bank of England as potentially playing a significant role in confirming London as the leading European city.60 Islamic banking is the concept synonymous with observing the Islamic laws and regulations of banking. There are few such banks in the United Kingdom, and this banking process began in 2004. 61 This bank followed the words of the Qur'an, their holy book. The Islamic Bank of Britain is that particular bank. They said that it was not a decent financial service for British Muslims. It is the first bank operating in the UK that claims and operates. It is related to Islamic philosophy in general. It is also allowed to keep the account for those individuals who are non-Muslim as these non-Muslim communities. The Islamic Bank of Britain was founded by a group of Middle East investors to take advantage of the rising Shariah compliant market. In this bank, Shariah's complaint about the financial service in the UK in 2002 is required and they would be approved by the financial services authority.62 the regulation and advancement of Islamic finance, the members of the Shariah Bureau of Bank Indonesia will concentrate on the experience and growth of the Islamic Bank in Indonesia. A phenomenon affecting a number of institutions and instruments is Islamic banking. Islamic instruments are a narrow category of instruments for finance. Any transaction can be built into a sale, partnership, company, or a loan with any distribution of income. One of the goals of the Islamic Bank of Indonesia is to encourage an increase in the proportion of financing involved in such matters.63 The Islamic bank is also open to the public, i.e., it is not intended for a specific group or individuals who practise Islamic religion. It is also possible to describe the Islamic bank as the support with which Muslims can earn their livelihood. Responsible for Britain's ties with states in the Arab Gulf coming from the 19th century, Kuwait in 1961, to become independent from Britain, and Qatar, Bahrain and the Trucial States in 1971, (now the UAE) followed. Arabia Saudi since the British age, he has had good ties with Britain.64 Abdul Aziz Al Saud established the kingdom in about the 1920s. Since the 19th century, Oman has maintained close relations as well, and since 1970, this has continued throughout the reign of Sultan Qaboos. In Britain, several members of the Gulf ruling family have also been educated. More precisely, as we have shown, GCC member states have been active participants in the British Islamic finance market, while also maintaining large traditional financial investments in the United Kingdom, 60 64 ibid ibid 62 Mishra L, Islamic banking in UK, challenges & opportunities, International Journal of Academic Research and Development ISSN: 2455-4197, Volume 3; Issue 1; January 2018. 63 ibid 61 Harrison M, Islamic Finance and the UK, Global Economic Report Series, May 2018. Available from https://www.lancaster.ac.uk/media/lancasteruniversity/contentassets/documents/lums/golcer/IslamicFinanceUKR eport_VP.pdf 13
14. including through their respective sovereign wealth funds and acquisitions of assets . Launched in 2015, the Abu Dhabi Global Market has opted for the use of common English law. Compared to EU links with the six-nation Gulf grouping, in terms of UK relations with the GCC nations, only France has relations that are similar to those of the UK. 65 According to the Islamic Bank of Dubai in 2017, amid claims by various non-Muslim governments to be regional or global centres of excellence for Islamic banking and finance, the United Kingdom is the only non-Muslim nation to play a major role in the Islamic financial asset ranking of countries. The United States and other European countries other than the United Kingdom have yet to gain Islamic investors' interest and confidence. 66 The involvement of the United Kingdom with Islamic finance in Malaysia also reflects stronger bilateral relations, and the historical engagement of each nation with its domestic Islamic finance sectors and their growth share parallels through efforts to improve the socio-economic inclusion of its Muslim populations. Both countries are also significant contributors to Islamic finance's growth and expansion of education. Malaysia continues to lead the global Islamic finance industry in terms of regulation, standardisation and sukuk issuance, according to ratings agency Fitch 65 ibid Sabah Al Binali “EU 2.0 and the evolution of the UAE’s economy”, The National, Abu Dhabi. 67 Harrison M, Islamic Finance and the UK, Global Economic Report Series, May 2018. Available from https://www.lancaster.ac.uk/media/lancaster66 in late 2016. The Associate Membership of the Islamic Financial Services Board of the Bank of England in Kuala Lumpur provides space for more linkages in the field. 67 Expansion of Islamic Banking in the UK Over the last decade, Islamic banking has witnessed a global growth rate of 10-15% per annum and has gained prominence in the traditional banking system at such a rapid pace that Islamic financial institutions are represented in more than 51 countries today.68 Despite this consistent development, the mechanism by which Islamic banks are integrated into a traditional framework remains unfamiliar to many supervisory authorities and finance practitioners. While Islamic banking's growth rate is very high, it is the main issue of its comprehension, since many Muslims still do not have adequate knowledge on the fundamentals of these institutions. 69 Islamic banking windows have been opened by all major banks, such as Islamic banking units have been launched by Saudi American bank and Saudi British bank as well as foreign players in the financial sector such as HSBC and Citibank. In order to meet the requirements of a growing number of customers in the UK, Lloyd TSB university/contentassets/documents/lums/golcer/IslamicFinanceUKR eport_VP.pdf 68 Alowd J, Wodie A, Islamic Bamking in the West: The need for Islamic Banking in the UK 69 ibid 14
15. expanded Islamic banking services .70 In various branches of banks across the world, Islamic current account and home finance products completely developed in accordance with Islamic Shariah law are available. The banks do not pay interest on the current account to consumers who are on credit and these customers do not have any overdraft facilities on this account. The bank uses the declining musharaka and Ijarah framework for home finance to complete the property purchase 71 agreement. The aim of HSBC is to provide Islamic financial services throughout the world, where the Muslim community resides in both Islamic and non-Islamic countries, with a significant contribution to the Islamic banking sector. HSBC has a roadmap for potential innovations in the Islamic section, such as Shariah insurance, pensions and savings accounts, according to HSBC director Amanah Amjid Ali. 72 HSBC offers Islamic mortgage and current account services as well as great participation, such as HSBC amanah, consisting of the following characteristics: Account for investment by Murabaha contract, amanah cards, based on rates for fixed services, home finance and vehicle 70 Khan A K, Profitability of Islamic Banking in the UK: A profitability measurement of Islamic Banks in the UK. 71 ibid 72 Introduction to Islamic Investing, HSBC, Global Asset Management, Available from: https://www.assetmanagement.hsbc.com/uk/atta chments/amanah_doc.pdf, Accessed of 19 December 2020. 73 ibid 74 Development of Islamic Financial Institutions in the UK, UK Excellence in Islamic Finance, Available finance through the notion of Ijarah Personal loan based on tawrraq theory, takaful.73 The Islamic Bank of Britain provides investment accounts, savings accounts and treasury deposit accounts with names. The Islamic Bank of Britain is investing this money in Shariah-compliant stock trading. Islamic Bank of Britain customers are completely pleased with the bank officials' investment requirements. Any investment gains are shared between the bank and its clients. Non-Muslim savers who tend to avoid sectors such as cigarettes or alcohol are also given the facilities. A variable arrangement charge is also available for personal loans.74 London is a major financial market throughout the world, and its regulatory framework in the world is well known and respected.75 There are high levels of qualified people in the financial sector in London, especially in the traditional banking sector. By recruiting these staff members from traditional banking to Islamic banking, Islamic banking gets the benefits of these skills. Because of the world financial crisis, there is a great opportunity to establish Islamic banking on from: https://assets.publishing.service.gov.uk/governme nt/uploads/system/uploads/attachment_data/file /367154/UKTI_UK_Excellence_in_Islamic_Finance _Reprint_2014_Spread.pdf, Accessed on: 20 December, 2020 75 Harrison M, Islamic Finance and the UK, Global Economic Report Series, May 2018. Available from https://www.lancaster.ac.uk/media/lancasteruniversity/contentassets/documents/lums/golcer/IslamicFinanceUKR eport_VP.pdf 15
16. a modern basis , because interest-based structures generate financial distortions in the modern world.76 Many Muslims and other skilled and trained workers are currently interested in Islamic banking in the United Kingdom, which will help to grow and improve the Islamic financial system in this shackled economy. Islamic finance in the United Kingdom, according to Percy, chief executive of the Bank of London and the Middle East (BLME), has passed the primary development process and entered its growth phase.77 The Islamic Bank of Britain was founded as a retail Islamic bank in the United Kingdom in 2004, and BLME was launched in July 2007. In the UK, there are 21 traditional institutions that offer Islamic financial services to 1.8 million Muslim citizens under Shariah rule. 78 The role of the UK and the Bank of England in supporting Islamic Finance The Bank of England confirmed the launch date for a new non-interest-based deposit facility compliant with Shariah, the first from a Western central bank. The Bank notes that the facility, in which deposits from Islamic banks are funded by a returngenerating fund of high-quality Shariahcompliant properties, "will further 76 ibid ibid 78 Malik A, An Analysis of Islamic Banking and Finance in West: From Lagging to Leading, Asian Social Science Vol. 7, No. 1; January 2011 79 Ainley M, MAshayekhi A, Hicks R, Rahman A, Ravalia A, Islamic Finance in the UK: Regulation and Challenges, Financial Services Authority 2007. 80 Jones R, Bank of England announces new support for UK Islamic banks, Available from: https://www.financialreporter.co.uk/financenews/bank-of-england-announces-new-support77 strengthen the United Kingdom’s role as the leading international financial centre for Islamic finance outside the Muslim world."79 In 2019, Islamic finance had assets exceeding $2.4 trillion, 11% higher than a year earlier and a third greater than in 2015. 80 Andrew Hauser81 of the Bank of England said in a speech given during the UK Islamic Finance Week that key aspects of Islamic finance "make it particularly well suited to financing the post-Covid recovery." Hauser said these factors include prioritising equity-like risk-sharing over debt, factoring into investment decisions ethical and environmental concerns, and promoting beyond conventional banking creative financial solutions. In order to meet those commitments, traditional banks retain a number of high-quality liquid assets, including cash and central bank reserves; government and corporate debt; and asset-backed securities and commercial paper. They can also borrow from secured and unsecured money markets, and from central banks as a backstop. But the ban on payment or receipt of interest by Islamic for-uk-islamic-banks.html, Accessed on 10 December 2020. 81 Andrew Hauser is Executive Director for Markets in the Bank of England. Andrew joined in 1992 and has held senior roles across most of our major functions. As Executive Director for Banking, Payments and Financial Resilience, he oversaw our financial risk framework; the operation and strategic development of our payment systems and our wholesale and retail banking operations and he was an executive sponsor for our work on FinTech. 16
17. banks means they cannot use many of these resources .82 Hauser clarified that it was difficult for Islamic banks to adapt to the liquidity rules of 'Basel 3' after the crisis,' which gave centre stage to the very instruments they were forbidden to keep,' including government bonds such as UK gilts and US Treasuries, and remunerated reserve accounts of central banks. The new Alternative Liquidity Facility of the Bank of England would provide greater flexibility for UK Islamic banks to meet high-quality liquid asset (HQLA) requirements, allowing them to keep reserve-like assets in a noninterest-based environment. The ALF will be organised as a wakalah, a widely used model in Islamic finance, or fund-based facility. Participant deposits will be backed by an asset fund, the return of which will be transferred on to depositors instead of interest, net of hedging and operating costs.83 testing and begin the onboarding process for eligible applicants." This model's strengths include its relative simplicity, conceptually and practically, and its flexibility to accommodate future changes in what is still a fast-developing market. As the Islamic banking sector in the UK grows, the ALF will grow. And it will be well placed to take advantage of the increasing diversification of available sukuk assets eligible for HQLA. We will grow over the coming months. The Facility will be open for business from the first quarter of 2021.84 "The strengths of this model include its relative simplicity – conceptually and practically – and its flexibility to accommodate future changes in what is a still fast-developing market. The ALF will grow as the UK Islamic bank sector grows. And it will be well placed to exploit the growing diversification of available HQLAeligible sukuk assets. Over the coming months, we will finalise legal documentation, complete our operational Regulatory and legislative regime For over a decade, Islamic finance has grown rapidly in the United Kingdom and the government has taken a leading role in legislating for its growth and promotion. The UK has hosted the EU's first standalone Islamic financial institution and, according to the new Islamic Finance Country Index (2018), in terms of its overall Islamic finance offering, the UK is ranked 17th out of 48 countries. This places it first in Europe and first among nations with a non-Muslim majority.85 The UK has a long and proud tradition of openness and flexibility, which provides a strong foundation for growth, combined with London's role as a leading international financial centre and the large Muslim population of the United Kingdom (just over 5 percent of the UK population according to the 2011 census). London has 82 83 Jones R, Bank of England announces new support for UK Islamic banks, Available from: https://www.financialreporter.co.uk/financenews/bank-of-england-announces-new-supportfor-uk-islamic-banks.html, Accessed on 10 December 2020. ibid ibid 85 Ercanbrack J, The Regulation of Islamic Finance in the United Kingdom, Ecclesiastical Law Journal, Volume 13 , Issue 1 , January 2011. 84 17
18. long been viewed as the Western centre for Islamic finance as a result of its location .86 The UK solution has been to modify preexisting legislation and regulations governing traditional financial instruments to cater for mechanisms widely used in Islamic finance, rather than controlling Islamic finance items with separate legislation. In doing so, the approach of the United Kingdom was to ensure a fair playing field for Islamic finance products and traditional instruments, and so the United Kingdom proactively monitored and responded to any unfair treatment between the two by implementing regulations and remedial legislation. 87 For example, as early as 2003, in order to alleviate the unintended double taxation charges that emerged as a result of the mechanisms used by Islamic mortgages, the government implemented special exemptions for stamp duty land taxes and quickly remedied Sukuk's unfavourable tax treatment to position them on a level playing field with traditional debt instruments.88 approach to folding Islamic finance tools into the traditional legislative framework. For instance, anything defined as 'benefit' in an Islamic financial instrument would be treated in the same way as the provisions of previous Finance Acts dealing with 'interest'; this is especially relevant when considering Islamic financial instruments' tax treatment.90 In addition, provided that the Finance Act 2005 was generally aimed at bank financing with a particular emphasis on consumer financing, in particular Islamic mortgages, the Finance Act 2007 expanded the scope of the Finance Act 2005 to include sukuk (defined as alternative finance investment bonds (Section 53, Finance Act 2007)) in order to pave the way for the inaugural issuance of sukuk by the United Kingdom.91 The Finance Act 2005, as amended by the Finance Act 2007, sets out the primary legislation regulating Islamic finance in the United Kingdom. 89 Islamic finance transactions are described as 'alternative finance structures' by the Finance Act 2005 and take a reasonably straightforward The concern that emerged in connection with the proposed issuance of sukuk by a UK issuer prior to the implementation of the Finance Act 2007 was whether, for the purposes of the Financial Services and Markets Act 2000 (FSMA), sukuk will be considered to be the equivalent of a traditional bond or a collective investment scheme (CIS).92 The problem emerged because sukuk contemplates the issuer's investment in some properties of the issue proceeds earned from sukuk holders, all of which are features of a CIS. Market practitioners have long assumed that a sukuk should be handled in the same way as a traditional bond (with the investment 86 90 ibid ibid 88 ibid 89 ibid 87 Dewar J, Hussain M, The legal and regulatory framework governing Islamic finance and markets in United Kingdom. 91 ibid 92 ibid 18
19. in assets meeting the criteria of shariah (not investor)), but in order for such treatment to be provided in the United Kingdom, the regulator would have to make an assessment of each individual case-this was obviously not a realistic solution. A number of changes have been implemented by the Financial Services and Markets Act 2000 (Controlled Activities) (Amendment) Order 2010 to explain this issue and to confirm that sukuk should be regulated in the same way as traditional bonds.93 In particular, a range of consequential changes were made to other laws and regulations in the 2010 Order, including the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the Financial Services and Markets Act 2000 (Regulated Activities by Business) Order 2001 and the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. 94 Such amendments expand the framework of those regulations to include alternative investment bonds in the field of finance. The amendments show that successive UK governments have taken a clear approach to treating Islamic finance as a subset of the universe of traditional financial instruments. This approach demonstrates that the Islamic finance industry will be kept to the same standards as the UK's traditional finance industry and contracting parties should expect English regulators and courts to be subject to the same degree of scrutiny as their conventional peers.95 Supervisory Authority The Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) are the two principal authorities responsible for the regulation of Islamic financial institutions (to the degree that such institutions carry out 'controlled activities') (PRA). The FCA is the regulator of conduct with supervisory responsibility for Islamic finance in the United Kingdom, and the FCA is expected to approve and licence all Islamic banks in the United Kingdom.96 The PRA is responsible for the prudential supervision of banks, construction companies, credit unions, insurers and large investment firms, including the United Kingdom's Islamic banks. For the purposes of the FSMA, the FCA and the PRA both hold Islamic banks and financial institutions to the same regulatory requirements as conventional banks, and Islamic banks in the UK are considered to be 'financial institutions'. Sanctions and penalties are levied on Islamic banks in the same way as traditional banks. The approach to control of the FCA and the PRA can be summed up as 'no barriers, but no special favours'. 97 The FCA does not have shariah scholars, unlike some other regulatory bodies, such as Malaysia, who check the shariah enforcement of a product sold by an 93 96 94 97 ibid ibid 95 Ercanbrack J, The Regulation of Islamic Finance in the United Kingdom, Ecclesiastical Law Journal, Volume 13, Issue 1, January 2011. ibid ibid 19
20. Islamic finance institution . In line with the United Kingdom's approach of treating Islamic financial institutions in the same way as traditional companies, the Islamic financial institution will require that controlled activities be allowed and that the requisite permits be obtained from the FCA in the ordinary manner.98 Finally, it should be noted that financial transactions entered into with an entity and not otherwise subject to regulations pursuant to the FSMA may be subject to regulations pursuant to the Consumer Credit Act (CCA) 1974, unless that arrangement is entered into for commercial purposes in whole or in majority, or one of the other exemptions pursuant to the CCA 2006 applies. Tax treatment By altering tax law to provide for equivalent tax treatment for alternative finance, the UK government has attempted to resolve this issue. This was first done in the Finance Act of 2003, which culminated in substantial changes in the Finance Act of 2005, followed by frequent changes in the subsequent Finance Acts. The reforms were not only for the benefit of Islamic finance providers but were articulated in order to cover certain forms of alternative finance, whether or not it was Islamic. The UK government is not worried with whether Sharia enforcement has occurred. It is solely concerned with the legal form of the transaction that nonIslamic finance, as long as it complies with 98 ibid Lescher R, Islamic Finance in the UK, Copyright by: Laytons LLP 99 the requirements of the tax law, may gain from tax legislation. 99 Challenges of Islamic Banking in the UK Islamic banking is doing well in the UK economy, but in all segments of the economy and society, some of the possible opportunities and challenges should be taken up to make Islamic banking more user-friendly. In order to address the challenges and threats to the future needs of the financial sector, there is a need to develop a consistent and open structure of general Islamic banking that concerns all sectors of society and the economy. Since its inception, Islamic banking has faced so many challenges. Over the last two decades, Islamic banking has been in a process of transformation and growth in various countries. Islamic banking industries have often suffered from the problem of different views of Islamic scholars, according to Khalaf, believing that a product or practise may be approved by one scholar, another scholar may be considered un-Islamic.100 A standard shariah board has been developed in Malaysia, funded by the government. A community of religious advisors or scholars has been founded by the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions to issue fatwas (order, decision) on Islamic financial products. But it remains a voluntary body; because of this, some banks ignore the board's decisions, they are not strictly enforcing 100 Ainley M, MAshayekhi A, Hicks R, Rahman A, Ravalia A, Islamic Finance in the UK: Regulation and Challenges, Financial Services Authority 2007. 20
21. these rules on these organisations . It is true that Islamic banking faces the difficulties of lack of verification of decisions because there is no solidarity in the Muslim community, they feel that it is likely that some decisions are not appropriate. 101 There is a significant shortage of scholars and trained managers in the Islamic banking system. The managers are, sadly, not well educated in the use of Islamic financial practises. Islamic banking faces the problem of the legal system in western countries, especially in the United Kingdom, since Islamic banking is not yet properly regulated, so there is a possibility of creating friction between Islamic banking and regulators. It is a fact that Islamic banking is currently not well regulated because it does not have a strong network of branches. Britain's Islamic Bank has only eight branches in the UK. That is not enough, I guess, to fulfil the requirements of a large Muslim population. 102 Islamic banking is currently facing the challenge of opening the Islamic banking window into a modern form of traditional banking. It will enhance Islamic banking facilities, but Islamic scholars need to work hard to preserve the priority of Islamic Shariah. Islamic financial institutions face numerous challenges and difficulties, according to Bokhari, in which the absence of competent and skilled professionals to meet the requirements of this rapidly 101 ibid Mishra L, Islamic banking in UK, challenges & opportunities, International Journal of Academic Research and Development ISSN: 2455-4197, Volume 3; Issue 1; January 2018. 103 ibid 102 growing industry is the key and important factor.103 Islamic Finance in retail markets in the UK The retail sector has experienced growth and some major milestones in the last few years after a sluggish start in the 1990s and early 2000s. For example, the size of the Islamic mortgage market in the UK, relative to the mortgage lending stock of over £ 1.1 trillion in the UK as a whole and over 12 million borrowers, is estimated at just £ 500 million. Islamic mortgages have been structured in the United Kingdom under two separate Sharia-compliant arrangements, namely Murabaha and Ijara.104 The provider buys the property under the Murabaha method and sells it directly to the customer for the initial purchase price plus a negotiated profit margin. In deferred payments, the user pays this higher price in accordance with a fixed payment plan. This funding method falls within the definition of a regulated mortgage contract and has been regulated since October 2004 by the FSA alongside traditional mortgages. Rarely has it been seen in the UK. 105 The London-based Sukuk market is now well known. The Sukuk trade volume is still tiny, but if the government goes ahead with a sovereign problem, this could change (see below). There are also reports that a few inter-dealer brokers might be attempting to establish closer relations 104 Global Trends in Islamic Finance and the UK Market, available from: 105 http://ethicalfinancehub.org/wpcontent/uploads/2017/12/Global-trends-inIslamic-finance-and-the-UK-market-2017.pdf, Accessed on 22 December 2020. 21
22. with Islamic companies in the Gulf in London , likely by setting up regional offices there. Client Protection in Islamic Finance in the UK Principle 6 of the Principles of Good Regulation of the FSA states that 'a corporation must pay due consideration to the needs of its consumers and treat them equally.' To bring this into effect, the TCF programme of the FSA, which involves financial promotions, is intended. Many of these provisions, such as the requirement for Islamic financial institutions to report faults and prevent misrepresentations, naturally fit the principles and requirements of Sharia law. However, these institutions should ensure that customer understanding is adequate because of the often nuanced or uncommon existence of Islamic financial products. As the market evolves and new technologies are launched, this will become more important. These criteria and the additional layer of compliance with Sharia will provide a good basis for businesses to embed TCF into their sector.106 Islamic Finance and Covid-19 Over the years, of course, there have been many problems, but none maybe quite as severe as the Covid-19 pandemic. The human cost has been immense, 106 Kutty F, Islamic Finance, Consumer Protection and Public Policy, March 2020. 107 Hauser A, Executive Director, Markets, Why Islamic finance has an important role to play in supporting the recovery from Covid – and how the Bank of England’s new Alternative Liquidity Facility can help, UK Islamic Finance Week 2020, 2 particularly in parts of the Muslim world, as has the economic effect. It is known that there is some concern that Covid-19 could slow down the speed of growth in Islamic finance as economic activity declines and market participants return to more traditional instruments to meet the crisis's daunting financing needs. 107 But that does not have to be so because main aspects of Islamic finance make it especially suitable for post Covid-19 recovery financing: Firstly, as market participants get to grips with the size of debt accrued in response to Covid-19, the philosophical emphasis on equity-like risk and reward sharing will become increasingly important. When interest rates are so low, the debt attractions are obvious, particularly for those who can lock in long-term fixed rates in local currencies. But when rates increase, debt rolls over, or local currencies depreciate, those who borrow at floating rates, at short maturities, or in foreign currencies face sharp negative income shocks. Contracts for risk sharing, including those promoted by Islamic finance, face substantially lower mediumterm stability risks. For a long time, the Bank of England has advocated the risksharing merits of instruments linked to GDP that could be bundled in sukuk form. And we have recently announced, along with HM Treasury and the FCA, a high-level working group to explore ways to promote December 2020. Available from: https://www.bankofengland.co.uk//media/boe/files/speech/2020/why-islamicfinance-has-an-important-role-to-play-insupporting-the-recovery-fromcovid.pdf?la=en&hash=58B28008CE026D33B0590 F7DB5CDA84DAE723CAD 22
23. a culture of longer-term financial markets to encourage sustainable investment .108 Secondly, Islamic finance tries to stop engaging in practises which are socially harmful. It was pro-ESG, actually, before the word was ever coined! Over the past three years, the issuance of so-called 'green sukuk' has increased dramatically and in June the Islamic Development Bank released an ambitious $1.5 billion sustainability sukuk.15 But these are still very small figures compared to the large quantities of capital now seeking to invest in reputable ESG properties. So, there is plenty of space for further growth.109 Finally, it is natural that the prohibition of many forms of conventional banking in Islamic finance could promote the exploration of more creative forms of intermediation. There is great interest in exploring the potential of Islamic fintech to tackle a number of problems, including financial inclusion, such as Shariah compliant e-money platforms and peer-topeer lenders. In this field, the UK is a world leader.110 English Courts' approach to Islamic finance The governing law clause was held in Beximco Pharmaceuticals v Shamil Bank of Bahrain111 that: "subject to the principles of Glorious Shariah, this agreement shall be governed and construed in accordance 108 ibid ibid 110 ibid 111 [2004] 1 WLR 1784 112 Beximco Pharmaceuticals v Shamil Bank of Bahrain [2004] 1 WLR 1784 109 with the laws of England." It was held that: There can be only one governing law for a contract. Only the law of a nation may be recognised by the parties to a contract as the governing law of a contract. 112 It is not open to the parties to follow as the governing rule of a contract a non-national form of law. This does not, however, prohibit the parties from integrating a nonstate body of law or an international agreement into their contract by comparison. A corporation's contractual ability is regulated both by the law governing the company's constitution and the law governing the transaction in question. A company does not have the capacity to enter into transactions until its constitutional documents allow it to do so. An Act of Ultra Vires is invalid. 113 The case of The Investment Dar Business v Blom Developments Bank 114 shows that I am questioning the legitimacy and efficacy of Islamic financing contracts on the ground that one or more parties lack the right to enter into a transaction where certain parties are expected to behave in compliance with Sharia law and where there is a lack of consistency in the drafting of related clauses.115 The same problems are involved in these questions. Only national systems of law are recognised by English law. The law of Malaysia or England can therefore be the 113 Lescher R, Islamic Finance in the UK, Copyright by: Laytons LLP 114 [2009] All ER (D) 145 115 The Investment Dar Business v Blom Developments Bank [2009] All ER (D) 145 23
24. proper law of a contract . Shariah cannot be that. Nevertheless, within limits, English law has always allowed individuals to create their own laws. This is illustrated by a case currently being dealt with by Laytons. A wealthy person made his estate arrangements inter vivos. He died, and these laws are challenged by one part of his family on the ground that they preclude succession in accordance with Shariah. However, they must contend that, under the law of Kuwait, the clauses should be considered as testamentary provisions. The English court will then seek proof of the law of Kuwait, not Shariah. In the other hand, if you sell a financial instrument on the ground that it is compliant with Shariah and it is not you that would get it sold. Beneath misleading pretences.116 BREXIT and Islamic Finance in the UK The United Kingdom could become an even more attractive destination for Islamic finance globally, especially after Brexit. "As Dr. Bandar M.H. Hajjar, President of the Islamic Development Bank, headquartered in Saudi Arabia, recently said at a sukuk conference at the London Stock Exchange: "You have the financial, regulatory and legal experts required to grow the UK market into a vibrant global hub for Islamic finance.117 Islamic finance, however, remains largely unknown and misunderstood even within the UK Muslim community. In the 1970s, parallel streams based on the Gulf States 116 Lescher R, Islamic Finance in the UK, Copyright by: Laytons LLP 117 Foster J, How Islamic finance could plug the UK investment gap, Available from: and Malaysia started the new age of Islamic finance. The development of Islamic banking services, the issuance of sukuk and the provision of Islamic insurance, known as takaful, have seen growth in particular. There is scope for the UK to attract foreign direct investment from the Islamic financial market for infrastructure. "Brexit or no Brexit, investors in the Middle East will continue to invest in the United Kingdom and will continue to prefer Islamic finance over conventional UK investment financing."118 Conclusion Three factors are established in this research report, such as the fundamental basis of Islamic bank finance, its rise and growth and problems in the United Kingdom. This research is entirely linked to the Islamic financial system, which includes the idea of halal business opportunities and is equally shared on the basis of benefit and loss using the fund. It is the Islamic financial institution's cautious investment strategy and conservative management in the United Kingdom. It is studied here from study that all consumers are aware of Shariah law and Islamic economic system in the Islamic economic context. They also recognise that Islamic banking, for all sorts of business transactions, is an interest-free banking scheme. In Islam, the receipt and payment of interest is absolutely forbidden because interest payments are often triggered by credit crises and most countries face the https://www.raconteur.net/finance/investing/isla mic-finance-plug-uk-investment-gap/ 118 ibid 24
25. same problem because interest is taken . I conclude that the introduction of the Islamic financial system is an alternative approach and framework for both believers and non-believers, since growth, development and happiness are very significant. 119 It is also based on research that Islamic scholars play an outstanding role in Islamic banking growth. Every form of decision and action depends on Islamic Shariah law, but it becomes too difficult to reform this framework because of the problem of lack of trained scholars corresponds to customers' current needs and requirements. Thus, in the growth of Islamic banking, these scholars are very needy because they have the power to eradicate all financial problems, such as the credit crisis. 120 119 Mishra L, Islamic banking in UK, challenges & opportunities, International Journal of Academic Research and Development ISSN: 2455-4197, Volume 3; Issue 1; January 2018. 120 ibid 25
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