Abstract
The Islamic banking sector has grown significantly over the last three decades and reached many international financial markets. As their name suggests Islamic banks are governed by the rules of Islamic law (Sharia). The Sharia compliance requirement has its implication on the nature of Islamic banks’ operations. The prohibition of interest prevents Islamic banks from using conventional financial products. Instead, Islamic financial products are based on the principle of profit-loss sharing. Therefore, the Islamic feature of these banks has brought certain regulatory challenges. This article is concerned with the UK Islamic retail banking market and it focuses on the role of soft law and self-regulation in minimising these regulatory challenges.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References and Notes
This shift can be seen to a certain extent in the findings of the reviews conducted in UK, ‘The Turner Review: A Regulatory Response to the Global Banking Crisis’ (March 2009) and more clearly in ‘The Independent Commission on Banking: Final Report), which is foundation of the Financial Services (Banking Reform) Bill 2013.
Financial Conduct Authority (2013) High-level proposals for an FCA regime for consumer credit. Consultation Paper 13/7, March, p. 12, http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp137, accessed 4 April 2013.
Financial Services Authority (2009) Regulating retail banking conduct of business. Policy Statement 09/06, April, p. 2, http://www.fsa.gov.uk/pubs/policy/ps09_06_newsletter.pdf, accessed 2 May 2013.
Jenkins, P. (2012) HSBC’s Islamic closures highlight dilemma. Financial Times 7 October.
The concern over the integrity of the sector has been suggested by Tarek El Diwany, senior partner at Islamic consultancy Zest Advisory in London, see ibid.
It ‘combines the FCA Handbook and PRA Handbook in a single view and it is not a Handbook in its own right’Financial Conduct Authority and Prudential Regulation Authority (2013) Combined view, April, http://fshandbook.info/FS/html/handbook, accessed 11 April 2013.
It has been widely debated whether it is accurate to describe soft law as a law and also the use of soft law, how it applies internationally and its relation with hard law have been also discussed widely in the literature. Please see Blutman, L. (2010) In the trap of legal metaphor: International soft law. International Comparative Law Quarterly 59 (3): 605–624, Gruchalla-Wesierski, T. (1984–1985) A framework for understanding ‘soft law’. McGill Law Journal, 30(1): 38–88, Brummer, C. (2012) Soft Law and The Global Financial System. Cambridge: Cambridge University Press, Goldmann, M. (2012) We need to cut off the head of the king: Past, present and future approaches to international soft law. Leiden Journal of International Law 25(2): 335–368. Ahrne, G. and Brunsson, N. (2004) Soft regulation from an organisation perspective. In: U. Morth (ed.) Soft Law in Governance and Regulation: An Interdisciplinary Analysis. Cheltenham, UK: Edwar Elgar.
Gruchalla-Wesierski, T. (1984–1985) A framework for understanding ‘soft law’. McGill Law Journal 30 (1): 38–88, 44.
Blutman, L. (2010) In the trap of legal metaphor: International soft law. International Comparative Law Quarterly 59 (3): 605–624, 609.
Arend, A.C. (1999) Legal Rules and International Society. Oxford: Oxford University Press, p. 25.
See Footnote 7, Blutman (2010).
See Footnote 7, Goldmann (2012).
See Footnote 7, Brummer (2012).
ibid, pp. 128–129.
Abbot, K.W and Snidal, D. (2000) Hard and soft law in international governance. International Organisation 54 (3): 421–456.
Such as, easy access to capital and wide opportunities for investors.
Rodrigues, C.A. (1997) Developing expatriates’ cross culture sensitivity: Cultures where ‘Your Culture’s OK’ is really not OK. Journal Managerial Development 16 (9): 690–702.
Nelken, D. (2004) Using the concept of legal culture. Australian Journal of Legal Philosophy 29: 1–26.
Anthony Ogus, A. (2002) The economic basis of legal culture: Networks and monopolization. Oxford Journal of Legal Studies 22 (3): 419–434.
Examples of those intermediaries are: Basel Committee, International Association of Insurance Supervisors, Islamic Financial Services Board and International Organisation of Securities Commissions.
Brummer, C. (2010) Why soft law dominates international finance – And not trade. Journal of International Economic Law 13 (3): 623–643.
ibid, p. 630.
Senden, L. (2005) Soft law, self-regulation and co-regulation in European law: Where do they meet? Electronic Journal of Comparative Law 9 (1): 1–27.
Ogus, A. (1995) Rethinking self-regulation. Oxford Journal of Legal Studies 15 (1): 97–108.
In multi-cultural Britain, the issue of ‘forced marriage’, among many other issues, has been central to many legal debates regarding any legislative intervention, which might be interpreted as a form of an increased policing of South-Asian Muslim communities, see Wilson, A. (2007) The force marriage debate and the Muslim state. Institute of Race and Relations 49 (1): 25–38, For more general discussion on the relation between English law and ethnic minority cultures, see Poulter, S. (1986) Ethnic minority customs, English Law and Human Rights. International Comparative Law Quarterly 36: 581–615.
Stefanadis, C. (2003) Self-regulation, innovation and the financial industry. Journal of Regulatory Economics 23 (1): 5–25.
ibid, pp. 5–7.
Black, J. (1996) Constitutionalising of self-regulation. Modern Law Review 59 (1): 24–42.
Borchardt, G.M. and Wellens, K.C. (1989) Soft law in European community law. European Law Review 14 (5): 267–321.
Black28 (1996). There are other three forms of self-regulation identified by the author in the article, mandated self-regulation, sanctioned self-regulation and coerced self-regulation, where in all three the government has an active role, which varies from one to another.
This could be a trade association of a particular profession, such as the British Bankers Association (BBA).
Quran is the first primary textual source of Islamic law and the most authenticated one, it is believed to be the word of God reviled to his Prophet Mohammad and recorded in writing during the life of the Prophet.
Sunnah is the second primary textual source of Islamic law, which consists of the Prophet’s statements and actions.
Quran Surah Al-Baqarah, verse: 2: 219.
Minwer, L. (2000) Middle East: Islamic models of equity markets. Company Lawyer 21 (5): 161–165.
Al-Zuhayli, W. (2003) Financial Transaction in Islamic Jurisprudence Volume 1. Translated by M.A. Mahmoud, A. El-Gamal and revised by M.S. Eissa. Damascus, Syria: Dar Al-Fikr, p. 83.
Al-Dhareer, S.M.A. (1997) Al-Ghararr in contract and its effect on contemporary transactions. Eminent Scholars Lecture Series No.16 published by Islamic Research and Training Institute, Islamic Development Bank, p. X11I/194.
Wilson, R. (1999) Challenges and opportunities for Islamic banking and finance in the West: The United Kingdom experience. Thunderbird International Business Review 41 (4/5): 421–444.
HC Deb 28 April 1993, Vol. 223, col 398. http://www.publications.parliament.uk/pa/cm199293/cmhansrd/1993-04-28/Writtens-1.html, accessed 2 May 2013.
Gapper, J. (1993) UK acts against Islamic Bank. Financial Times 1 April: p. 22.
Aldohni, A.K. (2011) The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the UK and Malaysia. London: Routledge, p. 23.
Section 19 (1) FSMA 2000 states that ‘No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is – (a) an authorised person; or (b) an exempt person’. The regulated activities that are specified by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which is a secondary legislation under FSMA, include taking deposits.
Financial Services Authority (2007) FSA encourages the growth of Islamic finance in the UK, http://www.fsa.gov.uk/pages/Library/Communication/PR/2007/121.shtml, accessed 2 May 2013.
Blair, M., Walker, G. and Purves, R. (eds.) (2009) Financial Services Law. 2nd edn. Oxford: Oxford University Press, pp. 212–215.
ibid, p. 219.
Goodhart, C., Hartmann, P., Llewellyn, D., Rojas-Suarez, L. and Weisbrod, S. (1998) Financial Regulation: Why, How and Where Now? London and New York: Routledge, p. 3.
British Bankers Association (2009) In memory of the banking code, http://www.bba.org.uk/customer/article/in-memory-of-the-banking-code, accessed 2 May 2013.
Financial Services Authority (2009) Regulating retail banking conduct of business. Policy Statement 09/06, April, p. 3, http://www.fsa.gov.uk/pubs/policy/ps09_06_newsletter.pdf, accessed 2 May 2013.
ibid, p. 2.
Ellinger, E.P., Lomnicka, E. and Hare, C.V.M. (2011) Ellinger’s Modern Banking Law. 5th edn. Oxford: Oxford University Press, p. 65.
Financial Services Authority (2011) The Financial Conduct Authority: Approach to regulation, June, pp. 6–7, http://www.fsa.gov.uk/pubs/events/fca_approach.pdf, accessed 11 April 2013.
Financial Conduct Authority and Prudential Regulation Authority (2013) Combined view, http://fshandbook.info/FS/html/handbook, accessed 11 April 2013.
Financial Conduct Authority (2013) FCA Handbook. http://fshandbook.info/FS/html/FCA/MCOB/11/3, accessed 11 April 2013.
HM Treasury (2006) Consultation on secondary legislation for the regulation of Home Reversion and Home Purchase Plans, March, para 2.11, p. 6, http://www.hm-treasury.gov.uk/media/88B/F5/ria_homereversion_130906.pdf, accessed 2 May 2013.
Financial Services Authority (2007) Islamic finance in the UK: Regulations and challenges, November, p. 13, http://www.fsa.gov.uk/pubs/other/islamic_finance.pdf, accessed 2 May 2013.
Benjamin, J. (2010) The narratives of financial law. Oxford Journal of Legal Studies 30 (4): 787–814.
Cover, R.M. (1983) Nomos and narrative. Harvard Law Review 97 (1): 4–68.
Benjamin56 (2010), pp. 787–788.
This part of the code could also deal with the corporate governance challenge that Sharia Supervisory Board poses in relation to the structure of the Islamic financial institution.
Acknowledgements
I am grateful to Dr Alison Dunn for her useful comments on this article.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
DATA COLLECTION
In order to assess the feasibility of this research proposition it was necessary to discuss the above proposal with not only banks from the retail side of Islamic banking but also it was essential to consult trade associations such as the British Bankers Association (BBA) and the Financial Ombudsman Service. The BBA is one of the main ‘sponsors’ of the Banking Codes, their view has been thought to be of great benefit to this research.
I decided to conduct a series of personal interviews at management level; further, the type of interview used for the purpose of this research was the semi-structured interview. This form of interview gave me some freedom to alternate/develop my questions and direct the discussion according to the response of the participants. My semi-structured interviews broadly covered the following key themes:
-
The key regulatory challenges that Islamic financial institutions face.
-
The concept of self-regulation and soft law and their application in the context of Islamic banking.
-
The difficulties that can be identified in relation to any attempt by the industry to harmonise its practice.
Initially, I identified three retail banks that are actively involved in the retail aspect of Islamic banking in addition to the BBA as a trade association and the Financial Ombudsman Service. These institutions were contacted via email requesting an interview and explaining briefly the main theme of the research. The BBA and another two banks agreed to give interviews but the Financial Ombudsman Service and the third identified Islamic bank did not respond. All the respondent banks are UK-based banks, which are actively participating to the retail aspect of Islamic banking in the United Kingdom.
For the purpose of anonymity, names of individual participants, their positions and their respective organisations – clearly apart from the BBA – are not revealed. A summary of the respondents who agreed to participate is given in the table:
It is fair to say that the sample of interviews is quite limited, which may not be enough to give conclusive results. However, these consulted institutions are major players and they are at least capable of giving important insights into the industry.
Rights and permissions
About this article
Cite this article
Aldohni, A. Soft law, self-regulation and cultural sensitivity: The case of regulating Islamic banking in the UK. J Bank Regul 15, 164–179 (2014). https://doi.org/10.1057/jbr.2013.18
Published:
Issue Date:
DOI: https://doi.org/10.1057/jbr.2013.18