The development of Islamic banking in the UK: the application of Sharia principles under English law.

salam,

sorry for the lack of update. being busy with preparation of final year exam and mostly my dissertation. just finished it today. below is the draft of my dissertation. please be informed that the draft below is part of my final year law dissertation. enjoy your reading! =)

The development of Islamic banking in the UK

Prepared by:

Mohd Shazli Mohd Zaini

200329152

(8312 words)

Supervised by:

Mrs. Judith Dahlgreen

Contents

1. Abstract 3

2. Introduction 4

3. Chapter 1: The development of Islamic banking in the UK 6

- The reasons for the growth of Islamic banking

- The principles of Islamic finance

- The products of Islamic banking

4. Chapter 2: The applications of Sharia law in English courts 16

- Why English law is chosen to govern Islamic banking contracts?

- Analysis on the case of Islamic Investment Company of the Gulf (Bahamas) Ltd. v Symphony Gems NV & Ors

- Analysis on the case of Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and Others

5. Chapter 3: The regulation of Islamic banking in the UK 32

- The government’s objectives for Islamic banking

- How Islamic banks fit into the UK regulatory system

- Alternative finance arrangement under Finance Act

6. Concluding remarks 39

7. Bibliography 43

Abstract

The aim of this dissertation is to analyse the development of Islamic banking in the UK focusing on the applications of the sharia principles under English courts and the regulations of Islamic banking products under the UK legislations. The research is important, as the Islamic banking is rapidly being developed in the UK, it is essential to identify whether the UK has the necessary regulatory and supervisory framework to accommodate the growth of Islamic banking. Arguably, it is suggested that the UK has the capacity to further develop the Islamic banking because of its effective legal, regulatory and the supervisory framework as well as the efficient court system that can effectively deal with the Islamic banking disputes. The methods of the research will primarily based on the analysis on the articles and publications by the government’s agencies, academic’s journals’, textbooks on Islamic finance and the relevant websites. At the end, the result of the research suggested that although the UK has great potential for the growth of Islamic banking, the fundamental aspects of Islamic banking i.e. the sharia principles posses’ great challenges for the further development of Islamic banking in the UK.

Introduction

The aim of the first chapter is to provide with the theoretical aspects of Islamic banking in the UK. Firstly, the chapter will discuss on the reasons for the increase in demand of Islamic banking in the Western area especially in the UK. Next, it will define what is meant by Islamic banking and then goes to examine the main features of Islamic banking such as prohibition on maisir (speculation), riba (interest), gharrar (uncertainty) and the role of Sharia board. The final part of the first chapter will analyse several Islamic banking products which are murabaha (cost plus financing), ijara (lease) and sukuk (Islamic bond) that commonly used by parties on their contracts involving Islamic banking transactions.

Next, the objective of the second chapter is to analyse whether the English courts would consider the sharia principles when dealing with Islamic banking disputes. This is because, as the Islamic banking has been expanding, it is inevitable that the English court will be required to deal with the commercial disputes especially when the parties have designated the English law as the law governing the transactions.[1] The first part of the chapter will briefly examine two reasons for Islamic banks to designate the English law as the governing law of an Islamic banking contract and the position of the Rome Convention under English law, that fundamentally effect the judgements of these disputes. The chapter will then analyse two international Islamic banking disputes where English law has been chosen as the governing law namely Islamic Investment Company of the Gulf (Bahamas) Ltd. v Symphony Gems NV & Ors[2] and Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and Others[3]. The final part of the chapter will summarise on the legal principles established from these cases and the difficulties faced by the English courts, which tied by the Rome convention, in dealing with Islamic banking disputes.

Finally, the aim of the third chapter is identify whether the UK has the effective regulatory and supervisory framework to support the growth of Islamic banking. The first part of the chapter will analyse the UK’s objectives and guiding principles for Islamic banking in the UK. The chapter will then look at how the Islamic banks fit into the current UK regulatory system and the challenges of regulating Islamic banking in the UK. Finally, the chapter will discuss on alternative finance arrangement, which was introduced under the Finance Act, and whether the UK has adequate facilities to further promote the development of Islamic banking.

Chapter 1: The development of Islamic banking in the UK

Introduction

Islamic banking has seen rapid growth in the last decade, with the annual average growth rate of some 10 to 20 per cent and the current global Islamic finance assets stand at US $800 billion. [4] Norton Rose for instance, predicted that the Islamic finance industry would reach US $4 trillion by 2015.[5] The United Kingdom has huge potential on Islamic banking because of its 1.8 million Muslims population and about half a million regular Muslim visitors to the UK and approximately 12 million Muslims living in the EU such as in France and Germany.[6] Although the UK has been providing Islamic Financial Services for 30 years, the recent developments via government support and a favourably regulatory environment has encouraged Islamic banks to set up operations in the UK and has created the largest and most liquid market for Islamic banking product outside the Middle East and Asia.[7] For instance, in 2004, the Financial Services Authorities UK (FSA) authorised the first wholly Sharia compliant retail bank in the West, Islamic Bank of Britain,[8] which then followed by European Islamic Investment Bank[9] to cater the niche opportunities on Islamic banking.

As a result, the UK has become the key Western centre for Islamic banking with over $19 billion in sharia-compliant assets and comes eight in The Banker’s league table of Islamic assets worldwide ahead of other Islamic countries such as Egypt and the highest of all Western countries.[10]

The growth of Islamic banking in the UK

Initially, the increase in demand for Islamic banking is due to combination of sustained high oil prices from Middle East resulted a growth in wealth of a number of Islamic states.[11] Consequently, this has led to greater demand from Muslims especially from those living in Western countries such as in the UK for opportunities to invest in accordance with their personal beliefs and the manner prescribed by the rules of sharia.[12]

In addition, the excess liquidity in Middle East due to sharp rise in oil prices has lead to surge in demand for both conventional and Islamic financial assets. However, the local financial market was unable to accommodate the excess liquidity resulting in a significant spill over into international market.[13] In this case, the UK, with its established history of financial openness, is the suitable alternatives for Middle Eastern investor such as the acquisition of Aston Martin by Kuwait’s Investment Dar for $925 million, using sharia-compliant financing.[14]

Having said that, the FSA and HM Treasury has produced several working papers to identify the recent growth of Islamic banking in the UK.[15] The first reason is because of the strong markets and skills base in the UK due to the London strong history of financial innovation of being willing to innovate and respond flexibly to new idea, which in this case, the idea of Islamic banking.[16] Furthermore, the deep and liquid markets combined with a friendly EU business environment and large pool of legal, accounting and financial engineering skills also have played an important role for the domestic expansion of Islamic finance.[17]

In addition, many international institutions such as Deutsche and HSBC have had regional present in Middle Eastern and South Asian markets for decades, allowing them to develop considerable knowledge and experience of local markets, including Islamic finance.[18] In order to accommodate the rising demand for Islamic financial services, they have established sharia-compliant sections known as ‘Islamic windows’, some of which are based in the UK. Consequently, these Islamic windows have contributed significantly to the development of Islamic finance for the UK market due to these financial institutions experience in product development and access to far greater resources than those available to local institutions in the Middle East and South East Asia.[19]

The final reason is due to the establishment of the FSA in 1997 through combination of 11 different regulators into a single body under a single piece of legislation.[20] This has resolved many of the complications and conflicting views from previous regulatory system and allows the FSA to look across the system as a whole, including the Islamic financial institutions and products.[21] In particular, it will be easier for the government to introduce certain tax and legislative changes specifically designed to promote the development of Islamic banking such as in the Finance Act 2003 that abolished the double stamp duty land tax applicable to Islamic mortgages in the UK.[22]

Definition of Islamic banking

Having seen the development of Islamic banking in the UK, it is important to understand as what is meant by Islamic banking and most importantly, to determine the difference between Islamic banking and conventional banking. Generally, Islamic banking is any financial transactions that adhere with Islamic law (sharia) and Islamic jurisprudence (fiqh).[23] The sharia is not a codified rule of law but consisting of general rules and principles derived from the Quran and the practices (sunnah) and sayings (hadith) of Prophet Muhammad.[24]

Moreover, the general sharia principles relating to Islamic banking has been supplemented by Islamic jurisprudence (fiqh) developed by four main schools of thought in Islam (which are the school of Shafi, Hanbali, Maliki and Hanafi).[25] Thus, this explains the wide range of definitions for Islamic banking range from the very narrow (interest-free banking) to the very broad (financial operations conducted by Muslims).[26]

Main features of Islamic banking

Having said that, any Islamic banking transactions will be based on few main sharia principles such as prohibition on interest (riba), speculation (maisir), uncertainty (gharrar) and the role of Sharia boards.

Prohibition on riba means that it is not permissible to charge, pay or receive interest as Islamic principles require that any return on funds provided must be based on profit derived from a commercial risk taken by the financier. [27] This is because the sharia does not recognise the time value of money and it is seen merely as a means of exchange to create real economic value by investing in a permissible commercial activity that has the element of risk-taking by financier.[28]

Prohibition of maisir in Islamic banking effectively means that under the sharia, contracts which involve speculation which akin to gambling are not permissible (haram) and considered void.[29] The test is based on whether the revenue gained by chance rather than by productive effort. However, the sharia considers the elements of speculation in commercial arrangements, based on the degree of speculation involved and whether the intention of the transaction is to realise a gain from some productive effort or purely speculation. [30] For instance, the speculation involved in conventional over the-counter derivative is not permitted because the gain is being regarded as deriving from chance rather than the necessary productive effort.

The prohibition on gharar or uncertainty is based on Islamic principles of equity and efficiency in transactions.[31] Essentially, the existence of unacceptable gharar, particularly on the fundamental terms of the contract, such as the subject matter, price or time for delivery are considered void.[32] For examples, options, forward contracts and futures and conventional insurance.[33] Conventional insurance for instance, is not permitted on the basis, amongst other things; the gharar exists on the probability of occurrence of the insured event.[34]

The last feature is the roles of sharia boards in Islamic banks or conventional banks with Islamic windows. Sharia boards comprise a number of imminent Islamic scholars or legal practitioners to ensure that the products or the transactions comply with the legal requirement and most importantly, the rules of sharia. [35] Interestingly, under some jurisdictions, Islamic banks or financial institutions with Islamic windows are not required to establish a sharia board.[36] Thus, in some cases, the financial arrangements involving sharia boards may be voluntary to review and approve the proposed transactions as being sharia-compliant. Nonetheless, it is important for them to appoint a sharia board in order to have the necessary credibility with potential investors and customers.[37]

Arguably, these prohibitions in Islamic banking are the main driving force behind the development of modern Islamic banking as Islamic banks must use a different paradigm of financing, namely asset-based financing and profit-loss sharing, which distinguish Islamic banking from conventional banking.[38]

Islamic banking products

With regards to the general principles outlined above, a number of Islamic banking products have been developed such as murabaha (cost plus financing), ijara (lease) and sukuk (Islamic bond) to meet the demands of modern financial transactions.

Murabaha involves the purchase of a specific commodity by a financial institution upon the request of a client. Then, the client purchases the commodity from the financier on a deferred payment basis at an agreed mark-up that is structured to cover the cost of the commodity, the underlying risk and the profit margin.[39] The profit is usually defined in reference to an interest rate index such as the LIBOR (London Inter-Bank Offered Rate).[40] Arguably, the profit obtained is not riba, as the market value of assets and the interest rate index are indicative of one another and this method of determining profit in a murabaha sale is a natural outcome of a dual financial system.[41]

The second type of Islamic banking product is sukuk or Islamic bond. A sukuk is a certificate or note, which represents a proportionate beneficial ownership in an underlying asset for a defined period with the risk and returns associated with the cash flow generated by the asset belonging to the investors (sukuk holders).[42] Besides, the standard by Accounting and Auditing Organisations for Islamic Financial Institutions (AAOIFI) stated that sukuk must be asset backed and subject to sharia compliant contract.[43] Fundamentally, the difference between sukuk and conventional bond is the latter does not give any ownership rights in an underlying asset but a contractual claim against the issuer.[44]

The last product to consider is an ijara contract that allows the transfer of usage of an asset in return for rental payment; as such it is similar to a conventional lease contract. Under an ijara principle, the rent payable must be determined as a fixed sum prior to the commencement of the relevant rental period and it is possible to specify the rate based on conventional benchmark rate such as the Libor, plus a margin.[45]

Conclusion

To sum up, although Islamic banking is a relatively young industry, the industry has been growing at a phenomenal rate, especially as it is making its way into markets with significant Muslim populations but where there is little or no provision of sharia-compliant financial products and services at present.[46] Besides, the market for Islamic products also has potential to attract non-Muslim population as it provides unique alternative to the conventional banking.

Briefly, the reasons for the growth of Islamic banking in the UK are the global expansion of Islamic finance, the markets and skills base in London, the establishment of Islamic window by major international institutions and the formation of the FSA. Having said that, as the UK positions itself for the anticipated worldwide growth of Islamic banking, it is increasingly important to understand the legal position of contracts of Islamic banking products under English law. This is because, mostly, the Islamic banking contracts have reference to English law, with subjects to sharia principles, in the case of dispute of the agreement. Otherwise, the future growth of the industry could be hindered due to the absence of clear legal standing of Islamic banking contracts especially as the UK is becoming the Islamic finance centre in the Europe.

Chapter 2: Sharia principles and English law

Introduction

Generally, there is no requirement in Islam to designate sharia law as the governing law of a financial contract. The basic principle is that the contractual freedom is recognised as long as the contract adhere with Islamic rules and principles.[47] Thus, the common practice is to designate the national law as the governing law of a contract, with the following proviso incorporated: “… for long as it does not conflict with sharia laws”.[48]

Sharia principles and English law

Having said that, there are two main reasons on why the Islamic banking contracts are often constructed with reference to the English law. Firstly, the choice of English law is common in international financial transactions because it provides high degree of certainty for commercial disputes[49] and the international respect for English judges and their decisions.[50] Arguably, the problem with sharia law is that the law is far from a cohesive body of rules because different sharia schools of law take different positions to certain key points in a financial contract.[51] Moreover, the sharia law lacks certainty, as the sharia principles are capable of different interpretation by different Islamic jurists and scholars based on their school of laws. For example, the Shafie jurists such as in Malaysia authorise debt discounting in which Hanbali jurists in the Persian Gulf region may have different views. [52]

Besides, some commentators have argued that the wide interpretation of the freedom of contract principle under English law will enable transactions to be structured according to sharia laws.[53] Under English law, subject to certain limitation, section 2(1) of Contracts (Applicable Law) Act 1990,[54] which gives statutory effect to the Convention on the Law Applicable to Contractual Obligations 1980 (Rome Convention),[55]provides the parties with the freedom to choose the law applicable to their contract. Article 3 of the Rome Convention states:[56]

‘A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract’

However, later in the analysis of these cases, the Article 1.1 of the Rome convention delimits the parties choice of law to govern their contract to law of a state and did not provide sanction for the choice or application of a non-national system of law i.e. the sharia law. In other words, the sharia, which is not the law of a specific state but rather than a set of general rules as elusive to the English courts as lex mercatoria is excluded by the Rome Convention from being the governing law.[57]

Islamic Investment Company of the Gulf (Bahamas) Ltd. v Symphony Gems NV & Ors

In the first case, the Bahamas-based Islamic Investment Company entered a Murabaha agreement to supply valuable gems to Symphony Gems (SG) - the defendant company, which was incorporated in Belgium.[58] Briefly, Murabaha works through the bank buys the goods i.e. a large quantity of rough diamonds from the supplier, a company called Precious (HK) Ltd in Hong Kong, and re-sells them to the defendant on a deferred basis, adding an agreed profit margin. The defendant then agreed to pay the sale price for the diamonds over three instalments, effectively obtaining credit without paying interest. The mark-up here represents the bank's profit margin, but this is a reward for risk, not merely for providing finance, as the bank owns the goods until the resale occurs.[59] The resale process occurs after the banks paid the supplier (Precious Ltd) the cost in each case, which is US$7.5m and then re-sells them to the purchaser for US$7, 917,450 upon receiving the item.[60] The risk that the bank takes is the probability of default in payment by the defendant as the bank initially takes the title to the commodity, and paid the cost to the supplier before re-sells them to the buyer. This type of agreement is the most popular method of sharia-compliant financing because it is relatively simple to structure and has no element of riba (interest) as the profit margin is justified by the element of risk to the bank.[61]

In a nutshell, the issue in this case concerns with the amount of the balance due by the defendant since the bank already paid the a total of US$15 million to the designated account of the supplier, yet, no instalments had at any time been paid by the defendant as set out in the contract.[62] One of the reasons, because the defendant inclined to keep the liquidity at their disposal for other business purposes and requested to extend the maturity date for another few weeks.[63] The claimant already recovered US$7.5 million from a bank guarantee set up by the defendant but they now seeking action for the remainder of the cost.

To start with, under the term of the contracts, both parties agreed that ‘this agreement and each purchase agreement ‘shall be governed by, and shall be construed in accordance with, English’ law and ‘… the courts of England shall have exclusive jurisdiction to hear and determine any suit …’.[64] In addition, the agreement also includes the purchaser wishes to deal accordance with the sharia law through a Murabaha financing agreement. [65]

As a result, the judge, Mr. Justice Tomlinson, was confronted on three issues on this case; firstly, the application of the Murabaha principles on the agreement. The defendant, represented by Mr. Joseph, argued that the bank could not recover the claim because it is a claim to recover the sale price, and the absence of delivery of the 92,500 carats of assorted rough diamonds has also resulted loss and damage for the defendant.[66] The defendant then submitted their complaints not to the claimant, but to the supplier, Precious (HK) Ltd and received a reply from the supplier, about the payment of USD$15 million by the banks and the delay of shipment due to long execution and sourcing of the roughs diamonds.[67] Nevertheless, the claimant argued that the absence of delivery was justified because of the first instalments was due and the contract did not contain any obligation for the seller to deliver the item before the advance of the US$15 million.[68]

In his judgement, Mr. Justice Thompson did not consider Islamic law in his decision. Instead, the judge viewed the agreement as a normal purchase agreement with two distinct sales, which are from the supplier to the seller and from the seller to the purchaser and agreed with the claimant that the absence of delivery of goods because the purchaser has not made the necessary arrangements.[69] The judge’s view was supported by clause 4.4 in the contract, which stated that the payment by the purchaser, SG, should take place ‘… in all cases notwithstanding any defect, deficiency or any loss or any other breach of any supply contract … by the supplier’, which in this case, the failure the deliver the gems.[70]

Some commentators have argued that if the court were to consider Islamic law in the court, under Murabaha principle, the term releasing the bank from its responsibility will not be accepted.[71] As Murabaha is a purchase agreement, the seller must not get paid until the supplies have reached their destination i.e. the defendant company (SG) and the risk of failure to deliver should be borne by the bank, as sharing this risk justifies the bank’s margin of profits.[72]

The second issue is based on the principles of illegality on the ground that the contract contradicted with the rules of Islamic law. Article 10 (2) of the Rome Convention[73] encourages the courts, in finding the governing law of a contract, to consider the law of the jurisdiction in which the performance take place. In other words, as argued by the defendant, the contract is illegal under Islamic law because it was a law of the land in Saudi Arabia and the contract, at least in part, was to be performed there.

Having said that, the judge rejected the argument because the fact that the claimant’s base of operations is apparently in Saudi Arabia was irrelevant as the only obligation for the sellers was to make payment to Precious, the supplier, to the bank account in Zurich.[74] The court was also informed of the non-Islamic nature of the Murabaha agreement based on an advice from Dr. Yahya Al-Samaan who concluded that ‘… the agreement in issue does not have the essential characteristics of a Murabaha contract’.[75]

As such, both parties agreed to govern the Murabaha agreement without any restrictions or limitation under English law. Briefly, the principle of illegality under English law is defined in the case of Regazzoni v. Sethia.[76] The case established that the illegality doctrine is when both or one of the parties may intend to perform a contract in illegal manner.[77] With regards to this principle, the court declined to accept the illegality defence because the contract did not call for any performance by the sellers in the Saudi Arabia and the agreement was not to be applied in part in a country where sharia law was the law of land such as in Saudi Arabia especially when English law has been chosen to govern the contract.[78]

The final issue in this case is the claim of the ultra vires doctrine. By entering this particular contract, the claimant has contradict the bank’s Memorandum of Association, which stated that ‘“to carry out in a manner which is consistent with Islamic laws, rules, principles and traditions…”[79]. This is because the Murabaha agreement contained the condition to guarantee the payment regardless of any circumstances – which clearly contradicts with Sharia law principle that requires parties to share risk in order to gain profit.

However, the Company Act of Bahamas, where the bank was established, protected the third parties acting in good faith from any limitations in the bank’s memorandum.[80] In fact, the court concluded that having reviewed the documents provided and considered the applicable Bahamian law, found that ‘at the time the Murabaha agreement was executed by the claimant, the company was no longer subject to the ultra vires doctrine… unless it can be proved that the claimant was aware that the contract was ultra vires its objects’.[81]

On the other hand, some commentators argued that the English court has always been reluctant to apply the ultra vires doctrine because it has been considered as a ‘technical rule’ and companies by abusing this doctrine, would use it to avoid their contractual responsibilities which eventually could undermine the unique financial standing of London in international markets.[82]

To summarise, although the agreement in this case stipulated that it was governed by English law subject to compliance with Sharia principles, the court clearly stated that only English law was capable of being the governing law of a contract. This is because the parties agreed to use the English law on the agreement subject to Sharia principles. However, the court would only determine the validity of the contract under the exclusive jurisdiction of English law and it was not for the court to determine the validity of the contract under Sharia principles.[83]

Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and Others

In the second case, the claimant, Shamil Bank of Bahrain (the Bank), is a bank incorporated under the laws of Bahrain and operates in accordance with the principles of Sharia law as an Islamic financial institution.[84] Accordingly, the Religious Supervisory Board (the Board) is established under the Articles of Association (the Articles) of the Bank to ensure its commercial activities conform to the principles and provisions of Sharia law.[85]

Briefly, the primary role of the Board is to examine on a test basis each type of transaction entered into by the Bank for sharia compliance and later, submit an annual report to the shareholders as provided by the clauses 35 and 36 of the Articles that require the Board of the Directors to ensure that all the investment and other business transactions have been referred to the Board for approval prior of carrying out the transactions.[86] As such, the Board has certified that the activities of the bank, which include the transactions giving rise to the current dispute, that the bank’s business, were in full compliance of the sharia law.[87] This is because, prior to the action taken by the claimant, the defendant had never given any indication to the bank that the arrangement did not comply with the principles of sharia.[88]

Conversely, the first two defendants are Bangladeshi companies (part of the Beximco group) involved in the manufacture, import and export of the pharmaceuticals. [89] The third and fourth defendants are directors of the first two defendants and of the fifth defendant, which is the parent company.[90]

In 1995, the Beximco group wished to raise additional working capital to be used in its commercial activities and after some negotiations, the Bank and the first and second defendants entered into a Murabaha agreement. The structure of the agreement was that the Bank agreed to purchase, through the second defendant acting as its agent, certain goods from specified sellers for immediate onward sale to the first defendant and the parties also entered into a market rate agreement. The first defendant then agreed to pay to the Bank the Murabaha price that included a profit element and if any payment due remained unpaid for any period after its due date, the defendant would have to pay compensation to the Bank.[91]

In April 1996, the parties entered into a second Murabaha agreement whereby the Bank extended a further facility of US$15 million to the second defendant in which, the terms, and the repayment terms were essentially the same.[92]

Later, the first two defendants defaulted on the payments on these two Murabaha agreements, and following negotiations, they entered into the new ‘exchange agreements’ whereby the Bank agreed to discharge the outstanding amount in return for the right to receive unencumbered title to certain assets that currently owned by the them.[93] In addition, for the defendants’ use of the assets, the companies were required to pay a user fee while the third, fourth and fifth defendants would be the new personal new guarantees for them.[94]

Having said that, the dispute then arises due to the default in payment by the defendants on the instalments of the user fee only, which amounted to US$46. 86 million, as the exchange agreement has discharged the earlier Murabaha agreements.[95]

The main argument raised by the defendant was whether on a true construction of the governing law clause, the finance agreements were enforceable only if they were valid and enforceable both in accordance with the principles of Sharia and in accordance with English law.[96] This is because, as part of the terms of the agreement, the parties decided that jurisdiction over any legal action on these Murabaha agreements would be governed by the English law with term of ‘subject to the principles of Glorious Sharia’.[97] The defendants argued that the obligations of the balance due only enforceable if they are enforceable both under English law and sharia law respectively. Furthermore, the defendants claimed that loan was ‘dressed up as a disguise for an otherwise undocumented interest bearing loan’ via the Murabaha principles under the sharia law.[98]

The court at first instance, ruled that the governing law could not be the Sharia because of two reasons. Firstly, even if Sharia law were to be considered in the contract, the judge mentioned that when dealing with the applicable law on the agreement referred to the Article 1.1 of the Rome Convention that delimits the parties choice of law to govern their contract to law of a state and did not provide sanction for the choice or application of a non-national system of law i.e. the sharia law.

Furthermore, the wording of Article 5 of the Rome Convention[99] impliedly excluded the choice of law other than the law of state. The court described sharia law as a set of general rules and principles, which will definitely be excluded by the Convention from being the governing law. As such, the judge also agreed with the claimant’s submission that the words ‘ subject to the principles of Glorious Sharia’ refers to the Bank’s intention to conduct its affair according to sharia principles under the supervision of the Board.[100]

Nevertheless, even the sharia principles in the agreement were to be taken as state law, English law will still be chosen as a governing law because there could not be two separate systems of law governing the agreements. This is because the Rome Convention would not permit a situation where two laws simultaneously govern the question of the questionability of a contract.[101]

In addition, Mr Justice Morrison at first instance, stated that:

‘… It cannot have been the intention of the parties that it would ask this secular court to determine principles of law derived from religious writings on matters of great controversy...’ ^[102]

Thus, in order for the court to decide a sharia law issue in this case, it needs to have ‘its own view of the position under the sharia law’.^[103] However, the task will be difficult, if not impossible, for a secular court that lacks of required knowledge to apply Islamic law, as Lord Justice Potter observed in his significant speech in the decision of the Court of Appeal in the case, ‘most of the classical Islamic law on financial transactions is not contained as “rules” or “law” in the Qur’an and Sunnah but is based on the often divergent views held by established schools of law formed in a period roughly between 700 and 850 CE’.^[104]

The judge in the court of appeal also mentioned because of varieties of form and content of Murabaha agreements, thus, as long the Bank’s Religious Supervisory Board was satisfied with the nature of the transactions are in accordance with sharia law, that ‘concludes the matter’ and even if the agreements amounted to agreements to pay Riba, the defendants still liable for the principal sums of the transactions.^[105]

To sum up, in both cases, the results would have been totally different if the court had considered Sharia law principles in both agreements. The latter case^[106] shows that court can dismiss the Sharia law to govern the disputed contract due to the difficulty in applying Islamic law by a secular court.[107] Having said that, although the court chose not to recognise the Sharia as an independent body of law capable of governing the relationships between parties, there are few important concessions such as the court recognised that Sharia principles may be relevant to the intentions of parties when entering the contract and the court may have regards to expert evidence from Sharia scholars for advices regarding commercial disputes involving Sharia principles.[108]

Conclusion

In conclusion, with the UK positions itself for the anticipated worldwide growth in Islamic finance, it is increasingly important to understand how the English courts will approach matters where non-sharia compliance is alleged to destroy the essence of the bargain created.

As noted by Dr Akhtar, Governor of the Central Bank of Malaysia, during the Third Annual Islamic Finance Summit in 2004:

“…pre-condition to sustain the continued growth of Islamic banking and finance is a comprehensive legal structure for legal redress arising from financial transactions. The legal infrastructure needs to comprise both effective regulatory and substantive laws … for parties to resolve disputes relating to Islamic financial transactions…”[109]

Having said that, these two cases also illustrated how difficult it is for English courts to deal with disputes involving Islamic law principles due to several issues such as the sophisticated nature of Islamic law and the lacks of any recognised body or agency that the court can consult in relation to Islamic finance principles. Nevertheless, the courts in both cases rely on the Rome Convention as guidance to their decisions. Arguably, the Court decision for sole reference on English law for governing the contracts involving Islamic commercial disputes is ‘pragmatic solution for now’.[110] It is important for the financial services regulators such as the FSA, to establish clear and comprehensive legislative framework involving Islamic banking without compromising its growth. It is suggested that the contracts used by Islamic banks can be incorporated into the English law without the need for Islamic law to be part of English law.[111] As such, the next chapter will analyse whether the current legislatives and regulations frameworks are sufficient for the development of Islamic banking in the UK.

Chapter 3: The regulation of Islamic banking in the UK

Introduction

The hallmark of a well-developed financial infrastructure is a combination of an effective legal, regulatory and supervisory framework, as these factors would underline the stability of the financial system.[112] As such, the rapid growth of Islamic banking and the unique set of religious rules that govern it have given rise to a number of legal and practical issues that affect the providers of sharia-compliant products and services.[113] For the Islamic banking system, the framework needs to be consistent with the requirements of the sharia principles such as the establishment of sharia council, which provides assurance that the strategic direction, the formulation of policies and the conduct of financial transactions are in compliance with the sharia principles.[114]

UK objectives and guiding principles for Islamic banking

As banking regulators, the Bank of England and, from 1998, the FSA have been open to the growth of Islamic banking in the UK for some time. The first important signal was given in a speech by Lord Edward George, then Governor of the Bank of England, in September 1995 at a conference organised by the Islamic Foundation whereby he recognised ‘the emergence of Islamic banking on the international stage’ and the potential supervisory issues due to the unique features of Islamic banking.[115] Later, the issues were taken forward by Sir Howard Davies, Chairman of the FSA, during the Conference of Islamic Banking and Finance in Bahrain on 2003, who told the audience that he had ‘no objection in principle to the idea of Islamic bank in the UK’ as long as the Islamic bank met the FSA’s regulatory requirements.[116] In addition, he stated that a soundly financed and prudently managed Islamic institution would be ‘good for Muslim consumers, good for innovation and diversity in our markets and good for London as an international financial centre’.[117]

According to the report by HM Treasury, the UK’s objectives for supporting the development of Islamic banking are to enhance the UK’s competitiveness in financial services by establishing the UK as a gateway for international Islamic finance and to ensure that everybody, irrespective of their religious beliefs, has access to competitively priced financial products.[118] Therefore, the UK believes that in order to achieve these objectives, there are few key principles to guide the government’s approach which are fairness, collaboration and commitment.[119]

Firstly, under the fairness principle, the UK is not extending special favours, nor is it supporting one minority over another and wishes to see a level playing field established for Islamic finance.[120] The tax and regulatory system should not distort the investors or consumers wishing to choose sharia-compliant products. Besides, the UK believes that many non-Muslim consumers may benefit from an extended choice of financial products as the UK becoming a global centre for Islamic finance.[121]

The second principle is based on the idea of the collaboration between the government, the industry and the third sector to solve the problems facing the Islamic banking in the UK. [122] For instance, the government can support the industry by changing certain regulations to establish a playing field between Islamic and conventional financial products. Nevertheless, there is a limit to what the government can do before the intervention might distort the practices of the market and be anti-competitive. Therefore, a collaborative approach between the Government, industry and the third sector is essential if Islamic finance in the UK is to continue to develop.[123]

The final principle is based on the idea of commitment by the government. Based on this principle, the UK has established the Islamic Finance Experts’ Group (IFEG)[124] and Tax Technical Working Group to promote the industry and engage more closely with the practitioners. Besides, since 2003, the UK has introduced a number of legislative measures to remove tax and regulatory barriers to Islamic banking in the UK.[125] To sum up, the government’s support for Islamic banking is characterised by an approach of equal treatment for both Islamic and conventional banking. On a broader level, the government believes that the growth of Islamic banking in the UK is beneficial to all UK citizens.[126]

How Islamic banks fit into UK regulatory system

Traditionally, the UK government took no steps to accommodate Islamic banking within its body of laws.[127] The FSA operates under single piece of legislation that applies to all sectors: the Financial Services and Markets Act 2000 (FSMA).[128] Briefly, all the financial institutions authorised by the FSA are subject to the same standards regardless of their country of origin, the sectors or their religious beliefs, in line with the FSMA’s six Principles of Good Regulation such as to facilitate innovation and to remove any barriers to entry or expansion within the financial markets.[129] Under section 19 of the FSMA, any person carry on the regulated activity in the UK, must be authorised by the FSA and the breach of the section 19 may be a criminal offence.[130] The activities that are subject to regulation are specified in the Financial Services and Markets Act 200 (Regulated Activities) Order 2001 (RAO) that includes activities such as accepting deposits, insurance and dealing in investments as principal.[131] So far, most of the Islamic applications received by the FSA have been to establish Islamic banks with regards to the regulation under the FSMA and the ROA.[132]

The challenges of regulating Islamic banking in the UK

Having said that, due to the way Islamic financial services and products are structured, there have been a number of hurdles for the regulatory and tax authorities to overcome. As a matter of fact, in applying the FSMA to Islamic banking, the FSA has identified few main areas of potential difficulties relating to Islamic applications such as the regulatory definition of products.

Concisely, the definition of products offered by Islamic firms is a key factor that the FSA will consider as part of the authorization. Although the economic effect of Islamic products may be similar to or the same as conventional products, the underlying structure may be significantly different as Islamic products are based on a set of contracts acceptable under sharia principles.[133] For example, under the Chapter 5 of the RAO, with regards to the accepting deposit, there is an ‘unconditional obligation on the part of a bank to repay the amount received’.[134]

However, the sharia principles prohibit for ‘unconditional obligation’ as it against the fundamental tenet of Islamic finance, which is to ‘share in the risks of productive enterprise’.[135] Thus, the main challenge for the regulators i.e. the FSA, the HM Treasury and the Bank of England if possible, is to apply both the regulatory requirements and that of sharia law.

Alternative Finance Arrangements under the Finance Act

Arguably, the UK government has skillfully created an Islamic sub-economy, by enacting certain legislative and regulatory measures designed to facilitate Islamic financial transactions via the ‘alternative finance”.[136] In the last two Finance Acts in 2005 and 2006 (FA 2005 and FA 2006), the government has introduced a new direct tax code for so-called alternative finance arrangements, aiming to cater the growing Islamic financial market.[137]

The term was first introduced in section 72 and 73 of Finance Act 2003.[138] Previously, when Islamic mortgages on property transactions first arrived on the scene, it would typically attract double stamp duty land tax (SDLT) – once by the Islamic bank and then by the end consumer. Briefly, the SDLT refers to the tax payable on the purchase or transfer of property or land in the UK.[139]

As such, the transactions under this structure would involve the property to be bought and sold twice (that is, the vendor sells to Islamic bank which then, sells to the customer) to ensure that the lender can charge a ‘profit element’ rather than the interest.[140] Consequently, the providers of Islamic mortgages were faced with an additional cost and this would definitely affect the growth of Islamic banking. Hence, the Finance Act 2003 removed this double stamp duty requirement thereby ensuring that Islamic mortgages are treated on an equal footing with the conventional mortgages.[141]

Further developments were introduced under the Finance Act 2005 to equalise the tax treatment of the murabaha (cost plus financing) and the mudaraba (participation financing) with their conventional counterparts.[142] Under the Finance Act 2005, the murabaha and mudaraba arrangements, which are considered to be an ‘Alternative Finance Return’ and ‘Profit Share Return’ respectively, any payments under both arrangements will each be treated as if such payment is one of interest.

Therefore, such payment will be afforded the same rights and obligations as an interest payment under the tax.[143] Then, the provisions in the Finance Act 2007 looked to help facilitate sukuk issuance in the UK, known as alternative finance investment bonds, legislation also seeks to apply the same tax treatment that would be applicable to a conventional debt instrument.[144] To date, the legislative measures largely focuses on amending tax provisions for Islamic financial structures as these contracts typically involve multiple transfer of title in property.[145]

Conclusion

The potential for the future growth of Islamic banking is clear and the government seems to have taken the necessary actions to establish a strong foundation for the growth of Islamic banking in the UK. Besides, the UK authorities’ support for Islamic banking is characterised by an approach of equal treatment for conventional and Islamic finance and both institutions are regulated by the same high standards by the FSA.[146]

In other words, the government’s position on Islamic banking in the UK is ‘no obstacles, no special favours’ while ensuring a ‘level playing field’ between the Islamic finance and the conventional banking. This is because the government believes that the development of Islamic banking in the UK is beneficial to all UK citizens because the consumers have a wider choice of financial products, particularly those whose religious beliefs prevent them from accessing conventional finance.[147] In fact, the entire country also benefits from the success of the UK financial services industry as the leading Western centre for Islamic banking.[148] Having said that, looking for the future, it is suggested that the UK has great potential to continually become the ‘Islamic Gateway’ for the Islamic finance in the Western area and to compete with the other Islamic financial centre around the world.

Concluding remarks

In conclusion, the research shows that the UK, despite being a ‘non-Muslim’ country, has made numerous efforts via the changes on the regulatory and supervisory framework, to accommodate the unique features of Islamic banking transactions. The UK government’s objective for supporting Islamic banking in the UK is to establish Islamic financial centre in London, which in return, the UK will benefits from the further investment, jobs and indirect tax revenues in the economy. [149] Besides, the government also seeks to include a large domestic Muslim minority in the financial marketplace who may involve in the unregulated Islamic financial activities and deprives from the regulatory and consumers protections.[150] To sum up, the UK has played an important part in shaping the role of Islamic banking Western world because of its effective legal system, regulatory and supervisory framework particularly the measures taken by the government to consider the sharia principles for Islamic banking transactions.

However, does the current UK government’s policy on Islamic banking sufficient to further develop the market in the UK? This is because based on the few important findings on the research; there are few areas, which might limit the growth of Islamic banking in the UK. For instance, the second chapter shows that the English courts have been unwilling to apply the sharia law when dealing with the commercial disputes involving Islamic banking transactions mainly because of the Rome Convention that precludes parties’ choice of a non-state body of law as the governing law of their contract.[151] In other words, the English law would still solely govern the contract of Islamic commercial agreement that contained the term ‘according to sharia principles and subject to English law’. Some commentators argued that ‘it is the pragmatic solution for now’, due to the fact of the English laws itself, which may be definitely be incompatible with some of the provision of sharia law. As such, this may due to a lack of flexibility by secular courts to accommodate religious law. Arguably, it is suggested that these decisions might adversely influence some clients of Islamic banks who genuinely wish to adhere with the Islamic principles as the main purposes of the ‘reference to English law’ is because of the certainty that the English law provided and most importantly, the flexibility of the law that allows the contracts to be construed according to the sharia principles.

This is notwithstanding that the mandatory principles of sharia are the pillars on which Islamic finance.[152] Equally, as the judge on the Court of Appeal stated in the Shamil bank case,[153] the quoted words were no more than a reference for the bank to follow the principles of sharia on the transactions but that did not meant that sharia law was applicable to the contract in English court. In fact, the application of sharia principles was still a matter of debate, even in Muslim countries.[154]

In addition, with regards to the public awareness of Islamic banking products, some commentators argued that the regulators particularly the FSA, has not done enough to achieve their objective with regards to the Islamic banks. For instance, there is a common belief regarding Islamic finance that Islamic banks are restricted to the Muslims whereby the reason that these banks have their Islamic title is not due to the religions of their clients but the mechanism of their products.[155]

In addition, compared to the conventional products, the FSA has not taken enough measures to explain the new financial products introduced by the Islamic banks as most of these products are relatively new in the UK and these products tend to have complicated structures, which may be unfamiliar for the consumers.[156] As such, the continuous presence of this presumption may affect the growth of Islamic banking in the UK, as the Islamic banks may not after all, compete on the same ‘fair playing field’ with the other conventional banks.

Finally, on the regulatory front, the last chapter shows that the government has enacted very few regulatory provisions that address the unique contractual features of Islamic finance as found in the provisions of the Finance Act. It may be argued that whether these ‘few changes’ might be able to boost the UK’s position as the leading Islamic financial centre globally.

Finally, should the UK consider introducing a comprehensive legislative framework specifically on the ‘alternative finance arrangement’? Arguably, this will certainly improve the development of Islamic banking as the current ‘few enactments’ may be insufficient to attract potential investments of Islamic finance into the UK’s economy especially if the UK wants to compete with other global Islamic financial centre such as Malaysia which benefits from having a legislation that specifically dealing with the Islamic banking transactions.[157]

Besides, by having a specific comprehensive legal framework on ‘alternative financing’, it allows for the parties of Islamic banking transactions to conduct themselves with the sharia principles, and yet, benefited from the certainty that provided by the English law. In addition, the regulators also need to increase the public awareness on Islamic banking products to ensure that potential consumers are not deterred from subscribing Islamic banking products due to their misunderstanding on the current position of Islamic banking in the UK. As a result, the UK will definitely have a greater opportunity to compete with other major Islamic financial centres in the world.

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12. The Economist, ‘Friends and Rival’ (13 September 2007) accessed 13 April 2011

13. Will Rasmussen, ‘Islamic finance demand rising, but depth lacking’ Reuters (Dubai 27 March 2007) accessed 13 April 2011

14. Islamic Bank of Britain, ‘How the Wakala Treasury Deposit Account Works’, accessed on 16^th April 2011

15. Michael A., Ali M., Robert H., Arshadur R., and Ali R., FSA, ‘Islamic Finance in the UK: Regulation and Challenges’ (2007) accessed 5 November 2010

16. UK Trade and Investment, ‘The City: UK Excellence in Islamic Finance’ (2007) URN 07/1657 < http://www.londonstockexchange.com/specialist-issuers/islamic/downloads/ukti-uk-excellence-in-islamic-finance.pdf> accessed 27 November 2010

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3. European Islamic Investment Bank, accessed 12 April 2011

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[1] Abdul Karim Aldohni, ‘the challenge of Islamic banking disputes in the English courts: the applied law’ (2009) 6 JIBFL 350

[2] (2002) WL 346969 (QBD (Comm Ct))

[3] (2003) EWHC 2118 (Comm). The Appeal decision is reported in (2004) 2 Lloyd’s Rep. 1

[4] Farmida B., ‘The Election Briefing: Islamic finance’ (2010) < http://www.nortonrose.com/knowledge/publications/2010/generalelection/pub27214.aspx?lang=en-gb&page=all> accessed 27 November 2010

[5] Farmida B., Ibid

[6] FSA, ‘Islamic Banking in the UK’ (2006) Briefing Note BN016/06 < http://www.fsa.gov.uk/pages/About/Media/notes/bn016.shtml> accessed 5 November 2001

[7] UK Trade and Investment, ‘The City: UK Excellence in Islamic Finance’ (2007) URN 07/1657 < http://www.londonstockexchange.com/specialist-issuers/islamic/downloads/ukti-uk-excellence-in-islamic-finance.pdf> accessed 27 November 2010, p. 2

[8] Islamic Bank of Britain, ‘About Us’, accessed 12 Apr 2011

[9] European Islamic Investment Bank, ‘About Us’, accessed 12 April 2011

[10] The Banker, ‘Top 500 Islamic Financial Institutions’ (2009) accessed 11 April 2011, p. 4

[11] Atif Hanif, ‘Islamic finance – an overview’ (2008) I.E.L.R. 9, p. 9

[12] Qudeer Latif, ‘Islamic Finance’ (2006) 1 JIBFL 10

[13] Michael A., Ali M. and others, FSA, ‘Islamic Finance in the UK: Regulation and Challenges’ (2007) accessed 5 November 2010, p. 9

[14] Will Rasmussen, ‘Islamic finance demand rising, but depth lacking’ Reuters (Dubai 27 March 2007) accessed 13 April 2011

[15] HM Treasury, ‘The development of Islamic finance in the UK: the Government's perspective’ (2008) < http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/islamic_finance101208.pdf> accessed 27 November 2011

[16] Michael A. and others, supra n. 13, p. 9

[17] The Economist, ‘Friends and Rival’ (13 September 2007) accessed 13 April 2011

[18] HSBC, ‘About HSBC UAE’, accessed 13 April 2011

[19]UK Trade and Investment, ‘The City: UK Excellence in Islamic Finance’ (2007) URN 07/1657 < http://www.londonstockexchange.com/specialist-issuers/islamic/downloads/ukti-uk-excellence-in-islamic-finance.pdf> accessed 27 November 2010, p. 2

[20]Financial Services and Markets Act 2000

[21]UK Trade and Investment, supra n. 19, p. 2

[22] Section 71 - 73 Finance Act 2003

[23] Qudeer Latif, supra n. 12, p. 10

[24] Atif Hanif, supra n. 11, p. 9

[25] Ibid

[26] Ibrahim Warde, Islamic Finance in the Global Economy (1^st edn, Edinburgh University Press, Wiltshire, 2007), p. 5

[27] Qudeer Latif, supra n. 12, p. 10

[28] Atif Hanif, supra n. 11, p. 9

[29] Qudeer Latif, supra n. 12, p. 10

[30] Atif Hanif, supra n. 11, p. 9

[31] Maha-Hanaan Balala, ‘Islamic Finance and Law’ (1^st edn, I. B. Tauris Co. Ltd, Wiltshire, 2011), p. 26

[32] Qudeer Latif, supra n. 12, p. 10

[33] Mahmoud E.El-Gamal, ‘ A Basic Guide to Contemporary Islamic Banking’, accessed 16 April 2011

[34] Atif Hanif, supra n. 11, p. 9

[35] Atif Hanif, supra n. 11, p. 10

[36] Atif Hanif, Ibid

[37] Atif Hanif, Ibid

[38] Nima Mersadi Tabari, ‘Islamic finance and the modern world: the legal principles governing Islamic finance in international trade’ (2010) Comp. Law. 249, p. 250

[39] Nima Mersadi Tabari, supra n. 38, p. 252

[40] Guardian, ‘What is the London Interbank Offered Rate?’ (17^th August 2009) accessed 16^th April 2011

[41] Nima Mersadi Tabari,supra n. 38, p. 252

[42] Maha-Hanaan Balala, supra n. 31, p. 30

[43] Articles (2) 1 and (5/1/2) 2 of the AAOIFI Shari'ah Standard (17), AAOIFI, accessed 16^th April 2011

[44] Qudeer Latif, supra n. 12, p. 10

[45] Atif Hanif, supra n. 11, p. 112

[46] Atif Hanif, Ibid, p. 15

[47] Karim Djaraouane and Churi Joseph Serhal, ‘Choice of governing law in Islamic finance agreements’ (2009) I.B.L.J. 115, p. 119

[48] Karim Djaraouane and Churi Joseph Serhal, Ibid, p. 119

[49] Nima Mersadi Tabari, supra n. 38, p. 253

[50] Anonymous, ‘Dispute Resolution: England and Wales Prompted as

Jurisdiction of Choice’ (2008) 29, 1 Company Lawyer, p 16

[51] Karim Djaraouane and Churi Joseph Serhal, supra n. 47, p. 115

[52] Karim Djaraouane and Churi Joseph Serhal, supra n. 47, p. 118

[53] Nicholas HD Foster, ‘Islamic Finance Law as an Emergent Legal System’ (2007) 21, 2 Arabic Law Quarterly, p. 173

[54] Section 2(1) of Contracts (Applicable Law) Act 1990

[55] Rome Convention on the Law Applicable to Contractual Obligations 1980 (80/934/EEC)

[56] The Rome Convention, Article 3

[57] Nima Mersadi Tabari, supra n. 38, p. 253

[58] (2002) WL 346969 (QBD (Comm Ct))

[59] Rodney Wilson, ‘The issue of interest and the Islamic financing alternatives’ (1997) J.I.B.L. 23, p. 27

[60] (2002) WL 346969 (QBD (Comm Ct)), p. 14

[61] Maha-Hanaan Balala, supra n. 31, p. 28

[62] (2002) WL 346969 (QBD (Comm Ct)), p. 16

[63] Ibid, p. 19

[64] Ibid, Terms 25 - 26.1, p.10

[65] Ibid, Clause A and B, p. 3

[66] (2002) WL 346969 (QBD (Comm Ct)), p. 18-19

[67] Ibid, p. 18

[68] Ibid, p. 18

[69] Ibid, p. 23

[70] ibid, Clause 4.2(b)

[71] Abdul Karim Aldohni, n. 45, p. 350

[72] Ibid

[73] The Rome Convention, n. 53, Article 10(2)

[74] (2002) WL 346969 (QBD (Comm Ct)), p. 25

[75] (2002) WL 346969 (QBD (Comm Ct)), p. 13

[76] (1958) A.C. 301

[77] (2002) WL 346969 (QBD (Comm Ct)), p. 25

[78] Abdul Karim Aldohni, n. 45, p. 350

[79] (2002) WL 346969 (QBD (Comm Ct)), p. 26

[80] Ibid, p. 27

[81] (2002) WL 346969 (QBD (Comm Ct))

[82] Abdul Karim Aldohni, supra n. 1, p. 350

[83] Karim Djaraouane and Churi Joseph Serhal, supra n. 47, p. 119

[84] (2003) EWHC 2118 (Comm), p. 2

[85] (2004) 2 Lloyd’s Rep. 1, p.4

[86] Ibid, p.4

[87] Ibid, p. 5

[88] Ibid, p. 5

[89] (2003) EWHC 2118 (Comm), p. 2

[90] (2004) 2 Lloyd’s Rep. 1, p.5

[91] Ibid, p.5

[92] Ibid, p.6

[93] (2003) EWHC 2118 (Comm), p. 3

[94] Ibid

[95] Ibid, p. 4

[96] Ibid, p. 5

[97] Ibid, p. 2

[98] Ibid, p. 4

[99] Convention on the Law Applicable to Contractual Obligations (1980), Article 5

[100] (2003) EWHC 2118 (Comm), p. 8

[101] (2003) EWHC 2118 (Comm), p. 10

[102] (2003) EWHC 2118 (Comm), in para 36

[103] Mr Jusctice Khan, ibid in para 25

[104] LJ Potter, (2004) 2 Lloyd’s Rep. 1 para 55

[105] LJ Potter, Ibid, p. 10

[106] (2003) EWHC 2118 (Comm),

[107] Abdul Karim Aldohni, supra n. 1, p. 350

[108] Antony Hainsworth, ‘New letters of the law’ (2008) 158 New Law Journal 1382

[109] Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, ‘Ensuring Stability in the Islamic Financial System’, paper presented at the 3tf Annual Islamic Financial Summit (London, England: January 13, 2004), accessed on 23 April 2011

[110] Nima Mersadi Tabari, supra n. 38, p 254

[111] Abdul Karim Aldohni, supra n. 1, p. 350

[112] Zeti Akhtar Aziz, supra n. 109

[113] Atif Hanif, supra n. 11, p. 14

[114] Zeti Akhtar Aziz, supra n 109

[115] Michael A. and others, supra n. 13, p. 19

[116] Howard Davies, Chairman of the FSA, (2 March 2003), , accessed on 24^th April 2011

[117] Howard Davies, Ibid

[118] HM Treasury, supra n. 15, p. 13

[119] HM Treasury, Ibid

[120] HM Treasury, Ibid

[121] HM Treasury, supra n. 15, p. 13

[122] HM Treasury, Ibid

[123] HM Treasury, Ibid

[124] Fazl Syed, ‘Report on Islamic Finance Experts Group (IFEG)’, , accessed on 24^th April 2011

[125] HM Treasury, supra n. 15, p. 14

[126] HM Treasury, Ibid, p. 12

[127] Qudeer Latif, supra n. 12, p. 10

[128] Financial Services and Markets Act 2000 (FSMA)

[129] FSA, ‘Principles of Good Regulation’, <http://www.fsa.gov.uk/Pages/About/Aims/Principles/index.shtml>, accessed on 24^th April 2011

[130]FSMA 2000, Section 19(1)(a) and (b)

[131] Financial Services and Markets Act 200 (Regulated Activities) Order 2001 (RAO)

[132] Michael A. and others, supra n. 13, p. 12

[133] Michael A. others, Ibid, p. 13

[134] Financial Services and Markets Act 200 (Regulated Activities) Order 2001, Chapter 5 (2)

[135] Richard Iferenta and others, ‘An Introduction to Islamic Banking’ (2005) Tax Journal, Issue 808, p. 24

[136] Jonathan Ercanbrack, ‘The regulation of Islamic finance in the United Kingdom’ (2011) Ecc. L. J. 69, p. 69

[137] Charles Goddard, ‘Finance Act notes: alternative finance arrangements - sections 53 and 54’ (2007) B.T.R.518, p. 518

[138] Finance Act 2003, Section 72 and Section 73

[139] HMRC, ‘Stamp Duty Land Tax (SDLT): the basics’, , accessed on 24^th April 2011

[140] Richard Iferenta and others, supra n. 135, p. 24

[141] Section 72 – 73 Finance Act 2003, amended by Finance Act 2005, Schedule 8, Part 2

[142] Finance Act 2005, section 47-50

[143] Qudeer Latif, supra n. 12, p. 10

[144] Finance Act 2007, section 53

[145] Jonathan Ercanbrack, supra n. 138, p. 69

[146] Jonathan Ercanbrack, supra n. 138, p. 69

[147] HM Treasury, n. 12, p. 12

[148] Ibid

[149] Jonathan Ercanbrack, supra n. 138, p. 72

[150]HMRC, ‘Impact Assessment for Stamp Duty Land Tax, Capital Gains Tax & Capital Allowance tax reliefs for Alternative Finance Investment Bonds’ (London, 2009), , accessed on 24^th April 2011

[151] Jonathan Ercanbrack, supra n. 138, p. 77

[152] Aisha Nadar, ‘Islamic finance: potential implications for dispute resolution’ (2009) Arbitration 296, p. 299

[153] (2004) All E.R. 1072

[154] Michael A. and others, supra n. 13, p. 17

[155]Abdul Karim Aldohni, ‘The UK prudential banking regulation and Islamic banks: has the Financial Services Authority achieved its regulatory objectives’ (2008) JIBFL 382, p. 383

[156]Abdul Karim Aldohni, Ibid

[157]Central Bank of Malaysia, ‘Islamic Banking Act 1983’, , accessed on 24^th April 2011