Financial Services Authority Guideline gif
In pointing out that the supervisory issues raised were similar in many respects to those of conventional banks, he also noted there were a number of potentially difficult questions to resolve, such as liquidity and risk management. But the problems, he said, should prove ‘more tractable’, the more they were understood by Western supervisors.
These sentiments were first translated into practice in 2001 when a high-level working group, chaired by Lord George with repre- sentatives from the City, government, the Muslim community and the FSA, was estab- lished to examine the barriers to Islamic fi- nance in the UK.
One of the main ones identified was the fact that Islamic mortgages attracted dou- ble stamp duty, both on the purchase of the property by the bank and on the transfer of the property by the bank to the customer at the end of the mortgage term. As noted above, any change here was clearly a matter of public policy; and government legislation in 2003 to remove this anomaly was wel- comed by both.
Bank of England and the FSA
This open approach was taken forward by Sir Howard Davies, when he was Chairman of the FSA. For example, in a speech to a con- ference on Islamic Banking and Finance in Bahrain in September 2003, he told his au- dience that he had ‘no objection in principle to the idea of an Islamic bank in the UK’.14 He went further in saying that, provided Islamic banks met the FSA’s regulatory re- quirements, the UK had ‘a clear economic interest in trying to ensure that the condi- tions for a flourishing Islamic market are in place in London’.
A soundly financed and prudently managed Islamic institution would, he argued, be ‘good for Muslim consumers, good for inno- vation and diversity in our markets and good for London as an international financial cen- tre’.
These high-level contacts with the Muslim community have since been reinforced by working level contact with Islamic institu- tions. The FSA now has good and growing links with the industry, other regulators and Islamic working groups in international or- ganisations.
It is also a participant in the recently estab- lished HM Treasury Islamic Finance Experts Group. These and other links have laid the foundation on which the FSA has been able to consider the authorisation of wholly Is- lamic firms.
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Sarah Gooden – Trowers & Hamlins Commentary
ence to Sharia law. There is a decision of the Court of Appeal
in the case of Shamil Bank v Beximco in 2004 which deals with this precise topic. In this case, the bank was seeking to en- force financing agreements which con- tained a governing law clause saying that «subject to the principles of the glorious Sharia, « the agreements should be gov- erned and construed in accordance with English law. The defendants argued that the agreements were invalid and unen- forceable because they were not in fact compliant with Sharia law and were there- fore not enforceable in accordance with that law. They argued that to be fully en- forceable they were required by the gov- erning law clause to be enforceable both under English law and under Sharia law.
There is not necessarily a conflict between a contract being in accordance with Sha- ria law and at the same time governed by English law.
Many finance contracts internationally are governed by English law by the choice of the parties. This is because English law is a well developed and respected system of law which gives the parties to a contract a reasonable degree of certainty as to how the contract would be interpreted and en- forced. Islamic finance contracts are no exception to this.
In practice, many agreements used in Is- lamic finance contain a standard govern- ing law clause stating that the contract will be governed by English law. There is often no specific reference to Sharia law. Generally, what people intend when they enter into a Sharia compliant financing agreement is that they are undertaking contractual obligations which are legally binding and enforceable under English law and which, in addition, comply with the religious principles and requirements of Sharia law. If we take as an example the simplest requirement of Islamic financing, that the payment of interest is not permis- sible, a person who wants to ensure that a contract does not infringe this principle, will make sure that the contract does not include any obligation to pay interest. This contract can be governed by English law, or the law of any other geographical juris- diction, and provided there is no overrid- ing law of that jurisdiction which would impose an obligation to pay interest, that contract will then be in compliance with the Sharia prohibition on the payment of interest. It is not necessary to achieve this, for the contract to include any refer-
The court decided that the agreements were governed by English law alone. The reference to the principles of Sharia law was simply intended to reflect that the bank was holding itself out as doing busi- ness in accordance with Sharia law. It was the role of the bank>s Sharia board to interpret Sharia law and apply it. The court decided that the parties could not have intended, having chosen English law as the governing law, that the English courts would be expected to determine and apply Sharia law in addition.
Most people involved in Islamic finance view this decision as positive because it means that contracting parties can have confidence that the courts will apply Eng- lish law in interpreting and enforcing a contract. This means people can have relative certainty as to the outcome. However, some people with a more purist approach to Sharia law see the decision more negatively because it indicates that the English courts will not be prepared to attempt to apply Sharia principles in addition to English law and because the outcome may be that contracts which are not Sharia complaint, but which were intended to be, may still be valid and en- forceable.
It should be noted this decision is based on what the court considered was the intention of the parties. If parties to a contract do intend that the courts should apply the principles of Sharia law it is still open to them to make that intention clear
in the contract.
Sarah Gooden Trowers & Hamlins LLP
2010 October Global Islamic Finance 49
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