This commentary, by SHARIAsource U.A.E. and Malaysia editor Paul Lee, examines the U.S. and the U.K. as an example of a model of competitive equality for the regulation of sharīʿa compliance in Islamic finance.
The regulation of Islamic finance has generally been an area to which Western jurisdictions have devoted limited attention, and courts and regulators have been forced to step in ad hoc to fill necessary gaps. This post examines relevant amendments and rulings in the United States and the United Kingdom, and argues that they espouse a rationale of competitive equality between conventional and Islamic finance. While such a model removes penalties or prohibitions against the practice of Islamic finance, it may lack sensitivity to additional requirements that may be necessary to ensure Sharīʿah compliance when contrasted with more comprehensive models of regulation.
Parties seeking to practice Islamic finance in Western jurisdictions are likely to face challenges from three main areas: (1) functional prohibitions on activities undertaken by certain financial institutions, like banks, (2) duplicate taxation due to the multiple steps involved in certain Islamic financial contracts that are not present in their conventional counterparts, and (3) judicial enforcement of contracts that attempt to follow Sharīʿah principles. Unless such issues are adequately addressed, Islamic finance will not be on equal footing with conventional modes of finance.
In the U.S. and the U.K., various amendments and regulatory rulings make certain types of Islamic financial contracts permissible. For example . . .