Islamic Banks and the European Banking Union: An Overview of Critical Issues and Perspectives

Sandra Antoniazzi

doi:10.13135/2421-2172/6424

Sandra Antoniazzi University of Rome 2 Tor Vergata

DOI: https://doi.org/10.13135/2421-2172/6424

Keywords: Islamic finance, Islamic banking, European banking union, Regulation, Supervision, Transparency, Certainty of rules, Comparison, Perspectives

Abstract

The aim of the paper is to provide a general, but in-depth, an overview of aspects of incompatibility and actual interest profiles of Islamic finance in relation to the legal system of the European Banking Union, identifying some prospects for positive future developments. It examines the relevant Islamic principles for banking and the differences from conventional European banks for regulation and supervision, some experiences and possible relationships. The modern communication between the Islamic banking scheme and the European (and international) one is certainly allowed by the activity of the IFSB regulator, especially about the adaptation to the Basel Committee standards and the related capital requirements, transparency criteria, common reference, considering the global application to operate in the international markets. The examination of the relationship with the European Banking Union allows the identification of future profiles of debate and research in Economics Law, considering the opportunity for regulatory adjustments and the interaction between EU and national law and the interesting ethical aims of the socially responsible Islamic finance.

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Guiding Principles on Shari’ah Governance Systems for Institutions Offering Islamic Financial Services (IFSB-10); IFSB has organised its online executive Program, “Managing Digital Transformation Risks for Islamic Financial Institutions (IFIs), 30 September 2021; A. A. Adewale and R. Ismal, “Digital Transformation in Islamic Banking”, IFSB Working Paper Series, WP-19/12/2020.

A. Boumediene, “Is credit risk really higher in Islamic banks?”, The Journal of Credit Risk, 7 (3), 2011, 97 ff.; T. Chamberlain, S. Hidayat, A. Khokhar, “Credit Risk in Islamic and Conventional Banking”, International Advances in Economic Research, 2018, 24 (1), 99 ff.

Z. Shafii and S. Salleh, “Enhancing governance, accountability and transparency in Islamic financial institutions: An examination into the audit of Sharia’a internal control system”, Malaysian Accounting Review, 2010, 9 (2), 23 ff.; S. Z. Farook and M. O. Farroq, “Incentive-based regulation for Islamic banks”, Journal of Islamic Accounting and Business Research, 2011, 2 (1), 8 ff.; E. Oz, Z. R. Khokher, M. M. Ali, R. Rosman, “Sharì’ah Non-Compliance Risk in the Banking Sector: Impact on Capital Adequacy Framework of Islamic Banks”, IFSB Working Paper Series, 5 March 2016, 1 ff. About risk regulation see N. Alam, “Impact of banking regulation on risk and efficiency in Islamic banking”, Journal of Financial Reporting and Accounting, 2013, 1, 29 ff.; P. Abedifar, P. Molyneux, A. Tarazi, “Risk in Islamic Banking”, Review of Finance, 2013, 2035 ff.; A. I. Maghyereh and B. Awartani, “The effect of market structure, regulation, and risk on banks efficiency”, Journal of Economic Studies, 2014, n. 3, 405 ss.; A. R. Alotaibi and A. V. Mishra, “Global and regional volatility spillovers to GCC stock markets”, Economic Modelling, 2015, 45, 38 ff.; A. Ali, “Analysis of the Determinants of Capital Adequacy Ratio: The case of Full-Fledged Islamic Banks in the Gulf Cooperation Council (GCC)”, European Journal of Islamic Finance, 2019, 14, 1 ff.; A. A. Adewale and Others, “Risk-Based Supervision in Islamic Banking”, IFSB Working Paper Series, WP-15/12/2020.

IFSB-19 Guiding Principles on Disclosure Requirements for Islamic Capital Market Products, 13 ff. e 24 ff.; S. F. Najeeb and M. M. Mustafa, “Strengthening the Financial Safety Net: The Role and Mechanisms of Sharì’ah-Compliant Deposit Insurance Schemes (SCDIS)”, IFSB Working Paper Series, 6 March 2016, 1 ff.; IFSB, TN-3 Technical Note on Financial Inclusion and Islamic Finance, December 2019.

S. Archer, R. A. A. Karim, V. Sundararajan, “Supervisory, regulatory, and capital adequacy implications of profit-sharing investment accounts in Islamic finance”, Journal of Islamic Accounting and Business Research, 2010, n. 1, 10 ff.

M. Casoria, “La regolamentazione concorrenziale nei paesi arabi del Golfo. Cronache di un enforcement abbozzato”, Mercato, concorrenza, regole, 2018, 401 ff.

The Central Bank of Bahrain adopted CBB Rulebook, http://cbb.complinet.com/cbb/microsite/cbb_rulebook.htm,and the Central Bank of Oman adopted the Islamic Banking Regulatory Framework in 2012, at http://www.cbo-oman.org/news/IBRF.pdf.

Dubai Financial Services Authority. About Islamic banking in UK: A. K. Aldohni, “Soft law, self-regulation and cultural sensitivity: The case of regulating Islamic banking in the UK”, Journal of Banking Regulation, 2014, n. 2, 164 ff.; E. S. Housby, Islamic financial services in the United Kingdom, Edinburgh: Edinburgh University Press, 2011.

H. Ahmed, “Basel III liquidity requirement ratios and Islamic banking”, cit., 253 ff.

Basel Committee on Banking Supervision, Assessment of Basel III - risk-based capital regulations - Saudi Arabia, September 2015; “Regulatory Consistency Assessment Program (RCAP)”, Assessment of Basel III Liquidity Coverage Ratio regulations - Saudi Arabia, September 2015, at www.bis.org. In May 2016, the Capital Market Authority announced changes to incentivise further foreign investment (in GCC Quarterly Review, Q2, 2016). Since January 2017, listed companies are required to use the standards prepared by the International Financial Reporting Standards for the financial reporting framework (in GCC Quarterly Review, Q4, 2016, at www.linklaters.com).

See Dow Jones Islamic Market Indices Methodology, December 2017, at https://us.spindices.com. In 1999, in Bahrain, the Dow Jones Islamic Market Indexes provided for the first shariah indices and offers a timely list of almost 70 shariah-compliant measures covering equities and fixed income securities around the World. See S&P Dow Jones Islamic Market World Index, 31 August 2021; M. Campra, S. Pucci, V. Brescia, “Can the Dow Jones Sustainable Index be useful for evaluating Dow Jones Islamic Market companies? European Journal of Islamic Finance, 2020, First Special Issue, 1 ff. The index measures the performance of stocks traded globally that pass rules-based screens for adherance to Shari’ah investment guidelines. About “shariah risk” see H. Visser, “Islamic Finance in Non-Muslim-Majority Jurisdictions: Regulatory Issues”, cit., 88 ff. About the role of the Auditing Organisation for Islamic Financial Institution, see T. V. Russo, “I contratti Shari’a compliant, Valori religiosi e meritevolezza degli interessi”, cit., 49 ff.

M. Ashraf M. and A. Lahsasna, “Proposal for a new Sharì ah risk rating approach for Islamic banks”, International Journal of Islamic Finance, 2017, 1, 87 ff.; A. Musleh Alsartawi, “Performance of Islamic banks: Do the frequency of Shari’ah supervisory board meetings and independence matter?”, ISRA International Journal of Islamic Finance, 2019, vol. 11, No. 2, 303-321.

The Central Bank of Bahrain has issued capital adequacy regulations (Circular n. 52/2017, which came into force on 1° February 2017 and fully implemented in 2019) in line with Basel III, see GCC Quarterly Review, Q1, 2017, at www.linklaters.com. About the role of central banks, see A. A. Hossain, Central Banking and Monetary Policy in Muslim-Majority Countries, Cheltenham: E. Elgar, 2015.

E. Aracil, “Corporate social responsibility of Islamic and conventional banks: The influence of institutions in emerging countries”, International Journal of Emerging Markets, 2019, 14 (4), 2019, 582-600; I. A. Oladapo et al., “Perception of stakeholders on governance dimensions of the Islamic banking sector”, International Journal of Emerging Markets, 2019, 14(4), 601-619; S. El-Halaby et al., “The non-economic consequences of disclosure in Islamic banks”, International Journal of Emerging Markets, 2018, 13(6), 1948-1968. About jurisprudence see S. Coopchik, “Judicial Decision-Making in Islamic Banking and Finance”, European Journal of Islamic Finance, 2015, 2, 1 ff.

See the Italian banking law “Testo Unico Bancario (T.U.B.)”, especially artt. 10 et seq.; T. V. Russo, I contratti Shari’a compliant, cit., 140 ff. About collection of savings, the principle of the obligation to repay under art. 11 T.U.B. is contrary to the typically Islamic current accounts which exclude it, but combinations of contracts would be possible, obviously according to mechanisms which would have to be accepted by the supervisory authorities, see F. Miglietta and P. P. Rampino, Gli strumenti di finanza islamica a sostegno del Sistema Italia, cit., 69-71. On banking activities see G. Gimigliano, “Art. 10”, in S. Bonfatti (a cura di), Commentario al Testo Unico Bancario, Pisa: Pacini, 2021, 41 ff., and banking authorisation see A. Benocci, “Art. 14”, ivi, 74 ff.; C. Brescia Morra, Il diritto delle banche, Le regole dell’attività, Bologna: il Mulino, 2020.

European Commission, “Banking Package 2021: new EU rules to strengthen banks’ resilience and better prepare for the future”, 27 October 2021, for the implementation of Basel III (also known as Basel IV) agreement that will involve the amendment of Directive 2013/36/EU, Reg. (EU) n. 575/2013 and separate proposals about the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV), at ec.europa.eu. On amendments (Commission Delegated Regulation (EU), 20 October 2021, n. 439/2022) to the CRR see “European Banking Institute Report on Economic Policy and Financial Regulation Measures: International, EU and Euro Area Levels”, 19 March 2022, at www.ebi-europa.eu.

U. F. Moghul, A socially responsible Islamic finance: Character and the common good, London: Palgrave Macmillan, 2017; F. Miglietta and P. P. Rampino, Gli strumenti di finanza islamica a sostegno del sistema Italia, cit., 79 ff.; Forum Finanza Sostenibile (2019), “L’Unione europea e la finanza sostenibile, Impatti e prospettive per il mercato italiano”, at www.finanzasostenbile.it.

S. Khavarinezhad and P. P. Biancone, “Future Trends and Finance Approaches in Islamic Banking”, European Journal of Islamic Finance, 2019, 12, 1 ff.; S. Khavarinezhad, P. P. Biancone, V. Jafari-Sadeghi, “Financing in the Islamic System and Sustainable Economic Development of Selected Islamic Countries”, European Journal of Islamic Finance, 2021, 19, 18-23; V. Brescia, A. Adam Sa’ad, R. Bt Hassan, S. Musa Bin Syed Jaafar Alhabshi, F. Lanzalonga, “Exploring sustainability from the Islamic finance perspective”, European Journal of Islamic Finance, 2021, 19, 45 ff.; F. Lanzara, “Islamic finance and Sustainable Development Goals. A bibliometric analysis from 2000 to 2021”, European Journal of Islamic Finance, 2021, 18, 1 ff.