Ercanbrack, Jonathan G (2011) The Law of Islamic Finance in the United Kingdom: Legal Pluralism and Financial Competition . PhD Thesis, SOAS (School of Oriental and African Studies) http://eprints.soas.ac.uk/13598 Copyright © and Moral Rights for this thesis are retained by the author and/or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder/s. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders. When referring to this thesis, full bibliographic details including the author, title, awarding institution and date of the thesis must be given e.g. AUTHOR (year of submission) "Full thesis title", name of the School or Department, PhD Thesis, pagination. THE LAW OF ISLAMIC FINANCE IN THE UNITED KINGDOM: LEGAL PLURALISM AND FINANCIAL COMPETITION BY JONATHAN G. ERCANBRACK SCHOOL OF LAW SCHOOL OF ORIENTAL AND AFRICAN STUDIES (SOAS) UNIVERSITY OF LONDON THESIS SUBMITTED FOR THE PHD IN LAW 15 SEPTEMBER 2011 1 DECLARATION FOR PHD THESIS I have read and understood regulation 17.9 of the Regulations for students of the School of Oriental and African Studies concerning plagiarism. I undertake that all the material presented for examination is my own work and has not been written for me, in whole or in part by any other person. I also undertake that any quotation or paraphrase from the published or unpublished work of another person has been duly acknowledged in the work which I present for examination. Signed by, Jonathan G. Ercanbrack 15 September 2011 2 DEDICATION I would like to thank my wife, Anna, and my daughter, Saskia, for putting up with me these past four years. I could not have completed this thesis without their love and support. Furthermore, I owe a great deal to my supervisors, Professor Peter Muchlinski and Mr Nicholas HD Foster, who devoted countless hours to my supervision and, most importantly, pushed me to achieve my best. I also wish to thank the William Ballantyne Fund and the School of Oriental and African Studies for generous grants, without which I would not have been able to carry on. 3 ABSTRACT The extant literature concerning the Law of Islamic Finance (LIF) is dominated by illustrations of Islamic financial contracts and critiques of the way in which the sharia has been circumvented. Much less emphasis has been placed on understanding the regulatory and financial environment in which the LIF is formed and practiced. This thesis considers the challenges in formulating and implementing a modern, transnational LIF in the conventional financial and legal environment and offers solutions to these problems. It demonstrates the way in which the classical sharia is transformed by these challenges into a LIF, a hybrid law resulting from pluralistic legal interaction and financial competition. In assessing the manner and impact of implementing the LIF in the United Kingdom, the thesis considers the interaction of the sharia with English law, UK financial services law and international regulatory standards. Comparative law methodology, with a particular emphasis upon legal pluralism and legal transplants, are employed. The sharia, a relatively stateless law, is the inspiration behind Islamic financial contracts. Dominated by transnational corporate interests, Islamic financial ijtihād represents the strategy to adapt conventional financial contracts to sharia criteria. The results are hybrid structures that conform to Islamic legal theory but which generate municipal legal challenges in practice, as well as sharia-compliance risks. Such structures have been integrated in English law with the creation of tax exemptions and novel regulatory classifications that treat these structures as loan arrangements and debt-based instruments. Furthermore, Islamic financial transactions are subject to UK financial services regulation, which itself incorporates European Union financial directives and Basel Capital Adequacy Standards. Finally, Islamic financial contracts, which are often governed by English law, face challenges in English courts concerning parties’ choice of the sharia as the proper law of their contract. Arbitration, on the other hand, offers parties the 4 autonomy to choose the sharia as the substantive law of their contract and to have it enforced under English law. The wide range of challenges in articulating and implementing a LIF demonstrate the hybrid nature of the law, resulting from pluralistic legal interaction in modern financial markets. This pivotal insight may encourage scholars and practitioners to revise their conception of the LIF and, by extension, their view of the industry and its financial practices. In sum, the LIF is a modern, transnational law that derives its inspiration from the classical Islamic tradition of commerce but which has been innovated in ways that distinguish it as an emergent law in its own right. 5 ABBREVIATIONS AAOIFI: Auditing and Accounting Organisation for Islamic Financial Institutions AB: Advising Bank AFIB: Alternative Finance Investment Bond BCBS: Basel Committee on Banking Supervision BIS: Bank for International Settlements CAR: Capital Adequacy Requirement CE: Common Era CDO: Collateralised Debt Obligation CIS: Collective Investment Schemes DCR: Displaced Commercial Risk DGS: Deposit Guarantee Scheme DIFC: Dubai International Financial Centre EC: European Council EEA: European Economic Area ESUA: Exchange in Satisfaction and User Agreements EU: European Union FSA: Financial Services Authority FSCS: Financial Services Compensation Scheme FSMA: Financial Services and Markets Act 2000 GCC: Gulf Cooperation Council HMRC: Her Majesty’s Revenue and Customs HPP: Home Purchase Plan IAB: International Accounting Board IAH: Investment Account Holders IB: Issuing Bank IBB: Islamic Bank of Britain ICC: International Chamber of Commerce ICTA: Income and Corporations Tax Act IDB: Islamic Development Bank IDR: Issuer Default Rating 6 IFI: Islamic Financial Institution IFRS: International Financial Reporting Standards IFSB: Islamic Financial Services Board IFSL: International Financial Services London IIC: Islamic Investment Company IIFM: International Islamic Financial Market IILM: International Islamic Liquidity Management Centre IIRA: International Islamic Ratings Agency IMF: International Monetary Fund INCOTERMS: International Commercial Terms IOSCO: International Organization of Securities Commissions LIBOR: London Interbank Overnight Rate LIF: Law of Islamic Finance LMC: Liquidity Management Centre LSE: London Stock Exchange MENA: Middle East and North Africa MLIF: Municipal Law of Islamic Finance NS&I: National Savings & Investments OECD: Organization for Economic Cooperation and Development OIC: Organization of the Islamic Conference PLS: Profit- and loss-sharing PRA: Prudential Regulatory Authority PSIA: Profit-sharing and investment account RAO: Regulated Activities Order SDLT: Stamp Duty Land Tax SG: Symphony Gems SPL: Sanghi Polyesters Ltd. SPV: Special Purpose Vehicle SSB: Sharia Supervisory Board TCF: Treating Customers Fairly TID: The Investment Dar Company TII: The International Investor TNC: Transnational Corporation 7 UAE: United Arab Emirates UK: United Kingdom UNCITRAL: United Nations Commission on International Trade Law US: United States VAT: Value Added Tax WTO: World Trade Organisation 8 Note: The transliteration of Arabic words into the Roman script has been undertaken according to the Library of Congress transliteration standard. For the sake of simplicity, most singular Arabic words have been given an English ‘s’ to denote the plural form. Words such as sukuk, however, which are often used in modern financial markets, are used in the plural. Finally, Arabic words which, according to the Oxford English Dictionary, have been borrowed into the English language have not been transliterated or italicised. Such words include the sharia, Hadith, Sunna and others. ARABIC-ENGLISH GLOSSARY ‘Ādat at-tujjār: practice of the merchant/trader ‘Adhāb: punishment, chastisement ‘Ahd: obligation, covenant, treaty, agreement ‘Aqd: contract, covenant ‘Amal: labour; action, performance Amānah: trust, faithfulness ‘Ariyah: loan Arkān (pl.): component(s), pillar(s) (of a contract) Aṣḥāb al-hadith: people of the Hadith (traditions); term associated with the Mālikīs ‘Ayn: a corporeal matter, substance Bāṭil: void (legal) Batīn: inner meaning or interpretation Bay‘ : sale Bay‘ al-dayn: sale of debt Bay‘ ghā’ib: contract of sale for an absent thing or object Bay‘ al-‘īnah: double sale used to circumvent the prohibition of lending with interest Bay‘ al-wafā’: a contract in which the owner of property (house or land) sells it, with the condition that that he will repurchase the property for a larger sum than the original price. 9 Bid‘a: innovation Dalīl: sign, indication Ḍarūrah: necessity, need Dayn: obligation, debt; also expresses the idea of “claim” or right Dhimmah: capacity, personal responsibility or obligation Fā’ida: interest; growth Faqīh (sg.) /Fuqahā’ (pl.): Expert in Islamic jurisprudence (fiqh) Farḍ: obligatory Fāsid: defective (legal) Faskh: rescission of a contractual bond Fatwa: legal opinion Fiqh: Islamic jurisprudence Fiţra: the native ability to know of God’s existence Furū: branches of jurisprudence; whereas the uṣūl al-fiqh indicates the roots of the law Gharar: excessive