ISLAMIC BANKING LEGISLATION AND REGULATION IN NEW JURISDICTIONS: ISSUES AND RECOMMENDATIONS

Islamic banking is continuously making headway on the global financial arena. Today, Islamic banking institutions are spread over 75 countries, with a number of new jurisdictions planning to enter the promising industry that has grown at an impressive 20.4% in the past quinquennium and amassed assets estimated to reach US$ 1.5 trillion by the end of 2013 (KFH Research, 2013). Countries interested in the value proposition offered by Islamic banking through its formal implementation include China, India, Luxembourg, Russia and Uzbekistan, among many other both Muslim-majority and Muslim-minority countries.

The introduction of Islamic banking within a conventional financial system, however, is not a straightforward process, for it requires careful examination and balancing of the needs of various stakeholders. For this purpose, a solid policy-based institutional framework specially designed to meet the needs of Islamic banking institutions should be put in place. Indeed, the very foundation of a successful Islamic banking industry lies in the formation and implementation of comprehensive yet facilitative legal and regulatory frameworks – which take into account the unique universal-banking-like characteristics of Islamic banking institutions.

An exemplary case in point is Malaysia, a global leader in Islamic banking and finance, where the government and the regulatory authorities have put considerable effort into crafting a complete set of rules to ensure efficient and prudent Islamic banking operations. In Malaysia, a centralised approach that stresses legal and regulatory developments in equal proportions has been adopted. Since the establishment of the first Islamic bank in the country in 1983, the domestic Islamic banking industry has grown tremendously thanks to dedicated legislation and extensive regulatory guidelines that allowed for healthy diversification of institutional players, formation of essential Shari’ah-compliant liquidity infrastructure, and endorsement of tax neutrality principles, among other things.