Legal and regulatory issues in Islamic finance Rodney Wilson UCD Sutherland School of Law, Dublin 14 th May 2015

Contents Islamic finance in Ireland Comparative legal experiences ◦ Malaysia, Gulf Cooperation Council, UK Legal systems ◦ Religious law and Shari’ah governance ◦ Common law, civil law and Shari’ah Shari’ah compliant asset management Islamic funds An Islamic finance strategy

Islamic finance in Ireland Main areas of activity ◦ Islamic funds first established over a decade ago in Ireland ◦ Sukuk issuance since 2005 Legal and regulatory framework ◦ Amendments in Finance Bills of 2009 and 2010 to facilitate Islamic finance ◦ Level playing field in tax treatment Regulation by Central Bank of Ireland

Comparative legal experiences Malaysia ◦ Islamic banking and takaful legislation in ◦ Islamic Financial Services Act, 2013 Gulf Cooperation Council ◦ Amendment to banking act in Kuwait in 2003 to cover Islamic banking ◦ Legal provision in UAE since 1980s ◦ Special Islamic finance regulation in Qatar and Bahrain United Kingdom ◦ UK Finance Acts provision for more equitable tax treatment for Islamic finance

Legal systems Religious law ◦ Shari’ah based on the Quran, the hadith and the fatwa of Islamic scholars ◦ Constitutional provision for Islam in most Muslim majority countries ◦ In Ireland constitution refers to Christian values – not a secular state Commercial contracts ◦ Litigation dealt with by state courts, not Shari’ah courts, in Muslim majority states ◦ Irish courts could deal with disputes between the parties to Islamic financial contracts

Shari’ah governance of financial institutions Role of Shari’ah boards ◦ Vet Islamic financial contracts ◦ Eliminate riba and gharar ◦ Scrutinize contracts for risk sharing Status of Shari’ah boards ◦ Members nominated by boards of directors ◦ Approved by AGM ◦ Privatization or nationalization of Shari’ah ◦ Criteria for appointment and remuneration

Common law, civil law and Shari’ah Common law jurisdictions ◦ English speaking world ◦ Pakistan, Bangladesh and Malaysia plus DIFC and QFC Civil law jurisdictions ◦ Continental Europe, the Arab World and Indonesia Compatibility of Shari’ah with common law ◦ Challenges to Shari’ah board rulings unlikely ◦ Provision for trusts used as SPVs

Shari’ah compliant asset management Islamic investment companies ◦ Invest in listed and private equity ◦ Exposure to residential and commercial property Companies versus Islamic banks ◦ Banks subject to stringent regulatory reporting, capital and liquidity requirements ◦ European Islamic Investment Bank has given up its banking license recently ◦ Al Baraka precedent for this in London in 1990

Islamic funds Screening criteria ◦ Financial screens restricting leverage ◦ Sector screens prohibiting investment in companies involved in alcohol production and distribution or gambling activities Parallels with ethical or SRI funds ◦ Islamic funds more reactive than pro-active Tax advantages of Ireland for funds ◦ Exemption from taxes on dividends and capital gains as well as transfer taxes such as stamp duties

An Islamic finance strategy Long term commitment ◦ Not just responding opportunistically ◦ Promotion of Ireland because of its experience in UCITS administration and its skill base in fund management Increasing Ireland’s international profile ◦ Join the Islamic Financial Services Board as an Associate Member following precedent of Luxembourg ◦ Send delegates to Islamic asset management conferences in Dubai and Kuala Lumpur