LEGISLATION ON ISLAMIC BANKING: A

COMPARATIVE STUDY

by

Prof. Dr. ÑAbdul ×amÊd MaÍmËd al-BaÑlÊ

Professor of Comparative Fiqh and Islamic Economics,

Formerly Head, Department of Economics, Faculty of SharÊÑah,

ImÉm MuÍammad ibn SaÑËd Islamic University (in the South)

Consultant to the Supreme Consultative Committee

for the Full Implementation of the Provisions of Islamic Law

al-DÊwÉn al-AmÊrÊ, Kuwait

A paper presented at the 6th

Conference of

The SharÊÑah Boards of Islamic Financial Institutions

The Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI), Bahrain1

1 Editor’s note: The Table of Contents is at the end of the document.

1

In the Name of Allah, the Compassionate, the Merciful

May the peace and blessings of Allah be upon the noblest of all the prophets–our

leader–MuÍammad, his family and all of his companions.

OBJECTIVE OF THE RESEARCH

To appraise the features of the movement of Islamic banks and financial institutions in

the light of the laws governing them, and the extent to which these institutions and

their relevant legislation can achieve their goals and mission and their role in the

desired transformation, growth and development.

INTRODUCTION

Codification of any subject matter represents an advanced stage of its development

and the extent of obligation and commitment in it, since it represents a statutory point

of reference for that subject. It organizes the relevant issues and determines the extent

of agreement about them in order to achieve stability and justice in application and

practice. The SharÊÑah ideal of equality between people in their dealings before the

law is achieved through the codification of law, which clarifies their rights and mutual

obligations. This has led the Supreme Consultative Committee for the Full

Implementation of the Provisions of Islamic Law in Kuwait to make codification of

laws a part of its approach; i.e., by drafting new laws as well as revising existing ones.

Therefore, the need to prepare model legislation for financial institutions and Islamic

banks has become a pressing need whose time has come.

The weightier SharÊÑah maÎlaÍah2 in our view is that legal codification has become a

necessity that must be adopted in this modern era, in which globalization has

prevailed as a legal system and new international institutional order.

2 Editor’s note: In the rational sense, maÎlaÍah means a cause or a goal which is good and brings

benefit and prosperity. Al-GhazÉlÊ states that maÎlaÍah is the consideration which secures a benefit or

prevents harm and is, at the same time, harmonious with the aims and objectives of the SharÊÑah. (Al-

MustaÎfÉ. Beirut: DÉr IÍyÉ’ al-TurÉth al-ÑArabÊ.), p. 217.

2

The law and its system as a standard of reference form a comprehensive unity that

applies to all its parts and regulates relationships, whether between persons or

properties. It is a relative term [whose exact meaning] depends on what is assigned to

it and its specific content.

If the laws assigned to it are man-made, it is known as positive law. However, if such

rules are derived from Islamic jurisprudence and the SharÊÑah, then it will be

considered a SharÊÑah-based code.

On this basis, the jurists and exegetes of the past used the term ‘law’; for instance Ibn

Juzay, Ibn Rushd, al-Mawardi, and al-Fakhr al-Razi; and works were composed on

the laws of the Islamic sciences. ImÉm AbË ×Émid al-GhazÉlÊ observed in his IÍyÉ’

that when disputes proliferate, a pressing need arises for a political authority to settle

them; and the political authority needs a law by which to do so. The jurist (faqÊh) is

an expert in the law of management and the ways to mediate between people when

they dispute.

Al-QarÉfÊ and other scholars have made similar observations.

The most accurate definition of taqnÊn (codification of laws), in our opinion,

is: “The expert phrasing, in the form of legal provisions, of the rules of fiqh

deduced for various aspects [of life], to be complied with by the subjects of

such laws.” By doing that, SharÊÑah law will replace man-made law, which

earlier took its place by force.

As we have said, the preponderant SharÊÑah maÎlaÍah has necessitated the new

trend toward codification. The criticisms of codification are only related to its

presumed consequences, in our view: including restricting the powers of

judges and its inability to deal with changing circumstances. These criticisms

can be refuted, and they do not outweigh the benefits of codification. These

include the SharÊÑah maÎlaÍah of making the rules precise and regular, ease of

reference to them, unification of judicial decisions, prompt settlement of

disputes, ease of reference by all people of various educational attainments to

the codified laws, and the provision of advance knowledge about judgments.

All of that will prevent people from resorting to man-made laws. There are

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other benefits besides. This is what I have testified to, and international

conferences have been organised about it. Therefore, there is no harm in

codification of laws. In particular, what is called “referral in codification” has

refuted other arguments being spread by the antagonists that it will lead to

stagnation and diverting judges away from fiqh and its sources. This is

especially true for the type of referral provided for in Act No. 15 of 1996

amending some provisions of Law No. 67 of 1980 in the issuance of the

Kuwaiti Civil Code, which provides in Article 1 (2) that:

In the absence of a legislative provision, the judge should adjudicate in

accord with the provisions of Islamic law most consistent with the

reality and interests of the country, and in the absence of such law, he

should adjudicate according to custom (Ñurf).

This law is part of the achievements of the Supreme Consultative Committee for the

Implementation of the Provisions of Islamic Law. However, we have set down

several conditions for the desired codification of laws, which must be taken into

account. They include:

1. The law should not be tailored towards a certain school of thought; benefit

should be taken from the abundant wealth of jurisprudence without prejudice.

2. Jurisprudential choice (takhayyur) from among the rules of Islamic law should

be on the basis of what is:

most consistent with the objectives of the SharÊÑah (MaqÉÎid al-SharÊÑah);

most consistent with public interest;

more likely to remove constriction and hardship.

3. The law should be subject to ongoing review in the light of its practical

application and the requirements of reality, so that the texts will not become

frozen without achieving the interests of the people.

4

All this is strengthened and supported by the essence of codification and its basic

principle: that all the provisions come with sanctions that are binding on anybody

who violates them. Obligation is indicated by thorough understanding of the letter

ÑUmar ibn al-KhaÏÏÉb sent to AbË MËsÉ al-AshÑarÊ on the administration of justice.

He remarked: “Speaking the truth without enforcing it is of no benefit.” Another

indicator in its favour can be found in the statements of jurists that the ruler has the

right to bind judges to [the fiqh views] he chooses and prefers.

For this reason, the attempts and concerted efforts in the process of

codification in earlier eras as well as the modern period have culminated in the

statement in many constitutions of Arabic and Islamic countries that the

SharÊÑah is the source of the statutes and legislation. This reflects a genuine

desire on the part of the rulers and their peoples to codify the provisions of

Islamic jurisprudence. On top of all that, Article 45 of the charter of the Islamic

Fiqh Academy states that it will strive to codify Islamic jurisprudence through

specialized committees.

5

THE STRUCTURE OF THE STUDY

I have divided the study, after the Introduction, into four main sections:

Section One: The conceptual fiqh framework for model legislation for Islamic banks

and financial institutions.

Section Two: Detailed contents of the laws and legislation regulating Islamic banks

in effect in some Muslim countries.

Section Three: Common sections in the codes being studied which represent points

of convergence between them.

Section Four: Sections unique to the codes being studied which represent points of

difference between them.

The most important documents of the study.

Conclusions and recommendations of the research.

6

SECTION ONE

THE CONCEPTUAL FIQH FRAMEWORK FOR THE MODEL

LEGISLATION FOR ISLAMIC BANKS AND FINANCIAL INSTITUTIONS

There are three features underlying this conceptual framework.

1. The basic concepts that constitute the essence of the model:

The meaning of bank/Islamic financial institution and what is intended

thereby.

The mission of the bank/Islamic financial institution.

The underlying aims and objectives for which they were founded and which

they seek to achieve.

2. Criteria and standards that constitute the tools for the model:

The stage of developing standards that can be used as [points of] reference.

The key principles for the standards and benchmarks used.

Identification of the deviations from the model and their causes.

Explaining remedies and the necessary proposals to address the

deficiencies.

3. Consistency of the frameworks and components of the banks/financial

institutions with their mission and the manifestation of the latter (the mission)

in the former (the frameworks and components). This forms the mechanism of

the model:

The concepts are clearly defined and; they constitute the essence of the

model.

The standards that are developed and formulated to measure the extent to

which the concepts are realized as well as deviation or departure from

them are the tools of measurement.

The components and structures are means to achieve the mission and

implementation of the aims and objectives; therefore, they represent the

mechanism of the model.

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Firstly: Defining What is Meant by “Islamic Financial Institutions” and Their

Mission

1. The Meaning of Islamic Bank/Islamic Financial Institution:

Their basis in Islamic faith;

Compliance with the provisions of the SharÊÑah and acting in accord with the

objectives of the Law (maqÉÎid al-SharÊÑah);

The developmental and investment dimensions in their activities and business.

2. The Mission of the Islamic Bank/Financial Institution and its Aims and

Objectives

The mission primarily means the raison d'être of the organisation, i.e. the need

the organisation will satisfy for a section or a group of the society.

The objectives mean specific targeted results which can be measured on the

basis of criteria that are also specified.

The goals are areas of activity to be undertaken in order to achieve the

organisation’s mission, but they are couched in a general form. They are

derived from the mission, while the objectives are derived from the goals.

The bylaws and articles of association must stipulate the:

Mission

Objectives

Goals

3. The efficiency of the organisation in identifying and formulating its mission

and employing it properly for its different components and organisational

schemes.

4. Providing criteria to evaluate this mission and continuing to develop them.

Secondly: The Bylaws and Articles of Association:

Important matters they must include:

1. Inclusion of standards related to the basic principles of Islamic banks/Islamic

financial institutions and their role in the society.

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2. The legal structure that will be applied and the model or models used (whether

investment – social security – agriculture – co-operative – developmental...)

3. Statement of the mission, objectives and goals of the organisation.

Thirdly: Standards and Criteria:

Developing a set of standards and criteria as an all encompassing normative model:

1. This means identifying a set of standards upon which any judgment will be

based regarding the extent to which the Islamic bank/financial institution is

adhering to its envisioned role as per the mission, objectives and goals

mentioned in its bylaws.

These standards may take a quantitative or descriptive form, the latter being

based on analysis of opinions, orientations, and reports, among others.

2. The development of standards should be followed by ‘the measuring process’;

i.e., practical application of the adopted standards in the operations of the

Islamic banks/financial institutions.

3. The measuring process is intended to identify the deviations from acceptable

proportions and averages and also identify the causative factors.

4. This will make it easy to voice and delimit suggestions for remedying

shortcomings in any sector or component of the Islamic bank/financial

institution.

Fourthly: Components and Organisational Structure:

Structure and components of Islamic banks/financial institutions:

1. The administrative structure, administrative operations and efficiency

standards entail:

Planning.

Organisation.

Direction.

Supervision.

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A. Decision-making is the essence of administrative operations:

Tenets guiding it.

Procedures that follow them.

B. The work force, which is based on:

Evaluating performance and progress in adhering to Islamic morals;

The evaluation system, with regular documentation for annual

appreciation of staff activities;

The hiring system and its priorities;

Preparation and training;

The salary schedule and its linkage to staff duties and performance, as

well as other incentives for attracting competent people.

C. Standards for effective advertisement and marketing

Publicity about the mission, objectives and goals of the organisation

should deal with the following:

Content of the publicity campaign for the organisation;

Agents for the dissemination of the information;

A person in charge of communication who would have the

requisite skills

Means and methods of advertisement;

The recipient of the advertised information, and the importance

of studying and analyzing public opinion and the company’s

image;

The impact of the advertisement and the possibility of

measuring it.

D. Planning the budget and its relationship with the goals and mission of the

organisation:

Its stages:

Study and preparation;

Implementation and follow-up;

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Evaluating the performance of the budget planning.

Sources of funds and their investment and use in accord with the

standards of their basic principles.

2. Investment Activity, Employment [of Funds] and Their Components:

A. Economic activity and its main components:

The fiqh characterization of the organisation’s relationship with the

owners of investment deposits;

The fiqh characterization of the organisation’s relationship with the

owners of current accounts;

Areas of investment;

The scope of investment;

The employment policy and its relationship with the mission and the

diversity of the organisation’s investment methods;

Joint investment and the obstacles it faces;

Designated deposits and the possibility of creating a secondary

market for trading their ÎukËk or certificates and the extent of

need for that in order to diversify investments:

(forms of designated deposits – areas of their use – their

associated problems (risks) – evaluating them– their fiqh

characterizations – and the accounting system for them).

Feasibility studies of the projects undertaken by the organisation, or

funded by it, or that it undertakes for others; which include the

following studies:

Financial;

Marketing;

Organizational;

Environmental;

Legal.

The banking services provided by the organisation, which include:

Planning and development of services and marketing

programmes for them;

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Funding services;

Non-funding services.

Efficiency standards for safeguard systems, their types and methods, in

particular for:

Bad investments;

Debt arrears; [as well as]

Security policies for deposits and employment;

Balancing between security, liquidity and profitability.

B. Social Corporate Responsibility and its core components:

ZakÉh funds and benevolent loans:

Other resources for mutual-assistance activities;

Distribution of mutual-assistance resources.

Identifying the objectives of social corporate responsibility in social

development and education about saving.

3. Supervision, Its Forms, Standards and Efficiency

This includes the following types of supervision:

A. SharÊÑah supervision, in terms of:

Its form and mode;

Competence and functions;

Its position in the organizational structure;

Its autonomy and the binding nature of its resolutions;

Financial transactions for its members;

The responsibility of the SharÊÑah Board.

B. Financial and accounting controls, in terms of:

Safety and appropriateness of the accounting systems and auditing

procedures in place.

Procedures for financial analysis of financial statements and the stages

of their preparation.

Criteria for evaluating economic profitability:

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Methods for measuring profit.

Methods for distributing profits and their basis.

Criteria for evaluating social profitability.

C. Internal administrative supervision and its standards.

D. Government supervision, its relevance and how it is carried out:

Supervision by the central bank and its appropriate mechanisms.

Supervision by the Ministry of Finance and Economy and its

appropriate mechanisms for Islamic financial institutions and their

activities.

E. Supervision by shareholders and depositors, it forms and the means of their

effectiveness.

4. Criteria for organisational success of the Bank/Islamic financial institution

in achieving its mission and objectives:

Commitment to the laws of the SharÊÑah as the basis for the organisation.

Profitability and economic-cum-social return.

Contribution to the development process through:

Contribution to added value in the Gross National Product (GNP).

The organisation’s impact on the balance of payments of the state.

The organisation’s role in the creation of employment

opportunities.

The organisation’s role in strengthening national investments.

The organisation’s role in environmental service projects.

Risk preparedness on the basis of:

Taking the middle course between the maximum forbidden risk

(gambling and uncertainty) and the maximum forbidden levels of

security (ribÉ).

The organisation’s fit with reality and the environment, and what is based

on it, including:

The legal system and traditional forms of credit.

The tax system, if any.

Cultural and intellectual conditions.

The banking market.

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General monetary policies and economic conditions.

14

SECTION TWO

DETAILED CONTENTS OF THE LAWS AND ENACTMENTS UNDER

WHICH ISLAMIC FINANCE OPERATES IN SOME ISLAMIC COUNTRIES

We will look at these decrees in their chronological order thus:

A list of the most important laws and enactments promulgated to guide the

operations of banks and Islamic financial institutions:

1. Law No. 66 of 1971 establishing a public organization called NÉÎir Social

Bank;

2. Law No. 28 of 1977 establishing FaiÎal Islamic Bank of Egypt;

3. Islamic Banking Act, No. 276, of 1983 in Malaysia;

4. Federal Law No. 6 of 1985 for Banks, Financial Institutions and Islamic

Investment Companies;

5. Banking Regulation Act of 1991 in Sudan;

6. Law No. 21 of 1996 regarding Islamic banks in the Republic of Yemen;

7. Banking Law No. 28 of 2000 in the Hashemite Kingdom of Jordan;

8. Law No. 30 of 2003 for amendment (addition of a section on Islamic Banking)

to Part Three of Law No. 23 of 1968 dealing with the currency, the Kuwait

Central Bank and the banking profession;

9. Law No. 575 of the 11th

day of February 2004 establishing Islamic banks in

Lebanon;

10. Decree No. 18112, dated 22/7/1983, and Decree No. 70 for the establishment

of banks, and Decree No. 83/7506 dated 16/12/1983 for the establishment of

Special Finance Houses in Turkey.

15

Item One

Law No. 66 of 1971 establishing a public organization called NÉÎir Social

Bank in the Arab Republic of Egypt

This Law is divided into (18) Sections, which are outlined as follows:

Article 1: Name of the organization

Article 2: Objective of the organization

Article 3: The restriction on dealing in interest (taking or giving) with anybody

Article 4: The organization will take help from the apparatus of the state in

pursuing its objectives.

Article 5: The capital of the organization

Article 6: The sources of the organization’s funds

Article 7: The Board of Directors

Article 8: Duties and powers of the Board of Directors

Article 9: The Treasury Minister’s approval of decisions by the Board of

Directors

Article 10: The organization’s budget appended to the State budget

Article 11: Exemption from taxes and fees

Article 12: The special treatment of the organization’s funds owed to others

Article 13: The organization’s exemption from the Banks and Credit Law No.

163 of 1957

Article 14: The laws for public sector workers will apply to employees of the

organization.

Article 15: The organization shall take over the functions of the Assistance

Fund for Students of Universities and Colleges.

16

Article 16: Issuance of the Implementation Decree of the Minister of the

Treasury

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Item Two

Law No. 28 of 1977 for the Establishment of the FaiÎal Islamic Bank of Egypt

This Law has 21 articles that cover the following areas:

Article 1: Licensing the establishment of an Egyptian joint-stock company called

FaiÎal Islamic Bank of Egypt

Article 2: The purpose of the Bank

Article 3: All the Bank’s transactions and activities shall be subject to the provisions

and principles of the SharÊÑah.

The provision for the SharÊÑah Supervisory Board; and the bylaws of the Bank shall

determine how the Board is formed and its duties.

Article 4: The headquarters, branches and agencies

Articles 5, 6, 7: The Bank’s capital, [provisions for] increasing it, and the currency the

Bank will use

Article 8: The legal identity of the Bank

Article 9: The impermissibility of nationalizing, expropriating or sequestering the

Bank’s wealth

Article 10: The Bank shall not be governed by the laws governing foreign exchange

controls, or public institutions, or organizations of public benefit, or public sector

companies, or the provisions of the Companies Act as provided for in the special

provisions of the Law. The Bank is subject to the laws for the supervision of banks

and credit with respect to its operations in the local currency and to what is contrary to

the provisions of this law.

Article 11: Exemption from taxes and fees

Article 12: The Bank is not subject to the supervisory laws except as provided for in

Item 3 of Article 10.

Article 13: The secrecy of accounts

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Article 14: Exemption of the Bank employees from laws on labour, employment,

wages and salaries, bonuses and pensions....The Bank shall be subject [in this regard]

to the special regulations issued by its Board of Directors.

Article 15: Neither the founders nor the shareholders shall transfer their shares outside

[the country] for the duration of the existence of the Bank. It is permissible to

[transfer] to third parties, as long as it does not change the proportion of ownership by

Egyptians and Saudis in the capital.

It is permissible to transfer shareholders’ profits in free [i.e., foreign] currencies and

in the same currency.

The same applies to depositors and customers in foreign currencies and also to

workers who are not nationals of the Arab Republic of Egypt within the limits of what

they earn.

Article 16: Import of electronic devices

Article 17: The duration of the Bank

Article 18: Arbitration to resolve disputes and conflicts among the shareholders and

other disputes

Articles 19 and 20: Amendment to the Bank’s bylaws and their issuance by the

Minister of AwqÉf

19

Item Three

The Islamic Banking Act of Malaysia (Act No. 276 of 1983)

This Act has 60 sections that cover the following areas:

Part I: Preliminary

Section 1: Short title of the Act, its commencement and implementation

Section 2: Interpretation of terms

Part II: Licensing of Islamic Banks

Section 3: Islamic banking business to be transacted only by a licensed Islamic bank

Section 4: The power of the Minister to change or annul conditions of licensing

Section 5: Cases in which a license cannot be granted

Section 6: Foreign banks3

Section 7: Opening of new branches

Section 8: Correspondent banks outside Malaysia

Section 9: License fees

Section 10: Restriction on the use of certain words in an Islamic bank’s name

Sections 11 and 12: Revocation of a license and its effect

Section 13: Publication of a list of Islamic banks4

Part III: Financial Requirements and Duties of Islamic Banks

Section 14: Maintenance of a certain percentage of capital funds

Section 15: Maintenance of reserve funds

Section 16: Percentage of liquid assets

3 Translator’s note: This part has been deleted in the latest amendment of the Act.

4 Translator’s note: Section 13A has been added in the latest amendment, titled “Advice of Syariah

Advisory Council”.

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Section 17: Auditor and auditor’s report

Section 18: Audited balance sheet

Section 19: Statistics to be furnished to the Central Bank

Section 20: Foreign branches

Part IV: Ownership, Supervision and Management of Islamic Banks

Section 21: Information and reports on change in control of Islamic banks

Section 22: Announcement of [any] restructuring

Section 23: Disqualification of the board of directors and officers of banks

Part V: Restrictions on Business

Section 24: Restrictions on payment of dividends and granting of loans and facilities

Section 25: Prohibition of loans to directors, officers and employees

Section 26: Restrictions imposed on grants of loans and credit facilities under

subsection 25(4)

Section 27: Restrictions imposed on granting credit to a customer5

Section 28: Facilities [to] the Board of Directors

Section 29: Limitation on credit facility for the purpose of financing the purchase or

holding of shares

Section 30: Proof of compliance with Sections 24, 25, 26, 27 and 29

Part VI: Powers of Supervision and Control over Islamic Banks

Section 31: Inspection of banks

Section 32: Special inspection of banks

Section 33: Making the bank’s books and documents available [for inspection]

5 Translator’s note: In the latest amendment of the Act, Section 27A has been added as “Control of

credit limits”.

21

Section 34: Banking secrecy

Section 35: Action to be taken if [credit] facilities granted are against the interests of

depositors

Section 36: Banks unable to meet their obligations must inform the Central Bank.

Section 37: Steps to be taken by the Central Bank with a bank that is unable to meet

its obligations

Section 38: The effect of the Central Bank removing or appointing a [bank] director

Section 39: The Central Bank’s supervision of Islamic banks

Section 40: Cooperation of Islamic banks with the Central Bank

Section 41: Extension of jurisdiction to include subsidiaries of banks

Section 42: A judicially imposed moratorium on an Islamic bank’s activities

Section 43: Amendment of a bank’s bylaws

Part VII: Miscellaneous and General rules

Section 44: ..........................6

Section 45: The priority of current deposits and savings deposits

Section 46: Penalties on directors and managers

Section 47: Offences by directors, employees and representatives of a bank

Section 48: Offences by companies, etc., and by servants and agents

Section 49: Prohibition on receipt of commissions by staff

Section 50: General penalties

Section 51: Authority of the Governor of the Central Bank to impose settlements and

arbitrate

6 Translator’s note: The author left it blank. In the provisions of the Act, “Indemnity” is provided for in

this section.

22

Section 52: Consent of the Public Prosecutor to filing a criminal charge

Section 53: Organizational regulations

Section 54: Bank holidays

Section 55: Application of other laws and priority of the Banking Act

Section 56: Exemption by the pertinent minister from any provisions of this Act

Section 57: Amendment of Banking Act 1973

Section 58: Amendment of Companies Act 1965

Section 59: Amendment of Central Bank of Malaysia Ordinance 1958

Section 60: Amendment of Finance Companies Act 1969

23

Item Four

The August 1983 Law for Interest-free (non-RibÉ) Banking in the Islamic

Republic of Iran

This Act has 27 Articles that cover the following areas:

Chapter I: Objectives and Duties of the Banking System in the Islamic Republic

of Iran

Article 1: The objectives of the banking system

Article 2: The duties of the banking system

Chapter II: Mobilization of Monetary Resources

Article 3: Acceptance of deposits with its types

Article 4: The undertaking by banks to repay the principal of interest-free (saving and

current) deposits

Article 5: Distribution of proceeds

Article 6: Promotional bonuses for depositors

Chapter III: Banking facilities to be granted

Article 7: Partnership in productive, commercial and services sectors

Article 8: Productive and developmental projects with a condition

Article 9: MuÌÉrabah with restrictions

Article 10: Facilities for the construction of housing facilities

Article 11: Facilities for the expansion of industrial and mining activities, agriculture

and services

Article 12: Facilities for leases with stipulation for transfer of ownership after the

contractual period

Article 13: Facilities for productive units

24

Article 14: Earmarking a portion of the resources as benevolent loans to applicants

Article 15: All agreements concluded in pursuance of Articles 9, 11, 12, 13, and 14 of

the present Law shall, under the contract to be signed between the parties concerned,

be considered binding documents.

Article 16: In order to provide the necessary conditions for the expansion of

productive, commercial and services activities, banks may engage in jiÑÉlah

(rendering a service against a reward).

Article 17: MuzÉraÑah and musÉqÉh contracts (sharecropping)

Chapter Four: The Central Bank and Monetary Policy

Article 18: The state owned corporations whose shares are not fully owned by the

Government shall conduct only those operations sanctioned by this law.

Article 19: Procedures for credit policy for short-term and long-term facilities

Article 20: Supervision by the Central Bank

Chapter Five: Miscellaneous

Article 21: Prohibition of dealing in usurious transactions

Article 22: The banks, upon authorization by the Central Bank, may engage in

authorized banking operations with state-owned institutions, government-affiliated

organisations and public corporations.

Article 23: The funds received as commissions and fees shall constitute the banks’

income and cannot be divided among the depositors.

Article 24: The rights of the members to business profits (reserved for the

government), and to exemption from commercial tax, and/or to tax exemptions

granted by law to factories and productive enterprises shall also apply to banks when

they undertake their roles in matters of imports or ownership.

Article 25: The units in which the banks have made investments and/or hold a share

shall be governed by the Commercial Code, unless they are subject to another law.

25

Article 26: All contravening laws shall be null and void.

Article 27: Operation of this Law

26

Item Five

Federal Law No. 6 of 1985

Regarding Islamic Banks, Financial Institutions and Investment Companies in

the United Arab Emirates

This law consists of 10 articles dealing with the following subjects:

Article 1: Definition: Islamic banks, financial institutions and investment companies

shall mean those whose articles and memorandums of association include a

commitment to abide by the provisions of Islamic law and conduct their

activities in accordance therewith.

Article 2: The form and legal framework, licensing, supervision and inspection must

be in accordance with the provisions of this Law.

Article 3: Business activities shall directly include services and banking, commercial,

financial and investment operations, as well as the establishment of

companies and participation in enterprises, provided that they are in

accordance with the provisions of Islamic law…and so on.

Article 4: Exemptions from existing laws

Article 5: A Supreme SharÊÑah Council is to be formed, incorporating SharÊÑah, legal

and banking personnel, to undertake higher supervision of the Islamic

banks, and its opinion shall be binding. The Council shall be attached to

the Ministry of Islamic Affairs and Endowments.

Article 6: The articles of association and bylaws must explicitly mention the

formation of a SharÊÑah Supervisory Board. The bylaws shall determine the

way in which this Board shall be formed, the manner in which it will

discharge its tasks, and its area of authority. The names of the members of

the SharÊÑah Supervisory Board shall be presented to the Supreme Council

referred to in the previous article for approval prior to issuance of the

formation decision.

27

Article 7: The State Audit Bureau’s control shall be confined to post-audit of these

institutions.

Article 8: Reconciliation of positions

Article 9 and 10: Executive matters

28

Item Six

The Banking Regulation Act 1991 of Sudan

This law is presented in 51 articles dealing with the following subjects:

Chapter I: Preliminary Provisions

Article 1: Title and commencement

Article 2: Arrangement of the sections

Article 3 & 4: Interpretation of (terms)

Chapter II: Licensing of Banks

Article 5: License

Article 6: Development of existing banks

Article 7: Licensing new banks

Article 8: Supervision and control of banks

Article 9: The use of the word “bank” and its conditions

Article 10: Scrutiny of persons whose practice of banking business is suspect

Article 11: Withdrawal of license

Article 12: Opening of representative offices

Article 13: Opening of branches, changes of location and closure

Article 14: Merger

Chapter III: Banking Operations

Article 15: Capital

Article 16: Reserve

Article 17: The percentage of loans, credit facilities, etc. of the capital

29

Article 18: Restriction on the acquisition of shares

Article 19: Ownership and possession of real estate

Article 20: Restrictions on profit margins and fees

Article 21: The maintenance of liquid assets

Article 22: Restrictions on funding

Article 23: Financing the banks

Chapter IV: Annual Accounts and Audit

Article 24: Accounts and budget

Article 25: Auditing

Article 26: The publication and submission of the budget

Article 27: The budget presentation

Article 28: Special audit

Article 29: Monthly data and the authority to request other data

Article 30: Making an appointment to provide information and data

Chapter V: Inspection of Banks

Article 31: Inspection

Article 32: Issues following the inspection

Chapter VI: Control of Bank Management and Its Operations

Article 33: Supervision of the management of banks not owned by the State

Article 34: Supervision of State-owned banks

Article 35: Supervision of financial institutions

Article 36: Supervision of banks’ operations

Chapter VII: Miscellaneous Provisions

Article 37: Stopping banking activities

Article 38: Power to issue directives

Article 39: Liquidation of banks

30

Article 40: The official liquidator

Article 41: Disposal of assets

Article 42: Disqualification of the general director

Article 43: The competent court

Article 44: Membership in the board of directors of more than one bank

Article 45: Burning of documents

Article 46: Bank holidays

Article 47: Confidentiality

Article 48: Staff and others are considered public servants.

Article 49: Incorporation of the banks

Article 50: Penalties

Article 51: The power of the Governor of the Bank of Sudan to make regulations

31

Item Seven

Law No. 21 of 1996 on Islamic Banks in the Republic of Yemen

This law is presented in 28 articles dealing with the following subjects:

Chapter I: Name and Definition

Article 1: The Law shall be known as the Islamic Banking Act.

Article 2: Interpretations

Article 3: Establishment; legal entity; branches; and amendment of the bylaws of banks

interested in engaging in Islamic activities as part of their activities

Chapter II: Objectives and Terms of Reference

Article 4: The objectives of Islamic banks

Article 5: The financing and investment activities carried out by Islamic banks.

Chapter III: Capital

Article 6: The amount of capital (a minimum of one billion YR) – how to increase it,

and its shareholders.

Article 7: Legal reserves

Chapter IV: Regulations of Activities

Article 8: The standard practice in banking

Article 9: Bylaws

Article 10: The Supervisory Unit at the Central Bank

Article11: The funding limits

Article 12: Instructions of the Central Bank

Article 13: Reserves in the Central Bank

Article 14: Limits on fees for services provided by the Islamic banks

32

Article 15: Not allowing any shareholder to borrow, in order to ensure the reputation

of the bank

Chapter V: Organs

Article 16: The general shareholder’s assembly and its powers

Article 17: The SharÊÑah Supervisory Board: the number of its members and their

qualifications. The bylaws and memorandum of association must specify

their remuneration, powers and duties, and the Board’s annual report.

Chapter VI: Budget, Final Accounts and Profits

Article 18: The maintenance of bank accounts, annual budget, profit-and-loss

accounts, and dividend investment…

Article 19: Bookkeeping and records

Chapter VII: Liquidation of the Bank

Article 20: How to treat the depositors and shareholders upon the liquidation of the

bank

Chapter VIII: Final Provisions

Article 21: Licensing of Islamic banks

Article 22: Bylaws and memorandum of association of an Islamic bank

Article 23: Provision of periodic statements to the Central Bank

Article 24: Inspection of Islamic banks

Article 25: The penalties for violating the law and other relevant laws

Article 26: Granting privileges and exemptions from the Investment Act

Article 27: The interpretation of the law

Article 28: Applying the law

33

Item Eight

Banking Law No. 28 of the year 2000 in the

Hashemite Kingdom of Jordan

A Law common to both conventional and Islamic banks

This law consists of 102 articles, which deal with the following subjects:

Article 1: The name of the law is “The Banking Law of the year 2000”.

Article 2: [Definitions of] terms, among which are “Islamic bank” and “Islamic

banking activities”

Ten articles of this Law are singled out for Islamic banks, from Article 50 to Article

59. They are as follows:

Article 50: The objectives of Islamic banks

Article 51: The power of the Central Bank to lay down special restrictions and ratios

to be adhered to by an Islamic bank in conducting its activities and

business

Article 52: Explanation of the Islamic banking activities which the Islamic banks may

engage in

Article 53: The conditions and restrictions the Islamic banks must comply with in their

operations

Article 54: Clarifying the acts and activities that Islamic banks may undertake, taking

into account any orders issued by the Central Bank

Article 55: The calculation of the investment risk fund

Article 56: The liquidation of an Islamic bank

Article 57: Liquidation of the rights of shareholders in an Islamic bank

Article 58: The SharÊÑah Supervisory Board; the number of its members; the binding

nature of its opinions; its functions and meetings; restrictions on

34

dismissing the Supervisory Board or any of its members; notification of

the Central Bank upon any appointment or dismissal.

Article 59: Subjection to tax, and the percentage of income exempted

Article 60: Accounts and financial statements

Article 90 (b): The Jordanian Islamic Bank for Finance and Investment and any other

Islamic bank already licensed by the enforcement date of this law shall be

regarded as licensed under this Law.

Article 92(e): All banking activities and financial operations shall, by virtue of their

inherent nature, be regarded as commercial, irrespective of the civil or

commercial capacity of the client in a contract or transaction with the

bank. Such operations shall be subject to the laws of the Commercial

Code in effect and shall not be subject to the rules of the MurÉbaÍah

Code.

Article 101 (a): The Jordanian Islamic Bank for Finance and Investment Act No. 62,

of 1985, is hereby repealed.

This law that was repealed contains thirty-seven articles providing for the objectives

of the Bank, its special province and domain, its functions and activities, the

supervision of its duties, SharÊÑah advisers and every other thing related to it.

35

Item Nine

Law No. 30 of 2003, with the addition of a special section on Islamic banks to

Part III of Law No. 23 of 1968 concerning currency, the Central Bank of Kuwait

and the organization of the banking profession

This Law is divided into five sections; Section 2 of it has 15 sub-sections. Its outline

is as follows:

Section 2(86): Definition of Islamic banks

Section 2(87): It is permissible for Kuwait banks to establish subsidiary companies to

conduct the activities of Islamic banks in accordance with the SharÊÑah

principles and the provisions of this Law. These subsidiary companies

shall be considered as independent Islamic banks in the application of

the provisions of this Law.

Section 2 (88): Requirements for the establishment of Islamic banks

Section 2 (89): Registration of Islamic banks

Section 2 (90): Conditions for the registration of Islamic banks

Section 2 (91): Conditions for the registration of branches of foreign Islamic banks

Section 2 (92): The capital of an Islamic bank

Section 2 (93): The formation of an independent SharÊÑah Supervisory Board. The

bylaws and articles of association of the bank shall specify its

establishment, the way it is structured, its special province, and the

permissibility of referring jurisprudential differences among its

members to the FatwÉ Board in the Ministry of Endowments and

Islamic Affairs.

Section 2 (94): Mutual accounts between the Central Bank and Islamic banks that are

not in contradiction with the SharÊÑah principles and are as decided by

the Central Bank

Section 2 (95): Operations between the Central Bank and the Islamic banks

Section 2 (96): Deposits of the Islamic banks

36

Section 2 (97): Supervision of the Islamic banks

Section 2 (98): Powers of the Central Bank over activities of the Islamic banks

Section 2 (99): Islamic banks are prohibited from owning or dealing in private

residential buildings and plots in the State of Kuwait except as

otherwise stipulated.

Section 2 (100): Islamic banks are subject to the provisions of this Law insofar as they

are not inconsistent with the SharÊÑah principles unless otherwise

specifically provided in this section.

Section 3: Registration of existing companies providing financial services in

compliance with the provisions of SharÊÑah

Section 4: Amendment of the status of existing banks that wish to operate in

accordance with the provisions of the SharÊÑah

Section 5: Commencement

Item Ten

37

Law No. 575 of 2004

The Establishment of Islamic Banks in Lebanon

This Law consists of 10 articles; its outline is as follows:

Article 1: Meaning of Islamic banks

Article 2: Licensing of Islamic banks

Article 3: Functions of Islamic banks

Article 4: Exemption of banks’ activities from the provisions of some Laws, and the

power of the Central Council of Banque Du Liban in the issuance of special

regulations governing the operations of Islamic banks

Article 5: Conditions for Islamic banks in acquiring real estate rights

Article 6: At least 50% of the basic assets and rights in the balance sheet items of

every Islamic bank should be invested in Lebanon...

Article 7: Mandatory periodic reports which an Islamic bank must disclose to its

customers

Article 8: Clients accounts, and distinguishing (between their deposits)

Article 9: Appointment of an advisory board, comprising three experts in Islamic Law

and in banking and financial operations, for a renewable three-year period

Article 10: Commencement

38

Item Eleven

1. Decree No. 18112 of 22/7/1983 and Decree No. 70 for the Establishment of

Banks in Turkey

This Decree consists of nine articles, which are as follows:

Section One: General Provisions

Article 1: The aim of the Decree is to regulate the types, administration, financial

operations and procedures, standardization, liquidation and auditing of banks.

Article 2: Scope – The Decree covers banks established under special laws, which

except for their special clauses, will be subject to this Decree.

Exceptions and Rules Guiding Development and Investment Banks

Article 9: Other Financial Institutions:

Rules guiding the establishment and running of other institutions not subject

to this decree

The specific principles of these institutions will be decided by the Council of

Ministers.

2. Decree No. 83/7506 of 16/12/1983 for the Establishment of Private Finance

Houses

This Decree has 17 articles, which are outlined as follows:

Article 1: Definition of private finance houses and provision for the principle of

profit-and-loss sharing in the financing of all agricultural and commercial

operations and private companies....They also undertake the raising of

funds additional to their own capital.

Article 2: Definition of terms such as “house”: ‘private finance houses’; “partnership

accounts”

39

Article 3: The institution should establish financial houses in the form of affiliate

companies...etc.

Article 4: Approval for incorporation

Article 5: The components of the house should include a committee of auditors.

Article 6: Types of funds accepted by the houses under the name of current accounts

and partnership accounts

Article 7: Participation in the accounts using Turkish and foreign currencies, and by

Turks and residents

Article 8: Partnership accounts sharing profits and losses resulting from the use of

funds

Article 9: The transfer abroad of profits, share capital and the funds deposited in

accounts

Article 10: Conversion of profits to capital

Article 11: Description of accounts after the passage of 10 years for current accounts

and children’s accounts

Article 12: The official bodies authorized to supervise

Article 13: Liquidation of the finance houses

Article 14: The procedure for effecting legal sanctions against practices that violate

the law

Article 15: The general powers are vested in the Prime Minister.

Article 16 and 17: Validity

40

SECTION THREE

COMMON SECTIONS BETWEEN THE STATUTES UNDER

CONSIDERATION, WHICH REPRESENT POINTS OF CONVERGENCE

Common sections between legislation regulating Islamic financial institutions:

1. Name of the organisation

2. Aims and objectives of the organisation

3. Licensing of the organization, the procedures and conditions for it

4. Funds of the organisation: (capital and reserves – deposits)

5. Secrecy

6. Supervision, administration and investigation by the financial controller

7. SharÊÑah Supervisory Board

41

SECTION FOUR

SPECIFIC PROVISIONS IN THE CODES WHERE THEY DIFFER, AND

COMMENTS ON THE DIFFERENCES

First: Definition of bank/financial institution:

1. The Malaysian Law No. 276 of 1983 on Islamic Banking was the first Law

known in this respect to describe an Islamic bank in Section 2 of the Law as:

“A company which carries on Islamic banking business and holds a

valid license.”

2. Article 1 of the Federal Law No. 6 of 1985 thereafter described banks and

financial institutions as:

“Those whose articles and memorandums of association

include a commitment to abide by the provisions of Islamic law

and conduct their activities in accordance therewith”.

3. The Banking Regulation Act 1991 of Sudan states in Article 3:

A Bank: It connotes any company registered under the

Companies Law of the year 1925, which carries out banking

business or a segment of it in Sudan or any bank established by

the Law.

Financial Institution: It implies any company employing

funds or a company established for investment purposes and

exercise any banking activities.

4. Section 2 of Jordan’s Banking Law No. 28 of 2000 described “Islamic bank”

as:

“A company licensed to engage in banking activities, in

accordance with the regulations and principles of Islamic

jurisprudence, and any other activities and operations pursuant

to the provisions of this law.”

5. Section 2 (86) of Law No. 30 of 2003, with the addition of a section on

Islamic banking to Law No. 32 of 1968, defines “Islamic banking” as:

42

The banks that provide banking business and any activities

considered by the Law of Commerce or by standard practice as

banking and which are in accordance with rules of the SharÊÑah.

They ordinarily accept all types of deposits, in the form of

current, savings, or investment accounts for specific or non-

specific terms and purposes; and they provide financial services

of different terms while employing Islamic contract terms such as

murÉbaÍah, mushÉrakah and muÌÉrabah.

Similarly, they render a variety of banking services to their

clients and investors; carry on financial and direct investment

activities, either with their own account or account of other

parties or in partnership with others, by the establishment of

companies or investing in existing companies or companies

under establishment that carry out various economic activities

which are in line with the SharÊÑah and rules and standards laid

down by the Board of Directors of the Central Bank, and all that

in accordance to the provisions of this Law. The Central Bank

shall lay down basic rules and regulations that regulate the

activities of branches of foreign Islamic banks licensed to operate

in the State of Kuwait; and the branches of any foreign Islamic

banks shall be regarded as a single bank under this Law.

6. Article 1 of Law No. 575 of 2004, establishing Islamic banking in Lebanon,

defines Islamic banks as:

The banks whose Articles of Association comprises an

undertaking not to contravene, in the operations they carry out,

the provisions of Islamic Law, particularly with the prohibition to

pay or receive interest.

Unless otherwise specified in this Law, Islamic banks shall be

governed by all legal and regulatory provisions in force in

Lebanon, particularly those relating directly or indirectly to

banks, including the Code of Commerce, the Code of Money and

Credit and the Banking Secrecy Law.

43

Commentary and Comparison between These Acts Regarding the Meaning of

Islamic Bank/Financial Institution

A. The laws that addressed the definition used diversified terms such as:

1. Exercise Islamic banking business

2. Conduct its activities in accordance with the provisions of Islamic law

3. Exercise banking business

4. Exercise banking activities

5. Engage in the banking profession in accordance with the provisions of

Islamic law

Islamic financial institutions have emerged in the conventional environment of

interest-based banking. Whatever the banking activity may be or its nature,

conventional banking has become pretty well fixed and known for being involved

in depositing and borrowing, banking services and finance lending, all premised

on the interest rate, which is ribÉ. The use by Islamic banks and financial

institutions of the term “banking business” in the prevailing climate does not

represent the true nature of Islamic banking. In the wider sense, it does not include

the foundations and fundamental principles of the practice of Islamic banking.

Among the first and foremost of these is that money is a medium of exchange and

capital, not really a commodity; thus, transactions of money for money are

governed by the rules of Îarf, which require immediate and symmetrical

exchange.

B. Some of these definitions included things which are not part of the definition like

the activities they carry out and the purpose for which these institutions were

established.

C. Some of these pieces of legislation make both SharÊÑah and conventional law

binding, in the sense that they stipulate that these institutions should carry out

their banking activities in accordance with the provisions of SharÊÑah as well as

the provisions of conventional law.

44

D. Some of these pieces of legislation merely state that they should conduct banking

business in accordance with the provisions of Islamic law but did not require them

to incorporate provisions in the bylaws and memorandum of association making it

binding upon them to do so.

E. Some of these pieces of legislation provide for an obligation not to violate the

provisions of Islamic law and specifically mention that interest will neither be

taken nor given.

For these reasons, it seems to us that if legislation undertakes to provide a definition

of Islamic banking, it must be careful to include, as much as possible, all that falls

within its scope and exclude what is not of it and to clearly express the true nature of

Islamic banking, including its background concepts, methods, and purposes. Against

this backdrop, we can define Islamic banks as:

“Those institutions whose memoranda of association expressly pledge not to violate

the provisions of Islamic law by positive act or omission when employing funds,

taking into account reality and the benefits recognized by the SharÊÑah (al-maÎlaÍah

al-sharÑiyyah) in doing so.”

Second: Mission of the Financial Institution

The above-mentioned pieces of legislation did not include an explicit provision on the

mission of those institutions, which is considered a de rigeur given in contemporary

knowledge.

The specific methodology adopted by those institutions determines their mission

since, according to the scholars of planning and strategy, their mission represents their

unique features, what distinguishes them from other similar organizations. The

mission gives a mental image of what the organization wishes to establish in the

minds of the people. In our view, the mission of Islamic banks is to work towards

“realization of the SharÊÑah objective of preserving property”, as discussed by the

scholars of uÎËl al-fiqh and jurists, and the consequent effects of that.

45

It is useful to emphasize the difference between the meaning of ‘mission’ and ‘goals’.

Goals represent the primary role of these institutions, which achieves benefit for all

parties involved in them. The stakeholders operate in a triangular relationship:

A. The financial institutions themselves

B. Its customers

C. The environment/community in which the financial institutions operate and to

whose regulations they are subject

Third: Point of Reference for Contentious Issues

Those pieces of legislation did not include a provision on a clear and specific point of

reference7 in the following circumstances:

1. Different fatwÉs (legal verdicts) which constitute a disagreement that has

impact on the progress of the institutions

2. Differences in understanding and interpreting the provisions of the legislation

itself

3. The sequence that must be followed by a competent judge in considering the

dispute before him and the relevant mechanisms of tarjÊÍ (preference) and

takhayyur (selection).

Fourth: SharÊÑah Advisory Board

The board for fatwÉ and SharÊÑah supervisory is considered to be the fundamental

characteristic that distinguishes these institutions. However, a careful consideration

of these pieces of legislation reveals that none of them combines all the components 7 By taking into account the Islamic Bank Act of Kuwait, which provides for reference to the FatwÉ

Board of the Ministry of Endowments and Islamic Affairs in the event of a disagreement among the members of Sharī‘ah Advisory Board on an Islamic ruling.

And taking into account the Federal Law of the United Arab Emirates which provides for a Supreme Sharī‘ah Council, which includes Sharī‘ah, legal and banking components under the Ministry of

Islamic Affairs and Endowments, if it is not expressly provided for, regarding its role in the resolution

of all kinds of contentious issues, as stated in Section 4.

46

and aspects of the SharÊÑah Board in a comprehensive and sufficient manner. The

provisions of the legislation should deal with the following firmly established

principles:

1. The independence of the Board, its supporting infrastructure and the power of

appointment and dismissal

2. The composition of its members and their characteristics

3. Powers, duties and responsibilities of the Board, particularly in three types of

supervision: With regard to the past, on-going or immediate, and with regard

to the future

4. The binding nature of the Board’s resolutions

5. The contents and types of the Board’s reports

6. The Board’s arbitration in disputes and its procedure

Fifth: The Role of These Institutions in the Communities in Which They

Exist

None of these legislative acts directly deals with the role of these institutions in

solving existing problems in the environments in which they operate, i.e., the social

problems that beset their societies, whether in relation to the government or the

people; nor with the need for integration and cooperation among institutions required

by this endeavour in order to bring about real, comprehensive and ongoing

development. [The goal] is to proceed upon the path that leads to the threshold of the

pleasant life promised in Islamic legislation and that achieves a sound example of

humans executing Allah’s will with regard to wealth.

47

Sixth: Systematic and Topical Classification

Some of the legislation failed to provide for topical division of issues according to the

customary standards of the technical methodology for drafting detailed legislative

rules.

Seventh: Management

Most of the legislation did not single out a chapter for the management despite its

great importance. It is one of the key factors in the success or failure of an institution,

and is thus one of the risks faced by these institutions. What we mean here is

management with its unique SharÊÑah parameters and responsibilities based on the

provisions of Islamic law regarding funds and actions.

Eighth: Integration among the Institutions

The legislation almost failed to provide any organizational scheme to integrate―or

even arrange for cooperation between―the Islamic financial institutions and which

would govern their operations. This is an urgent objective and practical requirement

imposed by the need to address the existing problems. Given that, it is no surprise that

these items of legislation did not mention any laws governing mergers between these

institutions, which would protect them from failure and closure.

Ninth: Internal Regulations and Islamic Professional Ethics

Most of the legislation does not provide for the issuance of internal regulations for the

institutions and what should be included among the basic Islamic professional ethics

to ensure the correct expression of professional ethics in the practice of banking

activities.

48

Tenth: The Turkish Experience

Due to important ideological considerations, we have added to this comparative study

of laws the Turkish experience, although it does not measure up to the level of law,

because it contains principles that we regard as having the utmost importance in the

transition to the practice of Islamic finance. Some of these principles are as follows:

Partnership accounts in all kinds of currencies and between various parties,

including Turks and others

Partnership accounts sharing profits and losses resulting from the use of funds

The financing of all agricultural, trade, import and export operations and of

equipment related to investment and leasing

Types of funds accepted by the “House” include current accounts and

partnership accounts; the latter grants right to profit and loss

The partnership account is characterized by the non-payment of interest or a

steady income to the account holder.

It must be noted that this paradigm shift in the Turkish experience which culminated

in the decree of 1983 and others that followed it was the result of courageous

initiatives in this part of the world, which carried the banner of Islam for centuries, by

the International Union for Islamic Banks and the International Institute of Islamic

Banks and Economics and the establishment of the FaiÎal Islamic Bank of Turkish

Cyprus, all of which occurred in the late eighties of the last century.

Eleventh: Peculiarities of the UAE Law

It is only the United Arab Emirates Law that provides in Article 5 thereof for the

formation of a Supreme SharÊÑah Council which includes SharÊÑah, legal and banking

components. The Supreme Council oversees the Islamic banks, financial institutions,

and investment companies; its opinion is binding; and it is attached to the Ministry of

Islamic Affairs and Endowments. This is a dream come true of the defunct

International Union for Islamic banks which has ceased to function and remains non-

49

functioning. We beseech Allah to revive it in a new form with a broader and more

comprehensive organization.

Twelfth: The Kuwaiti Law was unique in its mention of a number of issues; they

are:

1. It alone explicitly provided for the independence of the SharÊÑah Supervisory

Board in Section 2(93).

2. It alone provided in Section 2 (94) for mutual accounts between the Central

Bank and Islamic banks that are in accordance with the rules and conditions

that are not in contradiction with the SharÊÑah principles and are as decided by

the Central Bank.

3. Also, it is this law alone that provides in Section 2(95) that the Central Bank

shall come to the aid of Islamic banks in emergency cases, using instruments

and methods that do not contradict with the provisions of Islamic law and in

accordance with the terms and conditions set by the Board of Directors of the

Central Bank.

4. It is only this law that provides, in Section 4, that it is permissible for the

existing banks, on the date this law comes into operation, that wish to operate

in accordance with the provisions of Islamic law to amend their status in

accordance with the provisions of the Act and in accordance with the rules and

conditions determined by the Board of Directors of the Central Bank in this

regard. This opened the door to the conversion of conventional banks to

Islamic banking business in accordance with the rules and conditions that

should be taken into account in this regard.

5. It is only this law that provides, in Section 2(87), for the permissibility of

conventional banks practicing Islamic banking through their subsidiary

companies as legal and financial entities in accordance with the terms and

conditions and exceptions set forth in that section. Such subsidiary companies

50

would be considered independent Islamic banks in the application of the

provisions of this Law.

Thirteenth:

It is only the FaiÎal Islamic Bank Law that provides, in Article 18, for an

arbitration system to resolve disputes and conflicts among the shareholders as well

as other disputes. It is an important and urgent requirement that provides a way out

of the predicament of laws and courts that do not apply the provisions of Islamic

law.

Fourteenth:

It is only the Islamic Banking Act of Iran that provides, in Article 26, for the

removal of any contradiction between it and any other, contravening law by giving

this law priority in application and declaring all contravening laws null and void.

51

THE MOST IMPORTANT DOCUMENTS OF THE RESEARCH

1. Company and Commercial Laws and the Civil Law

Kuwaiti Commercial Companies Law, No. 15 of 1960, and its amendments;

UAE Companies Law, Federal Law No. 8 of 1984;

Companies Law of Qatar No. 11 of 1981;

Saudi Companies Code promulgated by Royal Decree No. 2/6 dated 23/3/1385

AH;

Law No. 68 of 1980 for the promulgation of the Commercial Code, and its

amendments, in Kuwait;

Law No. 67 of 1980 for the promulgation of the Kuwaiti Civil Code, and its

amendments;

Draft Companies Bill of Kuwait.

2. Banking Laws

Federal Law of the United Arab Emirates No. 10 of 1980, concerning the

Central Bank and the monetary system of the UAE

Law No. 7 of 1973 concerning the Qatar Monetary Agency

Islamic Banking Act of Malaysia No. 276 of 1983

Banking Law No. 28 of 2000 of the Hashemite Kingdom of Jordan

The Banking Regulation Act of 1991 of Sudan

Federal Law No. 6 of 1985 regarding Islamic banks, financial institutions and

investment companies – United Arab Emirates

Law for Interest-Free Banking Operations, August 1983 – Islamic Republic of

Iran

52

The Banking Companies Ordinance of Pakistan of 1962 and Circular No. 13

of 20 June 1984 regarding the elimination of ribÉ (interest) from the banking

system

Law No. 21 of 1996 regarding Islamic banks in the Republic of Yemen.

Law No. 30 of 2003, adding a special section on Islamic banks to the Third

Chapter of Law No. 32 of 1968 concerning currency, the Central Bank of

Kuwait and the organization of the banking business

Law No. 575, dated 11 February 2004, for the establishment of Islamic banks

in Lebanon

3. Special Laws

Presidential Decree, Law No. 66 of 1971 on the establishment of a public body

named NÉÎir Social Bank.

A Decree establishing Dubai Islamic Bank promulgated on 12/3/1975.

Decree No. 72 of 1977 for licensing the establishment of a Kuwaiti joint-stock

company with the name “Kuwait Finance House”

Law No. 28 of 1977 for the establishment of FaiÎal Islamic Bank of Egypt,

amended by Law No. 142 of 1981

FaiÎal Islamic Bank Act of Sudan No. 9 of 1977, as amended in the year 1984

Decree No. 18112, dated 22/7/1983 – a special decree establishing banks in

Turkey

Decree No. 45 of 1982 establishing Qatar Islamic Bank

Decree No. 2 of 1979 establishing the Islamic Bank of Bahrain

Libyan Law No. 74 of 1972 on the prohibition of ribÉ al-nasÊ’ah in civil and

commercial transactions between natural persons.

53

SYNOPSIS OF THE RESEARCH AND RECOMMENDATIONS

In the Name of Allah the Most Compassionate the Most Merciful

May the peace and blessings of Allah be upon the noblest of all the prophets–our

leader–MuÍammad, his family and all of his companions.

Allah the Most Exalted says:

"And verily, this is my Straight Path, so follow it, and follow not (other)

paths, for they will separate you away from His Path. This He has ordained

for you that you may become pious.” (al-AnÑām: 153)

Allah the Most Exalted also says:

“Say (O Muhammad): ‘Truly, my Lord has guided me to a Straight Path, a

right religion, the religion of Ibrahim, the true Islamic Monotheism; and he

was not of the polytheists.” (al-AnÑām: 161).

A religion whose values apply to every domain of life:

Today, we regard the process of economics and banking which has now beset the

modern world with two prominent ideologies: European and American

globalization, and Islamic universalism.

We are in tremendous need, today more than ever, to develop, at the very least, a

strategy of integrated dimensions and consistent planning in both the economic and

banking sectors. The goal of this strategy would be to provide the human mind with

sound thought and correct information that is capable of achieving general good for

the people and, in particular, realizing the good of wealth and avoiding its seductions.

A mind so equipped would be able to achieve general well-being for the people and

the pleasant life promised in the verse: “Enter this town and eat bountifully therein

with pleasure and delight wherever you wish...and We shall increase (reward) for the

virtuous." (al-Baqarah: 58).

Every nation has an identity which it is keen to defend and from which it derives its

givens in the ongoing movement towards development. Human history is full of

examples of that. The movement of “codification” and “issuance of legislation” may

54

be the most prominent and powerful factor in the protection of identity, the

maintenance of its glory and even its preservation over time.

Islamic civilization has a well-established creed that has a primordial origin which

stretches into an infinite future. Its comprehensive SharÊÑah is for the overall good of

every time and place. Its detailed practical legislation is derived from its legal

evidence. This civilization has prevailed, led and provided for the interests of the

people in this world and the Hereafter.

The blessed Islamic awakening has been nearly everywhere on earth expressing itself

through goodness, love and peace. Similarly, the Islamic financial institutions of

various types have become the institutional financial regulator which has been

brought to limelight in the world. It has confirmed its existence and uniqueness and

achieved good results and benefits for all the people wherever they may be found.

Human societies’ orientations towards Islamic financial institutions vary between

holistic and piecemeal approaches:

The holistic approach aims for full transition towards implementation of the

provisions of Islamic law in banking, insurance and investment.

The piecemeal approach envisions coexistence with the conventional system in what

is called a “dual system”, whether at the state level or at the level of the financial

institutions.

[This research] is meant as a sort of preamble, like that which introduces a

law and explains its causes and purposes. According to the customary format

of drafting legislative, it usually takes the form of a series of sentences, each

one beginning with the word “whereas”.

For these reasons, there is an urgent need to support Islamic financial institutions and

motivate their movement, particularly by transforming their presence, system,

purposes and everything related to them to a “Model Legal Framework”. The practical

laws of the SharÊÑah, which are derived from the detailed evidence for Islamic

jurisprudence as a whole, have to be codified for all the types of these institutions.

55

This has to be done by taking into account the reality of each country and the interests

of the people, the twin foci of ijtihÉd at all levels and in all institutions.

In order to achieve this purpose and goal, this study takes into account the following:

1. The specific nature of the work and activities of financial institutions; whether

they are banking, insurance, or investment without banking or insurance.

2. The specific legislative and legal environment in which this legislation exists and

whether the intent is:

i. complete transformation to implementation of the provisions and principles

of Islamic law;

ii. adoption of a system of “dual coexistence” between the Sharī’ah and

conventional systems.

3. Surveying the common denominators in the laws and regulations that have

already been issued on Islamic financial institutions of various types in different

countries, and emphasizing them.

4. Taking into account the conditions, of varying degrees of impact, of time and

circumstances in which we live and which affect these institutions. This is what I

refer to as the era of “globalization” or “the disease of globalization”.8 In

particular, and the most important, is the triad of international institutions:

i. International Monetary Fund

ii. World Bank

iii. World Trade Organization

What followed the presence of these three institutions is the international legislative

onslaught on the so-called Third World countries in particular, such as:

8 This is the term used to describe globalization at the Conference on The Family in the Middle East

and North Africa” organized by the Pope’s Council on the Family in cooperation with the Egyptian

Catholic Church, at San Stefano House in the suburb of MaÑÉdi, Cairo in 2004.

56

Laws and regulations to fight against terrorism.

Money laundering laws and regulations.

Tax laws and regulations.

Privatization laws and regulations.

Laws and regulations on trade liberalization and e-commerce…etc.

5. There should be a clear and specific point of reference for understanding and

interpreting the provisions of this legislation. There should also be a sequence

that must be adopted by the competent judge when applying the legislation to the

facts of any dispute before him; i.e., when choosing between the various

alternatives provided for by the laws and regulations derived from the rules of

Islamic law. This would have a similar function to the point of reference specified

in conventional laws at the beginning of their texts in this regard, which is known

as “referral” (iÍālah) or the reference for a judge.

6. Division of the substantive provisions of the law into chapters, taking into

account the sequential order and coherence that is expected in this process.

7. The use of definitions should be avoided as much as possible unless there are

compelling cases in which they are needed –for instance, if the term used in the

law is new or uncommon. When the definition of a term used, the following two

issues must be taken into account:

i. The definition should be placed at the beginning of the chapter in which the

defined term is found.

ii. Use of the defined term in its own definition should be avoided, e.g.: ‘Islamic

bank’ is defined as ‘a bank…’

8. The “technical methodology” found in the provisions of the law should be

adopted in drafting detailed legislation. That which should be envisaged as

“technical methodology” includes:

57

i. Solutions to the problems of relationships between different pieces of

legislative in terms of subject matter and in terms of ranking within the

systems of applicable pieces of legislation;

ii. Aspects of language, technical terms, arrangement of subjects and a desirable

sequential order.

Hopefully this unprecedented study has succeeded in achieving its objectives

regarding a new issue among the contemporary issues and has shed some light on

what is in existence and what should come into existence, so that these institutions

achieve continuity, stability and prosperity in achieving what must be achieved

through complete, comprehensive and sufficient legal frameworks. But they must

definitely be supported by effective specialized academic institutions as well as

practical institutions that do not yet exist.

Accordingly, we conclude that it is necessary to form a team of specialized experts of

various competencies, including comparative jurisprudence, law, banking, and

economics, that will develop its own working methodology and adopt all

contemporary means and techniques to codify banking, financial, investment, and

trade legislation. Their texts and implied meanings would be derived from the

SharÊÑah with its sources, means and purposes, while drawing upon the latest

developments of sound modern thought in these areas.

We are confident that the outcome of the work of this group would be beneficial and

useful for anyone who wants to blaze a trail or develop the existing legislation. By

those means the legal edifice of these institutions can be completed, and they can

survive in the face of the challenges and demands of the era of globalization.

And our final prayer is that praise be to Allah, the Lord of the Universe.

Prof. Dr. ÑAbdul ×amÊd MaÍmËd al-BaÑlÊ

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TABLE OF CONTENTS

Objective of the Research 1

Introduction 1

Structure of the Research 5

Section One 6

The Conceptual Fiqh Framework for Model

Legislation for Islamic Banks and Financial

Institutions

6

The Three Sections of This Framework 6

First: Defining “Islamic Financial Institutions” 7

Second: Bylaws and Articles of Association 7

Third: Standards and Criteria 8

Fourth: Components and Organizational Structure 8

Section Two

Detailed Contents of Legislation on Islamic

Banks in Place in Some Muslim Countries

Observations on the Most Important Laws and

Acts

14

Item 1: NÉÎir Social Bank Act 15

Item 2: FaiÎal Islamic Bank of Egypt Law 17

Item 3: Islamic Banking Act of Malaysia 19

Item 4: Iranian Law 23

Item 5: United Arab Emirates Law 26

Item 6: Sudanese Law 28

Item 7: Yemeni Law 31

Item 8: Jordanian Law 33

Item 9: Kuwaiti Law 35

Item 10: Lebanese Law 37

Item 11: Turkish Decrees 38

Section 3: Common Sections between the Statutes Which

Represent Points of Convergence

40

59

Section 4: Specific Provisions in the Codes Where They

Differ, and Comments on the Differences

41

1. Definition of a Bank/Finance House 41

Commentary and Comparison between These Acts

Regarding the Meaning of Islamic Bank/Financial

Institution

43

2. Mission of the Financial Institution 44

3. Reference to Contentious Issues 45

4. SharÊÑah Advisory Board 45

5. The Role of These Institutions in the Communities in

Which They Exist

46

6. Systematic and Topical Classification 47

7. Management 47

8. Integration among the Institutions 47

9. Internal Regulations and Islamic Professional Ethics 47

10. The Turkish Experience 48

11. Peculiarities of the UAE Law 48

12. Peculiarities of the Kuwaiti Law 49

13. Peculiarities of FaiÎal Islamic Bank of Egypt Law 50

14. Peculiarities of the Iranian Law 50

The Most Important Documents of the Research 51

Synopsis of the Research and Recommendations 53