The Regulation of Islamic Finance in the UK: A call for change

AuthorKhalifa H. K. Alkhalifa
PositionLLM (LSE) '21. LLB (SOAS) '20
LSE Law Review!
Vol. VII
The Regulation of Islamic Finance in the UK: A call for
Khalifa H. K. Alkhalifa*
For decades, the UK has been the leading nation in the Western world when it comes to
Islamic finance. Despite this fact, the Islamic banking industry within the UK is still far
behind conventional finance in terms of growth and development. This article argues that a
major obstacle in the path of this industry’s growth is the regulatory framework which it is
currently subject to. As it stands, Islamic banking is regulated by the Financial Conduct
Authority and the Prudential Regulation Authority in the same way as its conventional
counterpart. This represents an obstacle for the growth of the ind ustry since it subjects Islamic
finance to rules created with only conventional banking in mind. This article posit s that the
current regulatory framework should change so that it accounts for the unique features of
Islamic banking. Chapter 1 of this article contextualises the debate by describing the operation
of Islamic banking before going on to highlight how the risks involved in this type of banking
differ from those inherent in conventional banking. Chapter 2 builds on this analysis by
examining the interplay between Islamic banking and two regulated aspects of banking: capital
adequacy ratios (CARs) and guaranteed deposits. Chapter 3 concludes the discussion by
pointing out a number of issues which could undermine the adoption of a more industry-specific
approach by the UK regulators and offers starting points from which these issues could be
* LLM (LSE) ‘21. LLB (SOAS) ‘20. The author is deeply grateful to Professor Jo
Braithwaite for her guidance whilst supervising this work. The author further extends his
gratitude to the LSE Law Review Editorial Team for their helpful feedback.
The Regulation of Islamic Finance in the UK
Having only begun in the 1970s, Islamic finance is still a relatively new
industry compared to the longstanding history of conventional finance. Despite
that, the Islamic finance industry has grown consid erably and continues to be on
an upwards trajectory. By 2019, it had amassed $2.4 trillion in assets,1 which
represents an 11% increase from the year prior and a 33% increase from 2015.
Noteworthy is the fact that banking assets represent the largest share of assets at
A common misconception is that Islamic finance is only prevalent in
Muslim-majority countries. On the contrary, Islamic finance not only exists in
Western countries, but it also represents an ever-growing part of these
countries’ financial markets.3 This is especially so in the UK. An explanation for
the growth of Islamic financ e in the UK includes the fact that it is a way to
diversify the financial markets and gain access to capital held by potential
customers (especially devout Muslims) who are hesitant to make use of
conventional banking.4 For these reasons and more, the Islamic finance market
in the UK has grown to make it ‘the pre-eminent centre for Islamic finance’
outside the Muslim world.5
The financial industry in the UK is regulated by two bodies: the Financial
Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).6 The
FCA’s responsibilities include promoting effective competition and conduct of
business regulation while the PRA is responsible for ensuring ‘the safety and
1 Andrew Hauser, ‘Why Islamic finance has an important role to play in supporting the
recovery from Covid and how the Bank of England’s new Alternative Liquidity Facility
can help’ (Bank of England Speech, 2 December 2020) 2
accessed 1 July 2021.
2 ibid.
3 Arshadur Rahman, ‘Islamic banks and central banking’ (2017) Q3 Bank of England
Quarterly Bulletin 155, 156.
4 Abdul Karim Aldohni, The Legal and Regulatory Aspects of Islamic Banking: A Comparative
Look at the United Kingdom and Malaysia (Routledge 2013) 153.
5 Hauser (n 1).
6 Though they are two separate bodies, this article uses ‘UK regulators’ as a shorthand.

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