First, however, I want to explain the importance we attach to establishing a fair and reasonable regulatory framework for Islamic financial transactions and financial institutions. There are at least two reasons for this, the first social, the second economic.
The social reason is that there are estimated to be around 1.8 million Muslims – some 3 per cent of the population – living in the UK, and there are a further half million Muslim visitors each year. It would have been an invidious form of social exclusion for regulation to have prevented the development of financial products which conformed with their religious beliefs, and therefore to have condemned them to a position where their religious beliefs prevented them from accessing financial services. We at the FSA have been concerned to avoid this. In this concern, I should add, we were building on work started at the Bank of England where Eddie George as Governor was seized of the importance of this. The importance of preventing this form of exclusion from the benefits of the financial system lay behind the work which led to the establishment in August 2004 of the first wholly Sharia compliant retail bank in Europe or the US, the Islamic Bank of Britain. I am grateful to Dr Ahmed Mohammed Ali for his recognition of the ground breaking nature of this authorisation. We at the FSA are proud to have helped in the establishment of the Islamic Bank of Britain through resolving a number of regulatory issues, the most problematic of which was the treatment of Islamic deposits. By settling this, and other, issues we have not only enabled the Islamic Bank of Britain (now with seven branches) to be set up, but have also enabled already established banks, including some of the traditional high street banks, to offer Sharia compliant products. All these developments represent a major move towards financial inclusion – as well as to the ending of a barrier between communities which, like other barriers, we need to eliminate. Although the FSA has no statutory duty to promote financial inclusion, we are very pleased to have been able to make such a substantial contribution to this end.
The second, economic reason derives from the UK's position as the world's most international capital market centre. We are proud of the fact that we treat all financial institutions operating in the UK on the same basis, without regard for the nationality of either management or owners. It is important that we showed we were able to accommodate Islamic banking practices alongside traditional non Islamic banking, for reasons both of principle and of practical importance. We are very conscious of the rapid growth of Islamic banking worldwide over the last 25 years. London has a successful record as a trading centre for Islamic products: LME mudaraba trading and sukuks are examples. As well as the established Sharia compliant activities of major western investment banks, in March this year the FSA authorised the European Islamic Investment Bank – as its name suggests a wholly Sharia compliant wholesale Islamic bank. It is reasonable to regard London as a centre for a full range of Sharia compliant wholesale products – an important objective if London is to retain its international character.
We at the FSA are determined to continue to help the development of Islamic finance in the UK. The next initiative – already under way – is to bring Home Purchase Plans within the scope of FSA regulation, as non Islamic mortgages already are. HM Treasury is consulting on the changes to the Regulatory Activities Order needed, and the FSA has set out a consultation paper on how we would in practice regulate Home Purchase Plans. I expect this to start next year.
As Islamic finance spreads in both the retail and the wholesale markets, it becomes all the more important that we create a regulatory framework for it which is fair and reasonable. By this, I mean a framework which recognises the special features of Islamic finance and finds appropriate regulatory responses to them rather than simply applying solutions which have been devised for traditional, Western non Islamic banks or insurance companies. But I also mean a framework which offers those who use Islamic finance, whether from wholly Sharia compliant Islamic banks or by way of Sharia compliant products offered by non Islamic banks, the same degree of protection which is offered to those who use non Islamic finance. This means, for example, that in considering authorising Islamic banks in the UK we have applied the same principles – the five Threshold Conditions – that we apply to non Islamic banks seeking authorisation: adequate financial resources (both capital and liquidity), sound management and reliable systems and controls are among the most important of those principles. In the retail market – dealing with Home Purchase Plans, for example – we will want to ensure that the promotion of these products should meet the same standards – neither more, nor less – of being fair, clear and not misleading which we require in the promotion of non Islamic mortgages, or indeed, of any financial service. Given the novelty in the UK of Home Purchase Plans, and the fact that by necessity many of those who will wish to use them will be relatively inexperienced in financial services and products, it is particularly important that their promotions should set out the risks as well as the benefits of using them. The FSA will want to help raise awareness among prospective customers of these products by for example in providing impartial and accurate information about them. More generally, we will seek to raise financial capability in the Muslim community, as we are seeking to do amid the British population as a whole.
Both the providers and the users of Sharia compliant financial services and products have much to gain from the knowledge that these services and products are afforded the same level of protection and confidence as others regulated by the FSA. Our aim of fair and reasonable regulation is designed to achieve that.
You will note that I have been discussing the principles, not the detailed rules, of FSA regulation. We are striving to make greater use of principles, and less use of rules, across the FSA's activities. The issues arising in respect of Islamic finance – the special position of the Sharia Supervisory Board within an Islamic Bank, the rights of the bank customer under a mudaraba contract, or various accounting issues being addressed by the Islamic Financial Services Board – are specific and require specific solutions. But the principles which will be applied – adequate resources, sound corporate governance, reliable systems and controls, transparency, treating customers fairly – are general. Our challenge, for both the FSA and for Islamic banks, is to find the specific solutions which maintain the force – and the confidence – which those principles confer. I am very glad that to date we have together succeeded in doing this. I am determined that we continue on this path.
I hope this explanation of the regulatory principles which the FSA will apply to Islamic finance will help give confidence in the future for Islamic finance, retail and wholesale, in the UK.