Edited by M. Fahim Khan and Mario Porzio
Chapter 4: Islamic Banking in Europe: The Regulatory Challenge
M. Fahim Khan It can hardly be disputed that the growth of Islamic banking and finance in Europe is a welcome development in view of the fact it is effectively contributing to increased penetration of financial services and hence contributing to what is being referred to as ‘social inclusion’. The members of the large Islamic community in Europe, who refrained from benefiting from financial services on religious grounds, are now able to benefit from the financial market without violating religious norms. The emerging institutions offering Islamic banking services, however, are creating a challenge to the supervisory and regulatory bodies. The challenge posed by the emergence of these institutions is quite different from the challenge that regulatory bodies face with respect to supervising and monitoring the conventional financial institutions. The distinct regulatory challenge arises because of the methods these institutions adopt to mobilize funds and to deploy them to earn income on them. The ways in which Islamic banks can and do mobilize funds are all non-conventional and in some ways new to the regulators. Several issues and questions arise in the minds of regulators confronted with the task of supervising and regulating Islamic banks. Some methods for mobilizing funds, for example, would require asset management. Involvement of commercial banks in asset management is entirely a new phenomenon in the context of the conventional concept of commercial banking. Regulatory authorities will be rightly worried about how to define firewalls to keep asset management and commercial banking separate, legally, administratively and operationally,...
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