A. Abstract
Islamic Finance is a new beloved and distinct financial service in international banking and capital market after the global financial crisis in 2009 for its special Sharia-compliant feature of prohibiting interest and speculation, while encouraging profit-loss sharing model of investment. In China, because of the combined effect of external eastward of the investment of oil dollar from the Middle East countries after September 11 attacks in 2001 and the internal ‘One Belt One Road’ strategy of People’s Republic of China (PRC) government, Islamic Finance has also become an ostensible financial phenomenon in China (including both mainland China and Hong Kong SAR) in recent years. Unlike the fast development of Islamic Financial practice, the regulation framework of Islamic Finance is still obscure in mainland China, while in Hong Kong some efforts have been made to reform current regulation framework to consolidate the Islamic Finance into the official regulation scheme.
There are different regulatory ideology and framework on the Islamic Finance in mainland China and Hong Kong, because of distinct social, political and judicial considerations in these two regions. Compared with the halt on the regulation initiatives in mainland China, a unified regulation model can be found in Hong Kong, which is officially eager to be one hub for global Islamic Finance.
No doubt, the regulation on Islamic Finance is still far from comprehensive and effective in China and need more creative initiatives. Overall speaking, the regulation on Islamic finance draws insufficient academic attentions in China with little thorough and comprehensive literature on this topic and therefore no effective and practical proposal on how to regulate Islamic Finance being proposed. Current academic discussions still focus on the general discussion and proposals. Scholars gave different proposals to the future direction on the regulation of Islamic Finance in China, and they can be roughly sorted into two perspectives: one is supportive of setting up a separate regulation framework on Islamic Finance, while another one, with the deep worry of its strong religious and political oriented features, is against the official acknowledgement of Islamic Finance and proposes to force the Islamic Finance to be immersed into the conventional financial market and regulating model.
With this in mind, this essay seeks to clarify the current legal position regarding the regulation of Islamic Finance in mainland China and Hong Kong. Firstly, a concise review of the nature and main principles of Islamic Finance will be introduced, followed by a brief explanation of two exemplary regulation models in non-Muslim countries adopted by the regulatory authorities in United Kingdom and Singapore respectively. Secondly, as the main body of the essay, the current regulation framework on Islamic Finance in mainland China and Hong Kong will be analyzed on both descriptive and inferential level, meanwhile the problems of currently legal position will also be discussed. Finally, some scholarship opinion on the future direction of the regulation on Islamic Finance in China will be discussed with author’s opinion provided as a tentative conclusion.
B.Sharia-compliant Islamic Finance and its international regulation
Section One: the Introduction of Islamic Finance
Islamic Finance is a distinct sort of financial system which is a long-standing tradition in Muslim world but strange to most of the non-Islamic communities, while it has existed since the rise of Islamism more than one thousand years ago. Currently, it is mainly practiced in Muslim communities across the world, especially in the countries in Middle East Asia, where Islamism originated and is still the dominating religion today, and some Southeast Asia countries, like Malaysia and Indonesia, where Muslim community is also the dominating community[1]. Unlike other parts of the world, the religion-oriented Muslim communities are mainly regulated by the Sharia law, which ‘refers to God’s divine law as contained in the Quran and the sayings and doings of Muhammad (hadith).’[2]Under this religious legal system, the Islamic Finance, the ‘financial service in accordance with Shariah Islamic law, principle and rules’ as defined by IMF [3], is also featured with deep religious influence and has evolved into as a distinctive financial system prevailing in Islamic world.
Simply speaking, compared with conventional interest-based financial system, Islamic Finance is featured with two distinct concepts: ‘the prohibition of predetermined fixed interest and the preference of profit/loss sharing.’[4] The source of the two pillars came from Sharia law which prohibits the speculation and gambling (Maysir), interest rate (Riba) and speculation (Gharar), instead encourages equality, profit sharing and financial transparency[5]. Because of its distinct feature of prohibiting interest rate, the Islamic Finance operated as an asset-based finance model and a special bond called Sukuk[6] based on this model is popular in Islamic capital market[7] and the first modern Sukuk bond was issued in Malaysia in 1990s[8]. Even though Islamic Finance is alien from the conventional financial practice strongly rooted in speculation, it has attracted investors who wish to look for an alternative after the global financial crisis in 2008[9], since when Islamic Finance began to flourish globally with an increasing rate of 15% per year[10]. Till 2015, there had already been 27 jurisdictions issuing Sukuk bond[11].
Section Two: current international regulations on Islamic Finance
On the international level, there has already mature regulation framework on Islamic Finance, especially in the countries which were dominated by Muslim people, like Malaysia and most of the Middle East countries. There are two important international regulation authorizes on Islamic Finance: Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) based in Bahrain and Islamic Financial Services Board (ISFB) based in Malaysia. The later one is set up in 2002 and incorporates rules of Basel Committee on Banking Supervision, Bank for International Settlements and International Organization of Securities Commissions to set up a separate Sharia-compliant regulation framework based on the three pillars[12] of Basel II[13].
Beside Muslim countries mentioned above, some non-Muslim countries have also nurtured thriving Islamic Financial market and therefore set up relevant regulation schemes, with United Kingdom and Singapore as two typical jurisdictions adopting two different regulation frameworks. Summarily speaking, United Kingdom adopts a binary regulation framework, while Singapore adopts a unified regulation framework, which will be discussed in detail bellow.
With more than 3.3 million Muslim population (5.17% of total population) in 2018[14], United Kingdom has launched Islamic Finance since 1980s and till 2015 there were already five fully Sharia-compliant banks providing comprehensive Islamic Finance service and 57 Sukuk bonds were listed in London Stock Exchange[15]. Many universities in United Kingdom also offered various academic programs on Islamic Finance to train and provide relevant expertise to the market.
United Kingdom adopts a binary regulation framework on Islamic Finance and conventional finance. In order to avoid the double taxation issue on Islamic Finance products, United Kingdom government removed the requirement for financial institutions to pay the stamp duty when they retained the real estates[16]. Even though current Islamic Financial institutions, together with other conventional financial institutions, are all regulated by the Financial Services Authority under Financial Services and Markets Act 2000, United Kingdom sets up an independent Sharia Consulting Committee to monitor and check whether the operation of Islamic Financial institutions oblige with the Sharia law[17]. The Sharia Consulting Committee shows United Kingdom government’s acknowledgement of Sharia law as an separate set of legal rules operating along side with common law rules on the area of Islamic Finance.
Compared with the binary regulation framework in United Kingdom, a unified regulation framework is adopted in Singapore, another country enthusiastic to be a new international Islamic Financial center, with 14% Muslim in population above age 15 in 2015[18]. Singapore government wished to transfer Singapore into an hub of Islamic Finance to connect Asia and Mid-east and attract oil dollars into Singapore financial market[19]. In 2005, the Monetary Authority of Singapore (MAS) approved the issuance of Islamic financial product Murabaha[20]. In 2007, the Islamic Bank of Asia, the first Islamic bank in Singapore, was launched. In order to regulate the flourishing Islamic Finance in Singapre, MAS, instead of setting up an independent Sharia Consulting Committee, choose to fine tune the existing regulations framework, mainly by the forms of the amendments of existing tax law, to fit the Islamic financial product into current financial market[21] so that both Islamic Finance and conventional finance can be governed by the same set of rules.
The regulations in Unite Kingdom and Singapore concisely discussed above exemplify two typical regulation models in non-Muslim countries on the Islamic Finance operating in respective jurisdictions. The binary model adopted by United Kingdom permits a separate regulation Sharia doctrines, together with conventional regulation framework, to regulate Islamic Finance. Another model is trying to put Islamic Finance into the existing regulation framework by making partial amendments of existing law, manly on tax law, to remove the additional tax burden existing law puts on Islamic financial products. The two models will be discussed again in the following part regarding the regulation framework in China.
[1] According to the data of CIA, in 2010, the Muslim people constitute 61% of the total popular in Malaysia and 87.2% of the total population in Indonesia.
[2] Oxford Islamic Studies Online, ‘Islamic Law’<http://www.oxfordislamicstudies.com/print/opr/t125/e1107> accessed 18 March 2019.
[3] IMF, ‘Islamic Finance and the Role of IMF’ (2017) <https://www.imf.org/external/themes/islamicfinance/index.htm#2> accessed 18 March 2019.
[4] Xinyi Lu, ‘A Study of the Banking Services for Muslims in China’, (2014) 5 Journal of Business and Economics 2227, 2229.
[5] Tai-Leung Chong, ‘One Belt One Road initiative: the development of Islamic Finance’ (2018) < https://www.edb.gov.hk/attachment/tc/curriculum-development/kla/pshe/references-and-resources/economics/Islamic_finance_initiative.pdf > accessed 18 March 2019.
[6] Under the transaction scheme of Sukuk bond, investor has a common share in the ownership of the assets relating to relevant projects or investment activity. The holder of Sukuk bond is entitled to a share in the revenues generated by relevant assets rather than interest, which is prohibited by Sharia law but normally paid in conventional bond.
[7] Dena H Elkhatib & Pierre M Gaunaurd, ‘Islamic Finance’, (2012) 46 the International Lawyer 281,282.
[8] Mumtaz Hussain, Asghar Shahmoradi & Rima Turk, ‘IMF Working Paper: An Overview of Islamic Finance’ (2015) < https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf> accessed 18 March 2019.
[9] Ho Wai-Yip, ‘Forging China-Gulf Strategic Partnership in the East Asian Context: HongKong as China’s Gateway of Islamic Finance?’ in Tim Niblock and Yang Guang(eds), Security Dynamics of East Asia in the Gulf Region (Gerlach Press 2014).
[10] Dena H Elkhatib & Pierre M Gaunaurd, ‘Islamic Finance’, (2012) 46 the International Lawyer 281,281.
[11] Mumtaz Hussain, Asghar Shahmoradi & Rima Turk, ‘IMF Working Paper: An Overview of Islamic Finance’ (2015) < https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf> accessed 18 March 2019.
[12] Minimum capital requirements, Supervisory review and Market discipline.
[13] Yang Weicheng, ‘Study on the Problem of Islamic Banking Supervision: in the view the IFSB Regulatory Framework’, (2014) 27 Journal of Xian University of Finance and Economics 22, 23.
[14] Office of National Statistics, ‘Muslim population in the UK’ <https://www.ons.gov.uk/aboutus/transparencyandgovernance/freedomofinformationfoi/muslimpopulationintheuk>accessed 14 April 2019.
[15] British Ambassador Bishkek, ‘Islamic Finance in the UK’ <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/503491/2015047_Is_Fin_A5_AW_ENG_WEB.pdf>accessed 23 March 2019.
[16] Jiang Yingmei, ‘Globalization of Islamic Finance and its Development Trends in China’, (2014) 2 West Asia and Africa 45, 50.
[17] ibid.
[18] Department of Statistics Singapore, ‘Highlights of General Household Survey 2015’ <https://www.singstat.gov.sg/-/media/files/visualising_data/infographics/ghs/highlights-of-ghs2015.pdf >accessed 23 March 2019.
[19] Jiang Yingmei, ‘Globalization of Islamic Finance and its Development Trends in China’, (2014) 2 West Asia and Africa 45, 54.
[20] In a typical Murabaha transaction structure, the buyer and seller agree on the profit or “cost-plus” price for the item(s) being sold to finance a purchase without involving interest payments.
[21] GASCIS,’ Development of Islamic Finance In Singapore’ <http://www.gascia.org/development-of-islamic-finance-in-singapore/>accessed 24 March 2019.