Europe's Approach to Islamic Banking: A Way Forward - Wbiaus.org

Trakic4.4 Islamic banks vis-à-vis Credit InstitutionsAfter the above explanation about the financial institutions which are allowed tooperate in Europe, one may not but wonder, whether Islamic bank could be regardedas credit institution under the EU Directives? It is clear that the definition of a creditinstitution given in Article 4 (1)(a) of the Directive 2006/48/EC (which explains thatthe credit institutions are undertaking which collect the deposits from the publicwhereby the return of the deposits is guaranteed and grant the credit whereby theinterest is dominant element) does not accommodate Islamic banks because both ofthe activities of credit institutions are not within the lawful scope of Islamic banks.Therefore, Islamic banks, generally speaking, do not fall within the definition of creditinstitutions according to the EU Directives (Khan and Porzio, 2010).Having said the above, the definition of a ‘bank’ could differ from one EU country toanother. For example, Abbadessa (2010) 12 argues that the contention that theIslamic bank does not qualify to the definition of ‘bank’, according to Italian law, isdifficult to disagree. He contends that the Islamic banks do not do banking businesswhich banks in Italy do, such as collecting of the deposits from the public with theguaranteed return and granting of credit. It is essential for these two conditions to befulfilled in order for the institution to become a bank. However, Consolidated Law onBanking in Italy allows banks to operate other additional financial activities whichIslamic banks could competitively do. According to Abbadessa (2010), despite thefact that the financial activities are allowed, Article 10 paragraph 3 of theConsolidated Law on Banking clearly provides that the two preliminary conditionsmust be fulfilled in order for the institution to be called a bank. Therefore, in thesituations like in Italy, there should be a solution found for the Islamic banks either byway of having the two first requirements just formally mentioned in the corporateobjects and programs, while in practice the Islamic banks should be given the rightnot to follow them, or by creating some express legislative provisions allowing theIslamic banks to operate if the two preliminary conditions are not fulfilled. Currently,as mentioned by Abbadesssa (2010), these exceptions are not allowed in Italy sincethe “financial activities” comes as addition to the “banking activities”.Another aspect which differentiates Islamic banks from credit institutions is theunderlying structure of the products they offer. One of the underlying concepts basedon which the Islamic banking products are developed is trading. The trading isexpressly allowed in Islam while the interest is prohibited. 13 At the same time, thechallenge in developing new Islamic banking products is to make them inaccordance with the existing law of that particular country, or in this present case theEU. One of the widely spread Islamic banking products is murabahah financingwhich, in order to be practiced in Europe in its well accepted form, needs to beadjusted to be in accordance with the EU legislation.Murabahah financing is based on trading agreements, i.e. Property PurchaseAgreement (PPA) whereby the bank purchases the property which has beeninspected and chosen by the customer and then sells it back to the customer at themark-up price through Property Sale Agreement (PSA) (Sudin Haron and WanNursofiza, 2009). This product for example does not completely comply with the EUlaw and its application in the EU countries could raise some legal issues. Thequestionable practice of murabahah is the part where the bank upon selling of theproperty, for instance a car, to the customer is not willing to take warranty in case of23