Paper Title (use style: paper title)


 

 
European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

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EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

37 

 

 

Islamic Banks and the European Banking Union: 

An Overview of Critical Issues and Perspectives 

 
1 University of Rome 2 “Tor Vergata” (Italy) 

 

Contact the Author: sandra.antoniazzi@uniroma2.it 

   
Abstract— The aim of this paper is to provide a general, but in-

depth overview of aspects of incompatibility and actual interest 

profiles of Islamic finance in relation to the legal system of the 

European Banking Union, identifying some prospects for positive 

future developments. It examines the relevant Islamic principles 

for banking and the differences from conventional European 

banks for regulation and supervision, a number of experiences 

and possible relationships. The modern communication between 

the Islamic banking scheme and the European (and 

international) one is certainly allowed by the activity of the IFSB 

regulator, especially as regards the adaptation to the Basel 

Committee standards and the related capital requirements, 

transparency criteria and common references, considering the 

global application to operate in the international markets. The 

examination of the relationship with the European Banking 

Union allows the identification of future profiles for debate and 

research in economics law, considering the suitability for 

regulatory adjustments and the interaction between EU and 

national law and the interesting ethical aims of the socially 

responsible Islamic finance.   

Keywords: Islamic finance, Islamic banking, European 

Banking Union, Regulation, Supervision, Transparency, Certainty 

of rules, Comparison, Perspectives 

 

I.  INTRODUCTION 

 

In Europe, for several years now, there has been a significant 

growth of interest in Islamic finance and banking for 

investment companies, Islamic bond products and other credit 

collection instruments. Very significant was the position of the 

Financial Service Authority which, in 2004, issued an 

authorisation to operate to the Islamic Bank of Britain [1] and 

to the first European Islamic Investment Bank. Other 

European countries have experimented with Islamic financial 

products, albeit in a limited way [2]. In this context, it is 

interesting to look further at the possible relations between the 

conventional bank model that operates in the EU market and 

the Islamic bank that follows criteria, including ethical-

religious ones (e.g., the prohibitions of riba and gharar), but 

with issue regarding risk control and data transparency, 

regulation and prudential supervision [3], especially in relation 

to the current European system, capital requirements and the 

Basel III Agreement.  

  The age-old question of the prohibition of interest is also 

known in conventional banking, in the sense of considering 

the difficulties of the weak contractor for elementary forms of 

lending; moreover, the reference to the prohibition of usury 

and to the forms of protection provided by the national 

systems that extend to the various forms of traditional 

operations is inevitable, while for the issue of supervision and 

risks, the evolution has been very different until the 

appearance of European banking supervision. From the 

Islamic perspective, instead, the mechanism of pecuniary 

interests has been replaced by the “sharing” of the creditor in 

the profits and risks of the banking activity. In essence, the 

result of profit can be achieved through sophisticated legal 

constructions (shareholdings, investment funds, linked 

contracts) also to encourage credit, given that banks use credit 

in commercial operations, or with the affirmation of ethical 

justifying principles linked to necessity or the common good.   

  In addition, the prohibition of gain (gharar), based on 

uncertainty for reasons inherent in the value of the asset for 

speculative purposes or when the asset is not determined for 

the contracting parties and, therefore, the contract is qualified 

aleatory, involves an element of risk and uncertainty that is, 

instead, central to contracts in European (and international) 

financial markets [4]. A derivative financial product is, of 

course, an instrument that “derives” its value (price) from that 

of an underlying financial asset. Derivatives are intended to 

Sandra Antoniazzi1 

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European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

https://www.ojs.unito.it/index.php/EJIF/index 

EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

38 

hedge business risks (e.g., foreign exchange options to hedge 

foreign exchange transactions between importers and 

exporters), but are currently mainly used for speculation on 

future price movements, as the value of derivative contracts 

consists of multiples of the actual economic transaction. These 

financial instruments certainly do not meet the requirements of 

linkage to an asset and the character of “non-speculation”; 

conservative Shariah scholars argue that the prohibition of 

gharar eliminates speculation on interest, options and some 

conventional insurance contracts because they conflict with 

the prohibition of uncertainty and wagering (maysir), even if 

there is a hedging of an underlying economic transaction [5].      

  The main ways of collecting credit consist of current 

accounts for the management of payments, for which interest 

payable and receivable are foreseen and repayment is only 

guaranteed, and in savings deposits for which there is no form 

of guarantee regarding the return or the repayment of capital, 

but a share of profit paid periodically [6]; the other collection 

instruments, traceable to forms of co-participation or 

partnership - mudàraba and mushàraka [7], muràbaha [8] - are 

clearly different from bank deposits.       

  For the well-known principle of the prohibition of interest, 

there are further particular rules in the Islamic banking model 

[9]; it is based on precepts of the Shariah: the prohibition of 

investing in activities forbidden by Koranic law and in 

speculative activities, the sacredness of the contract and the 

obligation to pay the zakat, which is a religious tax; moreover, 

these principles also apply in the securities market [10]. 

Therefore, the model of the Islamic bank, precisely because of 

its necessary conformity to ethical-religious values, is 

conditioned in several respects: in investments, the bank must 

ascertain the credibility of the projects, the entrepreneurial 

skills of the client and the ethical character of the financed 

operation with regard to the aims; thus the collection of 

savings must be ethically consistent and the objective is 

obviously to attract the interest of savers, even if no interest is 

paid, through investment funds with participation in the profits 

according to pre-established conditions.  

 As we known, the Islamic banking has adopted the Basel III 

standards, a solution that revealed a significant regulatory 

challenge, given that the agreement does not consider the 

specificities of Islamic banks and Islamic products present 

various profiles of incompatibility with the European (and 

international) markets [11]. The context is complex and 

Islamic banks are required to be adequately capitalised to 

inspire trust and maintain sufficient liquidity under Basel III, 

like European banks, in order to protect depositors and avoid 

expensive governments “bail-outs” in the case of defaults. 

Besides an increasing number of Islamic funds screen equity 

investments to ensure they are permitted and there are even 

indices tracking Shariah compliant stock, most notably the 

S&P Dow Jones Islamic Indices. 

          This framework suggests a reflection on the sector in 

relation to the European Banking Union, in order to identify 

conflicting legal profiles, and to highlight the need for specific 

European and national rules and compatibility aspects 

especially considering sustainable finance. The aim of the 

research is to outline legal considerations regarding the 

prospects for the establishment of Islamic banks and the use of 

financial products; the results that emerge may provide a 

reference for future research.   

 

II. LITERATURE REVIEW 

 

The article adopts an interdisciplinary analysis between law 

and economics, in the sense that the legal reflection cannot 

disregard decisive economics studies. The literature cited in 

the “References” section shows jurists have not confirmed a 

particular interest, beyond the episodic in the context of 

conferences, especially in the Italian legal system or the 

initiatives of financial institutions (ECB, Bank of Italy). The 

results of economic studies make it possible to acquire an 

adequate awareness of the affirmation of Islamic finance in the 

international markets and of the reasons for its necessary 

consideration in relation to the European legal systems.  

  It should also be pointed out that the role of lawyers depends 

on the existence and interpretation of disciplines or at least the 

adoption of bills; as is well known, there are not European 

rules for Islamic banking, but individual experiences of some 

European countries. From the bibliographical references 

emerge a clear minority of law studies and an extensive 

panorama of in-depth studies by Italian and foreign 

economists who analyse the relevant presence in international 

market of Islamic finance from several points of view. 

  Predieri was the first Italian jurist to deal with Islamic banks 

in essays in 1996 and 2006 with the broader aim of fostering 

knowledge of Islamic law and contributing to cultural 

enrichment; Piccinelli also follows this line, focusing on legal 

instruments. Since 2006, some authors (Donato, Donini, Freni, 

Gimigliano, Miraglia, Piccinelli, Porzio, Rotondo, Russo, 

Santoro, Scolart, Casoria) have explored the topic from an 

interdisciplinary perspective, above all, in several collective 

volumes, often containing conference proceedings that 

highlight the intention to solicit further studies. However, the 

debate has not had much follow-up among Italian jurists, 

while there has been more interest in other legal systems. 

There are also some contributions from foreign lawyers 

(Aldohni, Al-Rimawi, Ariff, Arnaud, Decock, Engels, Farook, 

Housby, Lewis, Sagaert, Wilson, Knan, et al.) dealing with the 

differences between conventional and Islamic banking 

systems, also with reference to the European Union and the 

experience of the United Kingdom. 

  Undoubtedly, the most numerous and specific studies consist 

of economics studies by many foreign (Abbas, Abiad, Ahmed, 

Aracil, Ariff, Asad, Ashraf, Asutay, Chazi, Ginena, 

Gintzburger, Hassan, Khallaf, Khavarinezhad, Jafari-Sadeghi, 

Khan, Zamir et al.) and Italian authors (Biancone, Calandra, 

Colecchia, Floreani, Miglietta, Paltrinieri, Prandi, Lanzara et 

al.) who addressed various aspects of Islamic finance: the 

response to the crisis, capital requirements and the application 

of Basel III, risk exposure of GCC banks and activities in the 

European context as well as sustainable finance profiles.   

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European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

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EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

39 

           In this survey, the law and economics studies, reports 

and publications of the Islamic Financial Services Board 

(IFSB) [12] represent crucial references for an overall 

knowledge of the sector and regulation aimed not only at 

Shariah compliance, but also at aligning Islamic banks with 

international standards acquired by the European Banking 

Union and the Single Supervisory Mechanism. 

   This article could help fill a gap in law studies on possible 

relationships between the European system and Islamic 

banking industry. 

 

III. METHODOLOGY 

The method of investigation adopted consists in comparing the 

typical legal principles and the economic aspects of Islamic 

finance and the European Banking Union and national law, in 

order to verify whether the establishment of Islamic banks and 

investment companies is conceivable or whether, for reasons 

of structural incompatibility, the current European regulations 

and organisation can only admit the offer of Islamic finance 

products by conventional European banks. 

 More precisely, the method of comparative law [13] allows a 

comparison of the relevant aspects of the two sectors of 

banking activity that belong to different law systems, 

examining the European discipline and the principles of 

Islamic finance in order to identify possible areas of 

“coexistence” in the same system. The survey draws on the 

contribution of the extensive economics literature cited in the 

“References” section which has supported the study of legal 

profiles, in the light of the modern interdisciplinary research 

that is indispensable in such complex areas. In fact, for the 

field of Islamic finance, economic studies are prevalent 

compared to the limited interest of European jurists. 

  The difficulty of finding legal scholarship conditions the 

debate, which focuses mainly on the economic consequences 

and less on the construction of legal instruments for 

operational adaptation in the European banking system. In 

fact, lawyers tend to examine disciplines that already exist in 

the system of reference, the possible changes or bills; in this 

case there are no specific rules of European law, but there are 

general principles and individual experiences of some 

European countries that have allowed the use, within certain 

limits, of Islamic financial products.  
Economic studies, on the other hand, can evolve by 

examining global economic phenomena using case study 
criteria and empirical analysis of the activities of operators 
according to international standards. The approach is more 
open, and the object of the research concerns the economic 
consequences of existing legal schemes, which can provide an 
interesting basis for legal reflection, especially when a sector, 
such as Islamic finance, is so widespread that it cannot be 
ignored by European legal systems. 

IV. FINDINGS AND DISCUSSION 

A. The comparison with the European conventional banking 
system and differences 

Relations with conventional banks are difficult because of the 

characteristics of Islamic finance and banking activities 

exercised in the EU context according to different rules for the 

financial intermediary, above all, considering the management 

of the risk, to the rules of vigilance and to the regulation of 

competition. For the intermediary from the Islamic discipline, 

the implementation of transparency depends essentially on the 

respect of conduct provided by the supervisory authorities and 

by the Shariah guarantee committee for an ethical control, 

while the informative obligations depend on the discretion of 

the bank with inevitable problems of transparency and 

certainty of the rules. However, the IFSB has contributed 

significantly to improving relations with the conventional 

banking system. A central aspect that must be examined is the 

compatibility of the Islamic banking activity with the 

European supervision discipline, on the requirements of 

liquidity of the capital and on the financial system in order to 

envisage a framework of admissible relations.  

  In general, as we have seen, the principle of participation 

which is linked to the sharing of the risk characterises Islamic 

banking activity and because of its structure it is not linked to 

an obligation of guarantee for the capital deposited and funds 

reimbursement, a substantial aspect which is not compatible 

with European banking discipline and the requirements of 

capital liquidity, especially after the innovations of the 

Banking Union. However, it is necessary to distinguish 

between the regime of free and participating deposits and, in 

fact, only the latter can be affected by losses, if the bank is not 

able to meet them with its capital reserves. Moreover, it is 

necessary to point out that the location of the bank, be it 

Islamic or conventional, conditions the applicable discipline in 

the relative order; the purposes of the bank deposit are 

different: in the Islamic system, the capitalsation of savings 

and the guarantee of preservation, while in conventional banks 

the deposit has represented, at least until the financial crisis 

and the drastic reduction of interest rates, also a solution of 

investment and short-term savings [14].     

  An immediate comparison [15] between the two systems 

shows the different nature of the discipline: since for 

conventional banks the functions and operating procedures are 

provided for by European and national laws and standard 

rules, while for Islamic banks the reference is the Shariah to 

which the production of profits must conform, an objective 

common to the conventional bank, while the main function is 

different, which in the first case consists in participation in 

partnership activities and in the second in the intermediation 

of funds. The relationship with clients is a three-way one, i.e., 

between investors, partners and intermediaries, which is 

different from the “traditional” one based on the 

creditor/debtor dynamic; as for interest, this is not applicable 

as it is contrary to the rule of risk sharing between depositors 

and custodians of funds, unlike our system which provides for 

active and passive interest rates as a return and costs to be 

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European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

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EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

40 

incurred for the deposit. The approach is also different for the 

phase of verification of admission to projects financing, since 

the Islamic bank gives importance to the feasibility, while the 

conventional one gives priority to the reliability of the 

applicants and financing based on the provision of guarantees.  

In the event of defaults or delays, the Islamic bank cannot set 

interest or other charges, a rule that is, instead, general in the 

conventional scheme, and neither would there be an obligation 

to fully guarantee deposits, an issue that has been the focus of 

attention in the EU and in the choices of the ECB until the 

introduction of a single mechanism for the resolution of 

banking crises (Reg. (UE) 15 July 2014, n. 806; Directive 

(UE) 15 May 2014, n. 59).  

  In any case, the obstacle of the prohibition of interest has 

prevented easy access to the interbank market and investment 

in “conventional” securities precisely because of their intrinsic 

nature of referring to interest-based return mechanisms. 

However, specific forms of investment and credit collection 

have been developed for issuance, consisting of transactions, 

especially in mutual funds, in participatory corporate contracts 

and in the issuance of bonds and Sukuk, which are bonds 

deriving from the securitisation of portfolios of contracts, and 

in participatory current accounts. Islamic bonds are issued by 

the state or other public entities according to the scheme of 

securitisation of public assets through sale and lease Ijarah. In 

the mutual fund, the holders of the shares entrust the 

management of a capital to a specialised operator who is 

entitled to a fixed amount of the profits deriving from the 

management and the investor is entitled to a share in profits 

and losses proportional to the amount conferred, based on the 

trust agreement between bank and depositor. The management 

of the fund can also take place through a company, which is 

responsible for the correct administration of the investments in 

compliance with the Islamic discipline and the directives of 

the body (committee or council) in charge of monitoring 

compliance with the ethical rules and for any financial losses 

from which an obligation of compensation generally derives 

[16].    

 

B. Islamic Banking and European Banking Union 

 

The Islamic bond market has gained significant consideration 

even among conventional investors as well in the last decade 

precisely because these instruments are linked to material 

assets and, therefore, with a high degree of security [17]. Not 

only Muslim investors are involved, as they formally conform 

to Islamic principles, but also European ones, given the 

financial crisis caused mainly by the circulation of instruments 

that have unsafe mechanisms, based as they are on interest and 

debt. Indeed, these securities are currently traded in the largest 

secondary markets mainly because of their security qualities. 

  The growth of Islamic banking can certainly be traced back 

to the spread of investment funds and Islamic bonds; the 

establishment of the Islamic Bank of Britain [18], which is an 

expression of this evolution also by means of innovative 

management methods in order to acquire credibility in the 

markets, notwithstanding its very particular and distinct 

framework compared to conventional banks. Regarding taxes, 

the legislation in the UK facilitated the practical 

implementation of traditional models of acquisition avoiding 

interest, which are compatible with Islamic law. New rules 

have been implemented to levy the stamp duty only once in 

cases of Islamic mortgages and at first HSBC Amanah first 

offered such Islamic mortgages, with other banks following 

suit. 

  However, it is necessary to highlight the problematic issues 

of compatibility with the conventional market, regulation in 

the classical sense and the necessary transparency of 

requirements, when Islamic banks operate in European 

countries. It is necessary to consider the supervision exercised 

by the ECB and national central banks, according to the 

approach of European banking supervision (Reg. (UE) 15 

October 2013, n. 1024 and Reg. (UE) 16 April 2014, n. 468 

and related disciplines) and many rules (Basel III, EBA) that 

impose obligations of capital requirements and procedures of 

necessary transparency (e.g., the “stress test” for banks) about 

aspects of accounting and internal decisions that can only be 

based on the adoption of technological innovations for 

communications between the operators involved. Islamic 

finance schemes present interesting aspects from the 

perspective of a sustainable and socially oriented finance, but 

the critical issue is the certainty of the rules and their effective 

knowability through widely available technological tools. 

  It is, therefore, necessary to have a high level of transparency 

in internal controls by the Council of Shariah, which plays a 

role analogous to the ethics committees, but according to 

Islamic ethical-legal rules from which derives a certain 

unpredictability in the application of rules of conduct by way 

of interpretation. Moreover, a certain uniformity of rules 

would be necessary, given the obvious differentiation 

according to the countries of origin, an objective in theory 

constantly affirmed by the GCC, but difficult to implement 

even for the discipline of competition [19]. 

  The Islamic bank is, however, for certain activities, certainly 

comparable to a conventional credit institution, but for further 

services of a financial nature, problems of vigilance arise and 

for the collection of credit “at risk”, there is a need for greater 

transparency also for the savers, especially for European 

investors. From the mudàraba and mushàraka schemes derives 

a significant involvement in the business risk of the bank and, 

therefore, adequate supervisory measures are necessary. In the 

case of mushàraka, the partnership contract between bank and 

client foresees that the capital in goods or liquidity derives 

from both and allows the control to actively participate in the 

project [20]. Moreover, the need for an organisational 

separation of the activities of the bank is also envisaged for the 

Islamic bank, in order to avoid possible conflicts of interest 

between the parties involved in the business, like the universal 

bank scheme [21].   

 

C. Tasks of Islamic financial and banking authorities 

 

  The Islamic financial activity has, therefore, objectives of an 

economic nature (preservation of the capital, profits, 

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European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

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EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

41 

equilibrium between liquidity and profitability) and ethical-

religious rules (respect for the precepts and standards of 

behaviour of the Koran and of the Shariah, considering the 

legitimate goods - halal - and excluding the forbidden haram 

activities). Moreover, the concept of cooperation replaces the 

traditional concept of competition in the market mechanism, 

which is instead central in the EU.  

  The difficulty of “translating” ethical-religious or, at least, 

moral principles into rules of prudential supervision, which in 

the international market must be compatible with the 

requirements of Basel III, is evident, in addition to the uniform 

European framework for Member States. Furthermore, there is 

the necessary availability of information that can be acquired 

by financial intermediaries and investors, a condition favoured 

by technological innovation and tools in the most advanced 

countries along with the establishment of competent 

authorities. 

  The schemes of Islamic finance present characteristics that 

seem, in effect, to favour economic and social sustainability; 

however, the risk of unpredictable interpretations adopted by 

the Shariah supervisory committees is still an element of 

significant perplexity, especially if we consider the essentiality 

of legal certainty and reliability of the financial products, after 

various crises for different reasons. The current solution 

represents a delicate compromise between the acceptance of 

international standards and the objective of Shariah-

compliance activities.         

    The national Islamic banking supervisory authorities must 

guarantee the stability of the financial system according to two 

objectives: the control of capital requirements with 

international indications and the modalities of activity that 

must be Shariah-compliant. This stability depends on ensuring 

that Islamic banks have systems in place to control 

requirements and internal Shariah governance policies and 

processes to identify, monitor and control or mitigate Shariah 

risk as a result of interpretations that may be inconsistent. As 

regards the relationship between liquidity and credit risk, some 

studies have compared Islamic banks and conventional ones 

and revealed that the former are better than the latter in 

managing risks [22]. In addition, a further objective of 

financial regulation is the protection of consumer rights that 

may be affected by the proposed instruments, and it is 

essential that Islamic banks ensure fairness and diligence in 

their operations and compliance with Shariah precepts, as 

depositors are attracted to these institutions primarily for their 

ethical and religious principles.  

  Thus, the IFSB advises supervisors to provide banks with a 

framework of uniform internal rules to enable Shariah 

compliance, although supervisors will inevitably have 

differing views on Shariah governance given the different 

legal systems in which the banks operate. In addition, the 

IFSB ascertains the different needs of individual banks, which 

vary depending on different factors such as size and capital 

requirements; regulators should ascertain whether banks have 

control systems in place to ensure Shariah compliance. To this 

end, the IFSB has developed some guiding principles on 

requirements for the distribution of Islamic products in the 

capital market, for Sukuk and collective investment schemes. 

  The focus issue is the implementation of good practice in 

financial reporting and the establishment of an independent 

auditing systems and the task for any supervisory body can be 

made more manageable by learning from the experience of 

others and by applying available standards and guidelines. In 

this sense, the Basel III rules have contributed significantly. At 

the same time, it is possible to say that Islamic finance 

schemes may contribute generally to spreading an economic 

approach of solidarity. 

 

D. The relationship of the GCC countries with the ECB and 
some limited experiences of Islamic finance in EU Member 

States 

 

From 2005 onwards, it is possible to identify frequent contacts 

between the EU and the GCC, managed by the General 

Secretariat [23], and requests for specific advice to the ECB 

on the single currency project, which was planned for 2010, 

highlighting the European experience as a model to be 

followed for the establishment of a centralised banking entity, 

price stability, and fiscal and monetary convergence 

parameters [24]. However, links and political relations 

between the GCC and the EU date back to 1988 and a 

cooperation agreement, which provided for advice, mutual 

dispatch of delegations and annual meetings of ministers in 

sectors such as energy, transport, research and innovation, and 

the EU-GCC Clean Energy Network and the EU-GCC Trade 

and Business Cooperation Facility. At present, the objective of 

the single currency is postponed or at least suspended, given 

that there are no recent definitive decisions in this direction, to 

which have to be added the problems of agreement between 

the various countries, especially for the international policy 

guidelines that have created diplomatic difficulties.  

  Decisive decisions are still being awaited on monetary union, 

while for the financial markets the European discipline has 

already influenced regulation well beyond its natural 

boundaries of application due to the need for necessary 

harmonisation in order to encourage investment, despite the 

critical aspects. In fact, in the adopting standards, the IFSB, 

which includes GCC banks, has inevitably further rooted the 

European schemes as an experience of best practice in 

conventional markets, initially considering the Directive 

2003/71/EC (on trading in financial instruments), the 

Transparency of Issuers’ Information Directive 

(2004/109/EC), the UCITS Directive 2009/65/EC (regulation 

of undertakings for collective investment in transferable 

securities) and, subsequently, the most recent regulations in 

force, as well as the criteria adopted by the Basel Committee 

for European and international standards. 

  The cooperation of the ECB with non-EU countries has 

therefore also involved GCC countries, as it has strengthened 

relations with the General Secretariat, central banks and 

monetary bodies of the Member States since 2005, particularly 

with a view to introducing a single currency. Instruments have 

also been developed to enhance cooperation with the major 

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European Journal of Islamic Finance - ISSN: 2421-2172 

DOI: 10.13135/2421-2172/6424 - Published by University of Turin  

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EJIF content is licensed under a Creative Commons Attribution 4.0 International License 

 

Received: 15/10/2021 - Accepted for publication: 30/03/2022 - Published: 18/04/2022 

42 

central banks of many non-European states, including those of 

the GCC and their monetary authorities, through specific 

seminars [25], technical assistance and guidance, including 

through the contribution of expertise in the conduct of 

monetary policy, payment systems and banking supervision, 

as a “source of inspiration” for various systems. This advisory 

activity is part of the institutional tasks as provided for by 

Article 5 of the Statute of the ESCB-ECB (Protocol no. 4); for 

the collection of statistical information, the ECB “shall 

cooperate with the institutions, bodies, offices or agencies of 

the Union and with the competent authorities of the Member 

States or third countries and with international organisations” 

(Article 5.1.) while Article 6 refers to international 

cooperation and participation in international monetary 

institutions. 

  The ECB cultivates international relations [26] for 

cooperation with countries outside the EU; in particular, the 

Article 8 of Reg. (EU), 15 October 2013, no. 1024, on banking 

supervision, provides for the possibility for the ECB “to 

establish contacts and enter into administrative arrangements 

with supervisory authorities, international organisations and 

administrations of third countries, subject to appropriate 

coordination with the EBA. These agreements do not create 

legal obligations for the Union and the Member States”. This 

provision, which also allows for forms of cooperation in 

prudential supervision, may help to expand relations with 

other systems, especially in the exchange of information and 

the adaptation to common international standards.  

  In addition, a regulatory convergence between the EU, the 

GCC and other Islamic countries is necessary for the 

establishment of Islamic banks in Europe regarding the 

prerequisites for banking authorisation (Articles 4.1 (a) and 

14, Reg. (UE), no. 1024/2013), capital requirements, safety 

nets, independence and powers of supervisors. In fact, EU law 

and national legislation provide for rules on administrative and 

decision-making bodies in a way that is far removed from the 

presence of the Shariah board. 

  Islamic financial instruments have been offered on the 

market for some time; in 2004, in the United Kingdom the 

Islamic Bank of England obtained its authorisation, in 2006 

Sukuk was listed on the stock exchange and in 2014 saw the 

widespread issuance of Islamic bonds with a specific 

discipline, as in Luxembourg; while in 2004, Germany, the 

Land of Saxony-Anhalt decided on the issuance of Sukuk as in 

France [27]. 

 In Europe, the financial sector considers the needs of Muslims 

with some solutions, apart from the older case of the United 

Kingdom, now no longer part of the European legal 

framework, due to the significant presence of a very 

traditionally oriented Muslim population. In Germany, there is 

a significant experience: the Kuveyt Türk Beteiligungsbank 

(Frankfurt) which obtained a licence as a deposit and 

investment bank in 2015 after an experience that began in 

2004 [28], through a German bank that allowed the knowledge 

of Islamic finance, along with some national regulatory 

innovations. Other jurisdictions have introduced a special tax 

regime for Islamic investors for specific products. 

Stock exchange values are currently listed in the Dow Jones 

Islamic Market and FTSE Global Islamic Indexes. European 

banks already distribute shares in Islamic equity funds for 

financial investments that exclude companies involved in 

gambling, alcohol, tobacco or interest-bearing loans. 

  The development of Islamic finance has depended on its 

significant reliability and resistance to financial crises 

(2007/2008 financial crisis period) due to its low indebtedness 

and use of operational instruments that are based on real 

assets.  Certainly, financial products are more expensive as 

sharing entails control costs, problems of information 

asymmetry and property management. For an effective 

contribution to sustainable finance, a common regulatory and 

supervisory system is needed to ensure transparency and 

certainty, as well as contracts with clear content, especially 

considering the link between law and moral principles in order 

to limit legal risk as much as possible.  

  However, there are critical views regarding the tendency of 

Islamic financial institutions to offer products and services 

that are in essence similar those offered by conventional 

institutions and to try to come up with new ideas to remain 

competitive as a viable alternative to conventional finance; at 

the same time Islamic financial experts must ensure their 

Islamic character [29].     

  Financial transactions are guaranteed by assets and risk-

sharing and transactions have real purposes (concrete and 

productive activities, real estate), limiting financial 

speculation; moreover, some recent reports [30] on Islamic 

finance reveal prospects for growth, despite the difficulties 

caused by the pandemic [31]. These aspects are of 

considerable interest to European legal systems as an 

opportunity and alternative source of financing. In Europe, 

there is a significant presence of “Islamic counters” that have 

opened in conventional banks for depositors wishing to 

implement religious principles, but regulatory innovations 

must be introduced for supervision and regulation, in the sense 

that the EU member states where these banks are located 

should adopt their legislation considering all the potential risks 

in relation to this new financial activity.  

  These perspectives also appeal to the Italian system, on the 

assumption of appropriate regulatory changes necessary to 

overcome tax issues and incompatibilities with internal rules, 

in order to encourage the establishment of Islamic banks, 

especially in the form of investment banks, while European 

advisory companies are already widespread. In 2010, a 

seminar, organised at the Bank of Italy, brought together GCC 

central banks and monetary authorities to examine financial 

and economic developments in these countries and in the euro 

area and the consequences of the global financial crisis for 

stability and monetary policy. A relatively favourable 

economic experience emerged, especially in comparison with 

advanced economies and emerging markets. The GCC Region 

was seen as a major player in international financial markets, 

engaged in the efforts of the international community to 

reform the global framework for financial stability and 

banking supervision [32]. 

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43 

   Later, in 2013 at the IFSB Forum in Rome at the Bank of 

Italy, the Governor Ignazio Visco focused attention on the 

interest for Islamic finance and the opportunity to attract 

foreign capital to underpin economic progress and the 

intensity of the commercial and financial links with the 

southern shores of the Mediterranean and make it increasingly 

important for Italy and its financial system to be equipped 

with the knowledge and the operational instruments needed to 

interact with financial systems complying with shariah 

principles: the principle that profits should be generated from 

fully sharing in the business risk of an investment, the so-

called “profit and loss sharing principle”. The asset-banking 

requirement complements these prescriptions, providing for 

the link between each financial transaction and an identifiable 

underlying asset, but it has to be clearly ethical and certainly 

transparent.  

   The offer of Islamic financial products is characterised by 

high growth rates and the most relevant component is banking, 

but in non-Islamic systems an adaptation of traditional and 

fiscal schemes is required. The Italian legal system shows a 

limited and slow interest in these alternative financial 

instruments, compared to other European countries. Bill no. 

4453 of 2 May 2017, presents provisions concerning the fiscal 

treatment of the operations of Islamic finance, given that a 

decisive obstacle to the expansion of Islamic finance in Italy 

consists in the “duplication” of taxation because of the 

complex structure of the operations to ensure compliance with 

the Shariah, with an aggravation of fiscal costs in comparison 

with the instruments of conventional finance [33].  

The objective is to “assure a taxation equal to that of the 

conventional financial operations” (Article 1), in order to 

attract foreign investments and depositors from the Muslim 

community in Italy who already hold a high amount of 

savings. The “constant monitoring” will certainly have to be 

extended and supplemented by specific rules of regulation and 

supervision to be included in the current system.  

  At present, the project is still assigned to the VI Finance 

Commission, but there have been no further developments. 

The slowness of the Italian legislator has led some banking 

operators to consider the possibility of offering Shariah-

compliant products through “Islamic windows”, i.e., special 

branches created in conventional banks. Regulation appears to 

be a very important issue, in order not to exclude from access 

to credit a sector of the population corresponding to at least 

one million residents, both for social reasons and for 

evaluations of credit support and incentives for investment 

funds. 

 

E. The role of the IFSB 

 

The context of reform of the international rules and global 

difficulties have undoubtedly aggravated the relevant 

complexity of the multiple tasks carried out by the IFSB as 

regulator and supervisor of the Islamic banks in the system of 

natural belonging and as an authority that adopts the choices 

of necessary alignment to the conventional system for obvious 

interests in international markets. This organisation promotes 

and enhances the soundness and stability of the Islamic 

financial services industry by issuing global prudential 

standards and guiding principles, broadly defined to include 

banking, capital markets and insurance sectors.  

    The respect of punctual constraints of capital is a further 

controversial aspect, given that for the Islamic banks the 

prevailing limits consist in ethical rules of the Shariah, in 

addition to the evaluations of control of merit which depend 

on the interpretation of the Shariah, exercised by a council (or 

committee) of the Shariah, and limits for the liabilities in the 

balance sheet. However, in addition to these forms of ethical-

religious control, there is also the regulation of Islamic banks 

for the aspects that are linked to risk and capital requirements. 

In this context, the IFSB has taken on a decisive role, 

established in 2002 and operational since 2003, precisely 

because of the particularity of the requirements of financial 

institutions, which involves several banks in the Arab 

countries of the GCC and which provides international 

standards and obligations comparable to those provided by 

Basel III and the discipline on banking supervision. Indeed, 

the IFSB has published standards, guiding principles and 

technical notes covering various regulatory aspects for Islamic 

banking markets, insurance markets and financial markets.  

  The IFSB is an international organisation aimed at 

introducing standards, promoting and enhancing the soundness 

and stability of the Islamic financial services industry by 

issuing prudential rules and guiding principles for the financial 

services industry (banking, capital markets and insurance 

sectors). The standards developed derive from a complex 

process specified in guidelines and standard-setting 

procedures, which are characterised by the issuance of 

exposure drafts, the conduct of workshops and public 

hearings. In addition, the IFSB prepares very concise annual 

reports, conducts research and coordinates initiatives, 

roundtables, seminars and conferences for regulators and 

industry participants and for these purposes it cooperates with 

international, regional and national organisations, research 

institutes and market participants, as a “dialogue” entity with 

the conventional banking system. 

  The IFSB standards follow a comprehensive due process as 

outlined in its Guidelines and Procedures for the Preparation 

of Standards/Guidelines; it involves the issuance of exposure 

drafts and carries out workshops and public hearings, research, 

conferences for regulators and stakeholders [34]. These 

activities are carried out in cooperation with relevant 

international and national organisations, research entities and 

market players.    

  The Islamic Financial Services Industry Stability Report 

2021 [35] offers a selection of results from the IFSB 

international research and surveys to achieve a broader and 

common understanding of critical issues in Islamic finance. In 

line with governments and regulators in other countries 

engaged in economic recovery and the adoption of fiscal and 

monetary measures, the IFSB has been engaged in analysing 

the most effective interventions to support the banking sector 

and sustained its growth momentum in 2020 recording a 

growth rate of 10.7% year-on-year based on significant 

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44 

improvement, especially in the Islamic banking and capital 

markets segments. The financial stability indicators remained 

satisfactory, especially when compared with previous years’ 

performance, conventional peers, and assessment criteria used 

by international standard-setting bodies. 

  The IFSB closely monitors developments in the global 

financial system generally and specifically in the jurisdictions 

of its members; it has published a compendium of policy 

responses and a paper on the impact of the pandemic on the 

Islamic Financial Services Industry (IFSI) and several 

standards, guides and technical notes to complement the work 

of other international standards but also to cater for the 

specific tasks of the IFSB. The analysis conducted on the 

Islamic banking segment is based on the Prudential and 

Structural Islamic Financial Indicators (PSIFI) database of the 

IFSB, which has extended coverage of the database to both the 

Islamic capital market and takaful segments from 2020 

onwards. The report examines the implications for the 

soundness and resilience of the global IFSI and recent 

economic developments and changes in the global financial 

system, with a particular focus on the pandemic.  

  The 2021 Report presents an overview of the vulnerability 

aspects and the outlook of the global Islamic financial services 

industries and IFSB members regarding the three key sectors: 

Islamic banking, the Islamic capital market and Islamic 

insurance that are objects of an in-depth analysis based on data 

from the Prudential and Structural Islamic Financial Indicators 

database of the IFSB. This document provides an indicative 

outlook for the IFSI, which makes it a prime reference for 

information on the stability of Islamic finance globally and 

across national systems. 

  The developments and significant economic impacts depend 

on the widespread public health measures for the global 

pandemic, an external shock that did not affect the banking 

sector. However, the economic and social impacts have 

affected the stability of financial systems. The Islamic social 

finance sector can promote stability by diversifying the 

financial system and indirectly by financial and social 

inclusion through providing inclusive financial services for 

poorer people. This financial sector could complement the 

commercial financial sector through the zakah and waqf that 

can provide stable funds to tackle the adverse impact of 

negative shocks such as the pandemic. The zakah is a 

percentage of wealth a waqf represents in social capital that is 

relatively stable during negative shocks, and they provide 

support to people in need [36].  

Covid-19 has impeded the achievement of many goals, but it 

has also highlighted the need to make significant changes. 

According to the report, in this regard, Islamic social finance 

needs to transform to become more effective and resilient in 

order to help promote the development of sustainable and 

stable economic, social, environmental and financial systems. 

As in the European system, economic support measures and 

macroprudential policy measures [37] helped to improve 

financial conditions and to mitigate any potential financial 

stability risks that remained relatively resilient with significant 

differences in several countries.  

 Reading the report reveals the Islamic banking and Islamic 

capital markets sectors contributed to the increase in total 

worth of the global IFSI, while takaful sector experienced a 

slight contraction; otherwise, the IFSI demonstrated overall 

growth in 2020 despite many systems experiencing economic 

recessions as a result of lockdowns and heightened uncertainty 

due to the pandemic [38]. For example, the GCC countries 

maintained their position as the most important market for 

Islamic finance activities in 2020 and the Middle East and 

South Asia region is the second largest share remaining 

consistent with the previous year. 

 The data emerging from the report do not seem negative, if 

compared to the European experience and if we consider the 

level of transparency adequate; however, adjustments are also 

needed to participate in the European market. The countries 

examined, although they share an Islamic approach to the 

economy, also have very different situations in the financial 

sectors, due in part to differences in internal regulations, 

profitability levels and the market for available energy 

resources, as the Report clearly shows. 

For a useful comparison of compatibility with the European 

system, it is therefore necessary to examine the commitment 

to the Basel III standards. The Report considers the Basel 

Committee programme and strategic priorities for 2021-2022 

that focused on implementation and evaluation; it will 

complete existing work on the prudential treatment of crypto-

currency exposures about which a consultation document was 

published in June 2021 and on disclosure requirements related 

to market risk and sovereign exposures. In particular, the 

Report specifies that disclosure requirements may have some 

impact on future IFSB standards, confirming the direct 

influence on Islamic banking system. 

     In 2020-2021, international entities in the banking, 

securities and insurance sectors issued several documents 

(reports, consultations, standards, survey reports) that are 

relevant to the tasks of the IFSB, and show global 

developments and the impacts of new choices also as a result 

of the pandemic. The IFSB, “being the complementary global 

standard setter” for the Islamic banking, capital markets and 

takaful sectors, monitors standards and guidelines of these 

global authorities (Basel Committee on Banking Supervision, 

International Organisation of Securities Commissions, 

Financial Stability Board, International Association of 

Insurance Supervisors). Their activities and standards have 

been seriously affected by the pandemic; in fact, some entities 

have done significant short-term work in response to it, for 

example, by providing members with access to information on 

measures taken in other jurisdictions.  

  Some postponements of the implementation dates were 

decided for agreed reforms in order to allow institutions to 

focus more fully on their responses to the pandemic crisis, for 

example, the consultation on new Principles for Operational 

Resilience and revised Principles for the Sound Management 

of Operational Risk of the BCBS. The IFSB also adopted a 

consultation on Effective Practices for Cyber incident 

Response and Recovery, and IOSCO consulted on revisions to 

its Principles for Outsourcing with operational resilience as a 

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45 

driver of several changes. In these documents, there are no 

references to the specifically Islamic financial and banking 

regulations, but their influence on the work of the ISFB will 

emerge in future standards on broader aspects such as risk 

management or the supervisory review process.    

 Other topics for specific definitive standards relate to the 

impact of financial technologies, particularly crypto-assets and 

“stable coins”, but also include the use of artificial intelligence 

and machine learning by asset managers and other capital 

markets intermediaries and the use of big data analytics in 

insurance [39]. 

The Islamic financial system has shown resilience, and 

unprecedented interventions by governments and regulators 

have allowed markets to continue in their tasks [40]. The IFSB 

has identified a programme focusing particularly on fund 

liquidity and non-bank financial institutions based on 

analytical study and a number of changes in standards. In fact, 

Islamic capital markets have some very positive profiles such 

as the very limited use of derivatives and the adoption of 

social projects of financing, while in the Sukuk market a 

shortage of liquidity has become apparent. 

 

F. The regulatory criteria, standards and supervision of 
Islamic banks: the needs for transparency and knowability 

through technological innovation 

 

  The implementation of IFSB standards represents a challenge 

in some jurisdictions that have a limited experience, because 

they should have adequate infrastructure to support Islamic 

finance and a skilled policy team. The guidelines represent an 

opportunity to improve implementation rates by leveraging on 

the experience of other members and sharing the basic steps of 

regulatory and supervisory authorities that have successfully 

implemented IFSB standards [41].  

  Most of the regulatory and operational aspects of Islamic 

banking depend on the respective central banks which develop 

the legislative framework for competition within the Islamic 

financial sector; the legislations also contain provisions on 

governance and provide for Shariah compliance committees or 

boards for financial institutions, present e.g., in all GCC 

countries [42]. The main role of the Shariah supervisory 

boards is to ensure that the instruments offered by financial 

institutions are coherent with the fiqh (jurisprudence) on 

ethical-religious rules as a form of supervision and governance 

with additional tasks, e.g., advising the board of directors, 

providing guidance to Islamic financial institutions on the 

limits of activity, without executive functions that fall 

exclusively to the management of the bank or a strategic role 

for the board of directors. The Shariah board has no 

competence regarding the management of the risks, apart from 

those deriving from its own decisions or from the fatwa [43] 

which is a legal opinion on any Shariah question, according to 

a predetermined methodology. In fact, the board establishes 

rules and principles relative to Shariah, ensures that the 

policies and procedures of the Islamic financial institutions are 

compliant and can take decisions to create certainty of 

compliance. Together with the board of directors and other 

operational committees, the Shariah committee can prevent 

aggressive lending and higher-risk activities, counter unethical 

practices, and ensure compliance and principles for social 

justice purposes, although there may be changes of direction 

in decisions [44]. In this context, Shariah-compliant financing 

is a contributing factor to the efficiency of the GCC national 

banks and the functioning of the overall financial sector. 

  While several banking laws regarding Islamic finance require 

banks to have a Shariah board in-house, most regulators are 

reluctant to engage in Shariah matters and this trend is 

controversial. Malaysia’s regulation [45] is an exception, as 

the central bank has its own Shariah board, whose fatwa may 

be of a higher level than the Shariah boards of individual 

Islamic banks for internal control [46]. This ensures 

consistency and probably a reduction in risk, but it could 

potentially limit debate in the future by centralising the 

decision on compliance. Within the corporate governance 

system, therefore, adequacy to Shariah is essential, not least to 

help mitigate the effects of potential risks through due 

diligence respecting the ethical underpinnings of Islamic 

economics. However, from recent empirical evidence it 

emerges that the best practices of Shariah governance have not 

achieved the efficiency envisaged by the banks, which pursue 

objectives of governance of the activities according to the 

ethical Islamic economy [47] and the prevention of financial 

crises. 

 Compliant financing has demonstrated positive effects, but 

improving the quality of institutions, the rule of law, and the 

effectiveness of government action have emerged as equally 

important aspects as part of strengthening lending by banks in 

GCC countries. The main policy implication is that 

governments and policymakers will have to adapt legislation 

more vigorously and adopt reforms of laws and regulations 

governing the banking and financial sector and a more open 

economy. GCC countries have, in fact, long been in the 

process of continuously reforming their business sectors to 

make them more competitive internationally, but attention to 

strengthening the institutional framework in which finance 

operates is essential [48]. 

  However, the issue of securities regulation cannot be 

addressed independently of an examination of the legal 

context, especially since there are no abstract schemes 

developed in advanced regulatory regimes that can be 

adequately introduced into systems with different assumptions 

and ethical-religious limitations that are a source of legal risks 

inherent in the application of Shariah and constitutive effects 

for commercial legislation, such as the prohibitions of riba and 

gharar that limit the modus operandi of stock markets and the 

choice of securities [49]. 

  The Shariah produces legal and economic risks that are not 

quantifiable a priori and that can directly influence modern 

Arab commercial legislation and, in the worst-case scenario, 

could render the new discipline inapplicable, given the 

exercise of supervision according to ethical-religious criteria. 

In essence, the influence of Shariah cannot be fully foreseen in 

the examination of commercial legislation, as assessments are 

based on criteria that are subject to interpretation that is often 

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46 

not unambiguous and not even accessible through instruments 

of certain knowability. The need for transparency is 

particularly evident in order to reduce risks as they can be 

known and foreseen in advance [50]. 

 

G. The rules on capital requirements 

 

The IFSB institutional website has been enriched with content, 

and transparency has undoubtedly increased in recent years; 

however, the difficulty of framing ethical-religious principles 

in uniformly applicable rules and standards of banking 

regulation is evident. 

   The objectives of the guidelines are very similar to those 

pursued by the EBA and ESMA and, therefore, to the 

indication of technical standards as a basis for national 

regulatory and supervisory authorities to define, in turn, 

specific rules and guidelines on adequacy requirements for the 

marketing of financial products and investment funds [51], the 

dissemination of information in the sector and, in particular, 

greater harmonisation of regulation and practices, in order to 

encourage investments from third countries. In addition, they 

include the competence to prepare stress tests [52], similar to 

the EBA. Among the guiding principles in the offer of Sukuk 

securities and investment funds, inspired by good practices in 

conventional and Islamic markets, are the rules of clear, 

accurate and not misleading information to investors as well as 

timely disclosure for a reasonable investment decision; in 

particular, for Sukuk securities, the structure and related 

contracts must be described with sufficient clarity to allow the 

investor to understand and assess any risks attached to it [53] 

and there are similar rules for investment funds adopted by 

national regulators [54]. 

  The regulatory standards and guidelines for Islamic banks 

can be divided into two basic categories: the first set of 

standards relate to Islamic counterparties and consist of 

guidelines and conventional international standards that 

include the prudential standards necessary to ensure a stable 

financial system; in this development the IFSB uses existing 

international standards issued by relevant bodies, such as the 

Basel Committee, as the basis for its own standards with 

adaptations to suit Islamic banking practices. For example, the 

Capital Adequacy Standard for Institutions (other than 

Insurance Institutions) Offering Only Islamic Financial 

Services (2005) is based primarily on the principles of Pillar 1 

of the Basel II standards. In particular, the IFSB amended and 

adapted two Basel Committee documents to develop 

appropriate capital requirements for Islamic banking practices. 

Following the financial crisis, IFSB considered the new 

guidance of Basel III by adopting Revised Capital Adequacy 

Standard for Institutions Offering Islamic Financial Services 

(IFSB-15) incorporating the changes in capital adequacy 

requirements of the new international standards [55]. Thus, the 

Basel Committee rules are acquired indirectly through the 

intervention of the IFSB which adapts them to the reality of 

Islamic banking. The second type of IFSB standard rules is 

unique to Islamic financial activity and consists of guidelines 

for an adequate supervisory framework in the application of 

Shariah for Islamic financial institutions also through digital 

solutions [56].  

    The IFSB, in its publication Guiding Principles of Risk 

Management for Institutions (other than Insurance 

Institutions), has defined the various categories of risk (e.g., 

credit, investment, market, liquidity and operational risk) and 

clarified that Islamic financial institutions should be 

characterised by a comprehensive risk management process 

and transparency and reporting requirements. The process 

should consider adequate measures to comply with the rules 

and principles of the Shariah and ensure adequate risk 

reporting to the supervisory authority; among the forms of 

risk, credit risk: the Islamic Financial Institutions (IFIs) should 

have a specific strategy of financing and the instruments used 

must be in conformity with the Shariah, which recognises the 

potential credit exposures that can arise in different phases of 

the various financing agreements [57].  

As regards investment risk, IFIs should have appropriate risk 

management strategies and reporting processes in place in 

relation to risk characteristics for equity investments, 

including mudarabah and musharaka investments. With 

respect to market risk, for all assets, IFIs should have a system 

of appropriate technology tools with respect to risk 

management and reporting, to be considered separately, 

including for those that are not intended immediately for the 

market and/or exposed to high volatility pricing. In terms of 

liquidity risk, IFIs should have a liquidity management 

framework (including reports) in place, considering separately 

and in total liquidity exposures related to each category of 

current accounts, and restricted and unrestricted investment 

accounts. Finally, for operational risk, IFIs should have 

adequate systems and controls in place, including oversight to 

ensure compliance with ethical and religious norms and 

principles, including the risk of non-compliance with Shariah 

[58]. 

  Thus, Islamic banks face the same risks (dependent on 

insolvency, commodity price fluctuations, liquidity 

management, regulatory and market risks) as conventional 

institutions, but the typical risk is that of not properly fulfilling 

the principle of risk sharing in financial transactions or 

religious precepts related to economic activities.  

  The principles prepared by the IFSB also concern the 

transparency and necessary detailed information on the 

financial instruments and the investment funds for conformity 

to the Shariah, in order to allow informed decisions according 

to ethical-juridical rules; furthermore, specific regulations are 

provided for the composition of the board, their roles and 

responsibilities, the circumstances in which the non-

compliance can occur and the procedures to detect and control 

the risks, the processes of internal and external audit as well as 

the possible pecuniary sanctions as a measure of “purification” 

for the non-compliant incomes. There are requirements for 

transparency and constant updating of data by appropriate 

electronic reporting systems. 

   The Shariah-compliant contracts used by Islamic banks 

modify the risk-return characteristics of the products and have 

relevant regulatory implications [59]. However, despite the 

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47 

particularities, some regulatory standards of the Basel 

Committee can be applied to Islamic banks, while the specific 

characteristics in relation to ethical rules are certainly not 

considered by international regulatory standards. For example, 

the use of profit-sharing investment accounts (PSIA) raises 

several issues, e.g., whether to consider them as deposits or 

treat them as capital, as there is a risk-sharing element to the 

assets. Moreover, since the returns of PSIAs are based on the 

principle of profit-loss ratio, the rights of investor-depositors 

need to be protected and the fiduciary nature of the contract 

also requires greater transparency in the related banking 

operations [60]. 

  This is a concrete problem common to other international 

bodies adopting rules with standard provisions and, in fact, 

even the IFSB does not have “enforcement powers” [61] to 

ensure the effective application of its prudential standards in 

the various countries involved, and it is inevitable that 

enforcement depends on national regulators; in essence, few 

supervisors have incorporated these standards into national 

regulation and it is possible to state that the regulatory regimes 

of Islamic banks can be traced to three solutions: the first 

concerns a few countries (e.g., Bahrain, Oman [62]) that have 

adopted specific regulatory guidelines; the second solution 

concerns countries that require banks to follow the regulations 

foreseen for conventional banks, even if adaptations are 

necessary to respect the Shariah. 

The third solution adopted by countries such as Saudi Arabia 

and the United Kingdom [63] is to subject Islamic banks to the 

same regulation as conventional counterparties and Islamic 

banks adjust their operations to the existing regulation. While 

in the jurisdictions where there is no regulation of Islamic 

finance, the banks, also Islamic, adapt to the national 

regulatory provisions based on the standards of the Basel 

Committee and in these countries the Islamic banks must use 

products and instruments that conform to these rules and to the 

ethical-legal rules of the Shariah even if a frequent contrast 

emerges between products that conform both to those 

standards and to the ethical rules. Thus, e.g., under the Basel 

III rules on capital requirements, Islamic banks should 

ascertain acceptable capitalisation (Tier-1 and Tier-2) and the 

value of risk-weighted assets in their portfolios with the new 

risk benchmarks. Since PSIA cannot be accepted as capital 

under the strict Basel III definitions, one solution may be to 

issue long-term equity-based Sukuk that meet the definition of 

capital under the new regulatory requirements. In addition, as 

Basel III pays more attention to market and other special risks, 

the risk references for partnership contracts such as 

mudarabah and musharaka and sales-based instruments such 

as salaam and istisna’a (a medium-term funding technique) are 

likely to increase.  

  The Basel Committee had already published guidelines in 

relation to liquidity for risk management prior to the crisis 

(Basel II), but with the crisis, the central role of capital further 

emerged, and this led to the definition of specific requirements 

with Basel III. The aim of introducing the appropriate capital 

liquidity requirements is to promote a more flexible banking 

sector, improving its ability to withstand shocks from different 

sources. Basel III introduced the Liquidity Coverage Ratio 

(LCR) to meet short-term liquidity needs and risks and the Net 

Stable Funding Ratio (NSFR) to ensure adequate medium and 

long-term liquid funds. In particular, Saudi Arabia has 

implemented the requirements set out in Basel III, through the 

Saudi Arabian Monetary Authority, which has undertaken a 

number of initiatives to strengthen the prudential framework 

for bank capital and issued the Basel III risk-based capital 

framework in December 2012 to implement the first phase, 

which came into force in January 2013. A number of new 

rules and policies were also introduced in October and 

December 2012, in particular on capital requirements for bank 

exposure to central counterparties, the 3 Pillar and the 

Liquidity Coverage Ratio. The United Arab Emirates also 

recently adopted the capital requirements of Basel III through 

its own regulations [64].  

The risk of liquidity arises when banks face problems in 

acquiring sums of cash at reasonable cost from loans or from 

the sale of assets. In conventional banks, the needs of financial 

liquidity can be satisfied by private sources, by other financial 

institutions and by inter-bank money markets. The Islamic 

banks, instead, must consider the constraints of the Shariah in 

accessing liquidity from these sources. Since interest-bearing 

loans are prohibited, under Shariah it is not possible to borrow 

funds to meet liquidity requirements in case of need and, 

therefore, there are limits to borrowing; moreover, debt sales 

are prohibited by Islamic law in most cases and banks could 

not sell their debt-based assets to ensure market liquidity. 

   In this context, the identification of quantitative limits to 

borrowing is a central issue, as banks cannot receive large 

sums as interest payments and loans must not consist of more 

assets than the assets held, and loans involving large debts 

cannot be used to ensure liquidity; over the years, the general 

rules have been expressed more clearly as a certain reference 

for the banks and, in particular, the Shariah-compliant 

financial parameters [65] of the Dow Jones Islamic Market 

Indexes [66] are relevant as criteria of reference for the 

Shariah boards of the financial institutions [67]. For example, 

it is prohibited to hold shares in corporations which are in debt 

to the amount of more 33% of their own capital resources, 

which draw more than 5% of their profits from non-operating 

interest revenue or whose receivables amount to more than 

45% of their own capital resources. Besides, there were 

several attempts to establish generally binding standards in 

order to guarantee sufficient legal security such as the Shariah 

standard of the Accounting Organisation for Islamic Financial 

Institutions (AAOIFI) based in Bahrain [68]. 

   Without an adequate supply of Shariah-compliant liquidity 

instruments and active markets in which to trade, it will be 

difficult for Islamic banks to meet the requirements of Basel 

III, since they would have to shorten the maturity of their 

assets and increase the duration of their liabilities and capital, 

in order to meet the liquidity requirements. This may put 

Islamic banks at a disadvantage compared to their 

conventional counterparts and create obstacles to long-term 

growth; therefore, additional measures and initiatives with 

innovative interpretations for Shariah compliance need to be 

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48 

introduced to address liquidity requirements. 

  In many contexts, there are no inter-Islamic banks or 

organised money markets with reference funds in the event of 

a crisis. Furthermore, due to the lack of liquidity for Sukuk 

instruments and active Sukuk markets, the Islamic banks 

present significant risks of liquidity, given that these 

certificates represent a positive alternative to the traditional 

bonds (the issuer must return to the buyer the initial counter-

value and the agreed rate of interest), but are structured in 

such a way that the profits are linked to a concrete asset or to 

an underlying property with a relative right of ownership.  

  While central banks in some countries play an important role 

in providing tradable instruments to meet short-term liquidity 

needs, liquidity quotas are still a major problem, forcing many 

banks to raise more funds. The prohibition of the interest rate 

entails difficulties in the management of the liquidity in the 

absence of a Shariah-compliant inter-banking market and 

because of the impossibility of investing in government 

securities at short expiry and at low risk; a solution is 

represented by the issuance of Sukuk to be understood as 

share certificates of Islamic investment, even if related, by 

affinity, to bonds. Therefore, liquidity management is one of 

the most challenging and relevant objectives, but with a 

particular difficulty if liquidity instruments and infrastructure 

do not evolve. A robust liquidity framework for the Islamic 

financial sector will be needed, not only to meet liquidity 

requirements under Basel III, but also for the development of 

private sources of liquidity and public support services. 

 

V. CONCLUSIONS 

A. Prospects for Islamic finance in the EU and future 
economics law research 

 

        In the European system of conventional banks, the need 

to adapt to the requirements of the Basel standards, 

transparency rules and digital transformation and innovation, 

raise issues that may inhibit the development of Islamic 

finance. In fact, the Euro-system provides for interest-based 

instruments, and, for prudential regulation and supervision, all 

European banks are required to adhere to deposit insurance 

and financial services clearing systems, especially after the 

Banking Union. In contrast, Islamic jurisprudence, which has 

long prevailed in several Islamic countries, has held that the 

investment deposits of Islamic banks, which follow the “profit 

and loss sharing principle”, cannot be covered by deposit 

guarantee schemes. However, recently, this aspect has evolved 

due to the significant role played by the IFSB. Moreover, there 

is a significant further obstacle to the creation of Islamic 

banks, as the corporate governance and management board of 
European banks, which take full responsibility for 

management decisions based on EU and national laws, can 

certainly not be shared with the Shariah board [69]. 

         In general, therefore, there are several legal difficulties 

and complex profiles for the spread of Islamic banks in 

Europe, precisely because of the prevailing legal schemes. The 

establishment of banks would require a specific legal rule, not 

so much because of the European regulation that, in any case, 

is in line with the well-known international standards, but 

because of the issue of banking authorisation which still 

involves the supranational and national regulatory level and 

above all because of the internal national rules that need to be 

integrated.  

  In fact, Article 14.1, Reg. (EU) n. 1024/2013 provides that 

any application for an authorisation to take up the business of 

a credit institution to be established in a participating Member 

State shall be submitted to the national competent authorities 

of this legal system in accordance with the requirements set 

out in relevant national law.  

  Thus, for example, in the case of an Islamic credit institution 

to be established in Italy, the related application must be 

consistent with the objective requirements determined by 

Article 14 of the Italian Banking law (Testo Unico Bancario), 

in line with the approach introduced by Directive 

1977/780/EU now merged into Directive 2013/36/EU [70].  

 The authorisation is an administrative measure, which is 

issued when the conditions laid down in Article 14.1 are met. 

It is issued by the ECB, on the proposal of the Bank of Italy, 

and is denied by the ECB or the Bank of Italy, when the 

verification of the conditions, provided for in paragraph 1, 

does not guarantee sound and prudent management. For the 

establishment of non-conventional banks, it would be 

necessary to introduce specific rules on the admissibility of 

issuing authorisation with additional conditions for carrying 

out the activity, given the profound differences, just as specific 

rules are needed for the offering of Islamic financial products 

by domestic banks. 

The study of the German experience could be a useful 

investigation for new rules and future economic law research, 

in order to identify a solution compatible with Italian (or other 

European) banking laws and tax disciplines, on the assumption 

of a clear desire on the part of the legislator, obviously 

fallowing a political decision.   

  On the other hand, it would be easier to foresee European 

banks offering Islamic financial products or branches, 

although the problem of taxation or other legal compatibility 

questions would arise. This solution should be encouraged and 

studied, in view of the tangible advantages associated with it 

and for the presence of Islamic savers and investors, but with 

adequate controls on the purpose of the investments. However, 

EU and national legislation need a solution for reasons of legal 

certainty.    

   Apart from these central aspects, it is necessary to consider 

the process of profound change, already underway and 

accelerated by external events, affecting the activities of 

banks, the acceleration to new technologies and the related 

and new risks associated with them, issues that require rapid 

innovations in terms of the tasks of regulators and legal 

disciplines. 

 From the European perspective, the pandemic has confirmed 

the importance of a solid system of rules capable of directing 

banks towards virtuous and prudent behaviour and 

strengthening the ability of the system to cope with the crisis. 

Reforms and the establishment of the European single 

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49 

supervisory mechanism go back some ten years to address the 

financial crisis, but the framework made it possible to respond 

to the problems of the health crisis with more adequate capital 

strength and liquidity. Banks during the most acute phase of 

the pandemic supported the economy and regulators and 

supervisors strengthened the resilience of the financial system.  

  Currently, the Basel Committee intends to improve 

prudential rules based on studies to verify their actual 

adequacy and effectiveness; the implementation of the “Final 

Basel III” standards has been postponed to January 2023 due 

to the pandemic and to increase banking capacity to face the 

new challenges. 

These considerations can only be extended to Islamic banks: 

their challenge will be the “Final Basel III” implementation 

for their attractiveness in the international markets, and future 

success will depend on the imminent further adjustment in the 

direction of homogeneous standards. Certainly, this evolution 

will be examined by future legal and economics research. 

  Thus, several regulatory measures were adopted at 

international and EU level, allowing banks to absorb losses 

and lend during a very challenging period. The choices of 

postponing the implementation of the recommendations to 

2023 and not adopting any further reforms (the so-called 

“Basel Hard Stop”), in order to ensure the medium-term 

stability of the prudential regulatory framework, are consistent 

and appropriate, while not undermining the commitment of 

banks to transpose the new rules. The European Commission 

has formulated a proposal for a legislative act from which a 

wide-ranging debate has ensued to ensure the competitiveness 

of European banks, compliance with the Basel 

recommendations and the application of the proportionality of 

the rules, without any substantial weaknesses [71]. 

  This context undoubtedly has international consequences and 

can only affect Islamic banks and their relations with EU 

banks. For future research it will be interesting to examine 

how the forms of risks (credit, market and operational) are 

dealt with in the European Banking Union, according to the 

Basel indications, and how the same risks are assessed by the 

IFSB which, moreover, has adopted the same rules, precisely 

in order to cultivate profitable relations with conventional 

banks.  

  The reform of the Basel III rules has pursued three objectives 

to improve credibility, simplicity and comparability and has 

affected all risks of the so-called first pillar (credit, 

operational, market). In the case of market risk, it has not been 

easy to reconcile credibility, which is linked to the ability of 

quantitative measures to correctly reflect risks, with that of 

simplicity, which entails the rapid and immediate application 

and interpretation of calculation methods. Consequently, the 

search for a compromise has prevailed. 

   The previous reform of the Basel standards took place more 

than a decade ago, in connection with the 2007/2008 crisis, 

involving a comprehensive review of prudential standards and 

confirming the appropriateness of risk-sensitive rules. Indeed, 

from the outset, the Basel II rules had significant limitations 

and an inadequate incentive scheme, and so needed to be 

corrected. The new formulation has improved the credibility 

of risk measures, including through the reporting system, and 

has limited non-responsible behaviour in risk management. 

The pandemic has certainly confirmed the desirability of 

ensuring the existence of adequate capital for banks that can 

help to cope with external difficulties as financial support for 

companies and other private clients. 

  Regarding credit risk, as the EBA pointed out in the “Call for 

advice” of the European Commission, numerous revisions to 

be considered as widespread practices in the EU. Other 

revisions allow the European legislator discretionary choices 

that may contribute to the adoption of a discipline adapted to 

the specific aspects of the European systems. For operational 

risk, Final Basel III significantly amends the current 

framework by providing a single standardised approach for 

calculating the capital charge that replaces the previous 

approaches, of which three were standardised and one was 

based on internal models, which showed complexity, 

inadequacy in identifying the risk profiles of the banks, and 

significant problems of comparability across banks and 

systems.  

  Regarding market risks, the path has been very complex. The 

new standards, which were approved in an initial version in 

2016 and in 2019, change the treatment of risks according to a 

more appropriate approach to identify all the risks related to 

the trading activities of banks. The increased focus on risk has 

resulted from the increased complexity of the rules, as the new 

standard has been defined based on the operations of major 

international banks. 

 The transposition of the rules in Europe entails the application 

of the principle of regulatory proportionality, adequately 

balancing the simplicity and specificity of the measures, the 

provision of strict conditions for the use of internal models, 

but which must not constitute regulatory barriers accessible 

only to the major international banking groups, and simplified 

solutions for those banks that carry out insignificant trading 

activities, even though less sensitive to risk. 

        This complex evolution inevitably affects the adaptation 

of Islamic banking and financial products for access to the 

European market. There are several practical implications that 

cannot be solved by interpretation, but require a specific 

European legal framework on which to base national 

implementing rules, a model that is already applied to 

conventional banks for harmonisation requirements. 

  Therefore, a special regulation is needed for the coexistence 

in the Banking Union of European banks and Islamic banks 

and financial products, at least to obtain banking authorisation 

for legal certainty and uniformity of solutions. In addition, 

national supervisors could assess the admissibility of Shariah-

compliant banking contracts offered by conventional banks 

through the combination of several schemes that allow for 

effects that comply with domestic banking laws. The adoption 

of legal rules will, of course, depend on political choices, both 

at supranational and internal level. 

  Economic studies examine the relevance of Islamic banking 

activities also for some interesting sustainability aspects and 

this is a concrete basis for legal considerations to request 

regulatory interventions at European and national level. 

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50 

Adaptation, not immediate and simple, to international 

standards cannot be considered the only solution because of 

the implications, also theoretical, of the relationship between 

two sectors that are based on some very different principles.  

  Finally, we must mention the various similarities between the 

principles of Islamic finance (e.g., in the case of sukuk) and 

the principles of public-private partnership for infrastructures 

[72], regarding risk sharing, the lender as partner, the 

exclusion of speculative intentions and certainty in the 

definition of contractual performance. The comparison could 

be the topic for interesting studies in the future.  

Moreover, the United Nations published a study in 2016 

highlighting the possible contribution of Islamic finance to 

promoting the sustainable development goals of the 2030 

Agenda to finance infrastructure. However, sustainable 

finance requires rules and techniques to manage risk and 

technology to enable knowledge of standards and accounting 

rules for the maximum transparency in transactions, and 

control of compliance with Islamic law as well as 

compatibility with the conventional system: objectives that are 

very complex to achieve [73]. 
 

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Khan, “How “Islamic” is Islamic Banking?”, cit., 808-810; 

H. Ahmed, “Basel III liquidity requirement ratios and 

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51 

Islamic banking”, Journal of Banking Regulation, 2015, 
253-254.   

[8] S. I. u. D. Asad, “Islamic finance: Concepts, 

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requisites of capital and new patrimonial indexes of the 

banking assets to face the market risks. The entry into 

force, initially provided for the 1st of January 2019, was 

postponed to the 1st of January 2022, to allow the 

adjustments in a longer time with a transitional regime until 

the 1st of January 2027, date of full application. See “Basel 

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standards has been postponed until 1st of January 2023. See 

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inquadramento evolutivo, prime analisi d’impatto, prossimi 

passi”, 22 giugno 2021; A. Louhichi et al., “The regulation-

risk taking nexus under competitive pressure: What about 

the Islamic banking system?”, Research in International 
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measures of banking supervision to address the 

consequences of the pandemic, see K. Lackhoff (ed.), 

Banking Supervision and COVID-19, A Handbook, 

München: Verlag C.H.Beck, 2021.  

[12] According to IFSB Stability report 2021. 
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ff.; M. K. Lewis, “Ethical principles in Islamic business 

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Inter-Bank Analysis of Efficiency Performance, 

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ff.  

[22] K. Ginena, “Sharì’ah risk and corporate governance of 

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criteria, see N. Trad, A. M. Trabelsi, J. F. Goux, “Risk and 

profitability of Islamic banks: A religious deception or an 

alternative solution?”, European Research on Management 

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in International Business and Finance, 2019, 48, 17 ff. See 
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for Islamic Capital Market Products (Sukuk and Islamic 

Collective Investment Schemes), April 2017, at 

www.ifsb.org.  

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52 

[23] The General Secretariat, based in Riyadh, prepares 

reports, studies and accounts for the GCC; it also drafts 

rules and regulations and is responsible for assisting 

Member States in implementing decisions taken by the 

Supreme and Ministerial Councils, at www.gcc-sg.org; M. 

Sturm and N. Siegfried, “Regional Monetary Integration in 

the Member States of the Gulf Cooperation Council”, ECB 

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Integration in the Member States of the Gulf Cooperation 

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monetary union”, at www.bis.org. See Gulf Cooperation 

Council (GCC) and the EU, External Action, at 

www.europa.eu; ECB, “Economic integration in selected 

regions outside the European Union”, Monthly Bulletin, 

October 2004, 67 ff.; Habib M. M. and Stra’sky’ J., “Oil 

Exporters in Search of an External Anchor”, ECB 

Occasional Paper Series, n. 958, November 2008, 7 ff., at 

www.ecb.europa.eu.    

[25] M. Miraglia, “Islamic Banks: Criticality of the System 

and Profiles of Regulation, Perspectives of 

Harmonization”, Rivista trimestrale di diritto 

dell’economia, 2011, 338 ff.  See ECB, Annual Report 
2005,152-153; ECB, Monthly Bulletin, 2008, 14 at 

www.ecb.europa.eu. For example, ECB Seminar, 19th 

January 2012, with GCC States central banks and monetary 

agencies, organised by the ECB and the Central Bank of 

United Arab Emirates (ECB, Report 2012, 154). See ECB, 

Report 2013, 169; Report 2014, 106; Report 2015, 101 and 

Report 2016, 104, at www.ecb.europa.eu.  

[26] S. Antoniazzi, La Banca Centrale Europea tra politica 

monetaria e vigilanza bancaria, Torino: Giappichelli, 2013; 

Id., “L’Unione bancaria europea: i nuovi compiti della BCE 

di vigilanza prudenziale degli enti creditizi e il meccanismo 

unico di risoluzione delle crisi bancarie”, I-II, Rivista 

italiana di diritto pubblico comunitario, 2014, n. 2 and n. 
3-4, 359 ff. and 717 ff.; Id., “The ECB’s Banking 

Supervision and European Administrative Integration: 

Organisation, Procedures and Legal Acts”, Italian Journal 
of Public Law, 2015, 318 ff.; R. Ayadi and W. P. De 

Groen, “Banking and Insurance in the GCC Countries: Is 

there Regulatory Convergence with the EU?”, CES 

Research Papers, n. 4, 2013, 101, at www.cesp.eu.  

[27] In United Kingdom, the Al Rayan Bank, The 

European Islamic Investment Bank, The Bank of London & 

the Middle East, Securities House, The European Finance 

House were established and in France, e.g., the National 

Bank of Kuwait, Tejerat Bank, Qatar National Bank; while 

in Germany: The Irani Bank Sepah, Kuveyt Turk. In 

addition, some conventional banks also offer Islamic 

financial products, e.g., Commerzbank, Deutsche Bank, 

Dresdner Bank (Germany), Crédit Agricole (France), 

HSBC Group, USB Group, Barclays, Lloyds (UK). See W. 

Mansour, M. B. Abdelhamid, O. Masood, G. S. K. Niazi, 

“Islamic banking and customers’ preferences: the case of 

the UK”, Qualitative Research in Financial Markets, 2010, 

n. 3, 185 ff.; D. Ecke, Islamic Banking: Grundlagen und 

Potenzial in Deutschland, Hamburg: Diplomica Verlag 

GmbH, 2012; Grewal K., “Islamic finance in the global 

financial system”, F. Di Mauro et al., Islamic finance in 

Europe, ECB Occasional Paper n. 146, June 2013, 25 ff., at 

www.ecb.europa.eu; M. Ashfaq, Islamic Banking and 

Finance in Europe: the Case of Germany and United 

Kingdom, A Theoretical and an Empirical Analysis, 

Frankfurt: PL Academic Research, 2017. 

[28] See www.kt-bank.de. The KT Bank AG is the first bank 

in Germany and the Eurozone that has introduced 

comprehensive financial products and services according to 

the “ethical, sustainable and transparent Islamic banking 

principles” for the Muslim community and for all other 

customers interested. This bank is a wholly owned 

subsidiary of the Turkish Kuveyt Türk Participation Bank 

established in Istanbul. Kuveyt Türk has been laying 
groundwork in Germany since 2004 by means a German 

branch that explained the Islamic model. In 2010, KT Bank 

AG entered the market and was granted, by the Federal 
Financial Supervisory Authority (BaFin), the authorisation 

for non-EEA deposit broking. Then in March 2015, the 

BaFin granted a full banking license under German law for 

the provision of deposit and credit business in Germany. 

KT Bank is also a member of the 
“Entschädigungseinrichtung deutscher Banken GmbH” 

(EdB), to secure clients’ deposits up to € 100,000. On July 

1st, 2015, it started business branches in Berlin, Frankfurt, 

Mannheim, Cologne and Munich, planning to offer Islamic 

products in other EU countries. The KT Bank AG is a 
subsidiary of the Kuveyt Türk Participation Bank A.Ş, 

established in 1989 in Istanbul, and is leading the Islamic 

banking market in Turkey for more than thirty years. 

Kuveyt Türk’s shareholders include the Kuwait Finance 

House, the most important finance house in the GCC 

Region (62%) and the Turkish General Directorate of 

Foundations (18%). 

[29] G. Gomel (coord.), Islamic Finance and Conventional 

Financial Systems. Tendencies of the market, profiles of 

supervision and implications for the activities of the central 

bank, Bank of Italy, Issues of Economy and Finance 

(Occasional Papers), n. 73, October 2010, at 

www.bancaditalia.it; N. Schoon, Modern Islamic Banking: 
products, processes in practice, Chinchester: Wiley, 2016, 

158 ff. 

[30] “Dubai Islamic Economy Development Centre 

Report” 2020/21 (SGIE), at www.iedcdubai.ae; S&P 

Global report “Islamic Finance 2021-2022: Toward 

sustainable Growth”, at www.spglobal.com.  

[31] IFSB Regulatory and Supervisory Measures to 

Mitigate the Impact of Covid-19: Recommendations 

Relating to the Takāful/Retāful Industry, 6 August 2021; A. 

A. Adewale, “Assessing the Stability of the Islamic 

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53 

Banking Industry Amid the Covid-19 Pandemic”, IFSB 

Working Paper, WP-18/12/2020. For economic studies see 

M. M. Hamed, “The Role of Islamic Social Finance in 

Mitigating Humanitarian Crises”, European Journal of 

Islamic Finance, 2020, n. 16, 1 ff.; Md. Tanvir Alam, 

“Role of Islamic Finance during COVID-19: A Study on 

Practical Implication of Zakat as Short-term Emergency 

Support System”, European Journal of Islamic Finance, 

2020, n. 16, 1 ff.    

[32] “Eurosystem and GCC central banks and monetary 

agencies hold second high-level seminar”, Rome, 29-30 

June 2010; Eurosystem and GCC central banks and 

monetary agencies hold second high-level seminar, Mainz, 

14 March 2008, at www.ecb.europa.eu. See G. Gomel 
(coord.), Finanza islamica e sistemi finanziari 

convenzionali. Tendenze di mercato, profili di supervisione 

e implicazioni per le attività di banca centrale, Banca 

d’Italia, Questioni di Economia e Finanza (Occasional 

Papers), n. 73, ottobre 2010, at www.bancaditalia.it. 
[33] See the draft law at www.camera.it; A. Franco and C. 

Sallustio, “The taxation of sukuk in the Italian context: is 

Italy’s tax system ready for Islamic financial instruments?”, 

European Journal of Islamic Finance, 2017, n. 7, 1-6; F. 

Miglietta and P. P. Rampino, Gli strumenti di finanza 

islamica a sostegno del Sistema Italia, cit., 67 ff. 

[34] IFSB Forum on Covid-19 and its implications on 

Institutions offering Islamic Financial Services, 26 August 

2020; the IFSB’s 2nd Innovation Forum Discussing “Digital 

Transformation of Islamic Finance and other Innovative 

Solutions for Post-Covid 19 Recovery”. For new rules and 

standards see “Exposure Draft, Core Principles for Islamic 

Finance Regulation [Financial Market Infrastructures]”, 10 

September 2021; Core Principles for Islamic Finance 

Regulation (Financial Market Infrastructures), 26 

December 2021; for further documents and draft rules see 

www.ifsb.org. 

[35] The ISFB was established in Malaysia with the 

support of the International Monetary Fund on the 3rd of 

November 2002 (operative from the 10 March 2003), 

including banks of many countries (United Arab Emirates, 

Bahrain, Saudi Arabia, Oman, Qatar and Kuwait, Malaysia, 

etc.); see www.ifsb.org. 

[36] Islamic Financial Services Industry Stability Report 

2021, 101 ff.; see Reports 2015/2020. 

[37] D. A. Asafa et al., “Effectiveness of Macroprudential 

Tools for Islamic Banking”, IFSB Working Paper Series, 

WP-27/08/2021, 23 ff. 
[38] A. A. Adeyinka, “Regulatory and Supervisory Issues 

in Takaful Windows”, IFSB Working Paper Series, WP-

16/12/2020; Report 2021, 6.  
[39] Report 2021, 7-10; 40 ff.; 121; 118 ff. 

[40] About the assessment of the soundness and resilience 

of the Islamic financial system and analytical data, see 

Report 2021, 39 ff. 

[41] Report 2021, 128 ff. 

[42] A. S. Gintzburger, “An Analysis of Global Trends and 

Regional Pockets in the Application of Islamic Financial 

Contracts in Malaysia and the Gulf Cooperation Council”, 

M. K. Hassan and M. Mahlkhecht (eds.), Islamic Capital 

Markets, Chippenham: Wiley, 2011, 316 ff.; A. Chazi, A. 

Khallaf, Z. Zantout Z, “Corporate Governance and Bank 

Performance: Islamic Versus Non-Islamic Banks in GCC 

Countries”, The Journal of Developing Areas, 2018, 52, 2, 

109 ff; N. M. Nomran, R. Haron, R. Hassan, “Shai’ah 

Supervisory Board Characteristics Effects on Islamic 

Bank’s Performance”, The international Journal of Bank 
Marketing, 2018, 36 (2), 290 ff. 

[43] A. Makhlouf, “The Transformation of Islamic Law: 

from Classical Fiqh to Financial Fiqh”, W. Decock and V. 

Sagaert (eds.), Islamic Finance, cit., 125 ff.; M. K. Hassan, 

F. Miglietta, A. Paltrinieri, J. Floreani, “The effects of 

Shariah board composition on Islamic equity indices’ 

performance”, Business Ethics, 2018, 27, n. 3, 248-259; S. 

K. Kok et al., “The trade-off between knowledge 

accumulation and independence: The case of the Shariah 

supervisory board within the Shariah governance and firm 

performance nexus”, Research in International Business 
and Finance, 2022, 59 (C). 

[44] H. Ahmed, M. Asutay, R. Wilson, “Reflecting on 

Islamic Banking and Financial Crisis: Risks, Reputation 

and Stability”, cit., 12 ff. 

[45] Z. Man, The Islamic Banking System: The Experience 

of Malaysia, Islam and Finance, Istituto di Studi Sud 

Asiatici, Turino: Edizioni Fondazione G. Agnelli, 1991, 81 

ff. 

[46] Z. Shafii and S. Salleh, “Enhancing Governance, 

Accountability and Transparency in Islamic Financial 

Institutions: An Examination into Shari’a Internal Control 

Audit”, H. Ahmed, M. Asutay, R. Wilson (eds.), Islamic 

Banking and Financial Crisis, Reputation, Stability and 

Risks, cit., 149 ff. 

[47] H. Ahmed, M. Asutay, R. Wilson, “Reflecting on 

Islamic Banking and Financial Crisis: Risks, Reputation 

and Stability”, cit., 13.  

[48] A. R. Alotaibi and A. V. Mishra, “Time varying 

international financial integration for GCC stock markets”, 

The Quarterly Review of Economics and Finance, 2017, 

63, 66 ff; M. Darayseh and A. Chazi, “Bank Specifics, 

Economics Enviroment and Agency Theory: Determinats 

of Banking Performance in GCC”, The Journal of 
Developing Areas, 2018, 52 (4), 199 ff.; A. Y. H. Saif-

Alyousfi and A. Saha, “Determinants of banks’risk-taking 

behaviour, stability and profitability: evidence from GCC 

countries”, International Journal of Islamic and Middle 

Eastern Finance and Managament, 2021, 14 (5), 874-907.    
[49] A. S. Gintzburger, “An Analysis of Global Trends and 

Regional Pockets in the Application of Islamic Financial 

Contracts in Malaysia and in the Gulf Cooperation 

Council”, M. K. Hassan and M. Mahlknecht (eds.), Islamic 

Capital Markets, Chippenham: Wiley, 2011, 316 ff. 

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54 

[50] T. Azrak et al., “Does information disclosure reduce 

stock price volatility? A comparison of Islamic and 

conventional banks in Gulf countries”, International 
Journal of emerging Markets, 2021, 16 (8), 1769-1792. 

[51] IFSB, Islamic Financial Services Industry, Stability 

Report 2017, 43 ff.; Strategic Performance Plan 2016-2018; 

IFSB-19 Guiding Principles on Disclosure Requirements 

for Islamic Capital Market Products, 2-4.  

[52] See IFSB, TN-2, Technical Note on Stress Testing for 

Institutions Offering Islamic Financial Services (IIFS), 

December 2016; IFSB, Exposure Draft Technical Note on 

Stress Testing for Institutions Offering Islamic Financial 

Services (IIFS) [TN-2]. 

[53] See IFSB-19 Guiding Principles on Disclosure 

Requirements for Islamic Capital Market Products, 6 ff. 

and 14 ff. 

[54] For example, the Dubai Financial Services Authority, 

an independent regulator within the Dubai International 

Financial Center, adopted in 2007 a Hedge Fund Code of 

Practice as a general regulation of hedge funds. 

[55] IFSB, Islamic Financial Services Industry, Stability 

Report 2017, cit., 35 ff.; A. Msatfa, “Basel III in the 

Islamic Finance Industry”, Journal of Investing, 2012, 165 

ss.; O. M. Al-Hares, N. M. AbuGhazaleh, A. M. El-Galfy, 

“Financial Performance and Compliance with Basel III 

Capital Standards: Conventional vs. Islamic Banks”, The 

Journal of Applied Business Research, 2013, 4, 1031 ss.; H. 
Visser, “Islamic Finance in Non-Muslim-Majority 

Jurisdictions: Regulatory Issues”, Islamic Finance, 2019, 
83 ff.   

[56] Guiding Principles on Shari’ah Governance Systems 

for Institutions Offering Islamic Financial Services (IFSB-
10); IFSB has organised its online executive Program, 

“Managing Digital Transformation Risks for Islamic 

Financial Institutions (IFIs), 30 September 2021; A. A. 

Adewale and R. Ismal, “Digital Transformation in Islamic 

Banking”, IFSB Working Paper Series, WP-19/12/2020. 

[57] A. Boumediene, “Is credit risk really higher in Islamic 

banks?”, The Journal of Credit Risk, 7 (3), 2011, 97 ff.; T. 

Chamberlain, S. Hidayat, A. Khokhar, “Credit Risk in 

Islamic and Conventional Banking”, International 

Advances in Economic Research, 2018, 24 (1), 99 ff.  

[58] Z. Shafii and S. Salleh, “Enhancing governance, 

accountability and transparency in Islamic financial 

institutions: An examination into the audit of Sharia’a 

internal control system”, Malaysian Accounting Review, 

2010, 9 (2), 23 ff.; S. Z. Farook and M. O. Farroq, 

“Incentive-based regulation for Islamic banks”, Journal of 
Islamic Accounting and Business Research, 2011, 2 (1), 8 

ff.; E. Oz, Z. R. Khokher, M. M. Ali, R. Rosman, “Sharì’ah 

Non-Compliance Risk in the Banking Sector: Impact on 

Capital Adequacy Framework of Islamic Banks”, IFSB 

Working Paper Series, 5 March 2016, 1 ff. About risk 

regulation see N. Alam, “Impact of banking regulation on 

risk and efficiency in Islamic banking”, Journal of 

Financial Reporting and Accounting, 2013, 1, 29 ff.; P. 
Abedifar, P. Molyneux, A. Tarazi, “Risk in Islamic 

Banking”, Review of Finance, 2013, 2035 ff.; A. I. 
Maghyereh and B. Awartani, “The effect of market 

structure, regulation, and risk on banks efficiency”, Journal 

of Economic Studies, 2014, n. 3, 405 ss.; A. R. Alotaibi and 
A. V. Mishra, “Global and regional volatility spillovers to 

GCC stock markets”, Economic Modelling, 2015, 45, 38 

ff.; A. Ali, “Analysis of the Determinants of Capital 

Adequacy Ratio: The case of Full-Fledged Islamic Banks in 

the Gulf Cooperation Council (GCC)”, European Journal 
of Islamic Finance, 2019, 14, 1 ff.; A. A. Adewale and 

Others, “Risk-Based Supervision in Islamic Banking”, 

IFSB Working Paper Series, WP-15/12/2020. 

[59] IFSB-19 Guiding Principles on Disclosure 

Requirements for Islamic Capital Market Products, 13 ff. e 

24 ff.; S. F. Najeeb and M. M. Mustafa, “Strengthening the 

Financial Safety Net: The Role and Mechanisms of 

Sharì’ah-Compliant Deposit Insurance Schemes (SCDIS)”, 
IFSB Working Paper Series, 6 March 2016, 1 ff.; IFSB, 

TN-3 Technical Note on Financial Inclusion and Islamic 

Finance, December 2019. 

[60] S. Archer, R. A. A. Karim, V. Sundararajan, 

“Supervisory, regulatory, and capital adequacy implications 

of profit-sharing investment accounts in Islamic finance”, 

Journal of Islamic Accounting and Business Research, 

2010, n. 1, 10 ff.  

[61] M. Casoria, “La regolamentazione concorrenziale nei 

paesi arabi del Golfo. Cronache di un enforcement 

abbozzato”, Mercato, concorrenza, regole, 2018, 401 ff. 

[62] The Central Bank of Bahrain adopted CBB Rulebook, 

http://cbb.complinet.com/cbb/microsite/cbb_rulebook.htm,

and the Central Bank of Oman adopted the Islamic Banking 

Regulatory Framework in 2012, at http://www.cbo-

oman.org/news/IBRF.pdf. 

[63] Dubai Financial Services Authority. About Islamic 

banking in UK: A. K. Aldohni, “Soft law, self-regulation 

and cultural sensitivity: The case of regulating Islamic 

banking in the UK”, Journal of Banking Regulation, 2014, 

n. 2, 164 ff.; E. S. Housby, Islamic financial services in the 

United Kingdom, Edinburgh: Edinburgh University Press, 

2011. 

[64] H. Ahmed, “Basel III liquidity requirement ratios and 

Islamic banking”, cit., 253 ff.  

[65] Basel Committee on Banking Supervision, Assessment 

of Basel III - risk-based capital regulations - Saudi Arabia, 

September 2015; “Regulatory Consistency Assessment 

Program (RCAP)”, Assessment of Basel III Liquidity 

Coverage Ratio regulations - Saudi Arabia, September 

2015, at www.bis.org. In May 2016, the Capital Market 
Authority announced changes to incentivise further foreign 

investment (in GCC Quarterly Review, Q2, 2016). Since 

January 2017, listed companies are required to use the 

standards prepared by the International Financial Reporting 

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55 

Standards for the financial reporting framework (in GCC 
Quarterly Review, Q4, 2016, at www.linklaters.com). 

[66] See Dow Jones Islamic Market Indices Methodology, 

December 2017, at https://us.spindices.com. In 1999, in 

Bahrain, the Dow Jones Islamic Market Indexes provided 

for the first shariah indices and offers a timely list of almost 

70 shariah-compliant measures covering equities and fixed 

income securities around the World. See S&P Dow Jones 

Islamic Market World Index, 31 August 2021; M. Campra, 
S. Pucci, V. Brescia, “Can the Dow Jones Sustainable 

Index be useful for evaluating Dow Jones Islamic Market 

companies? European Journal of Islamic Finance, 2020, 

First Special Issue, 1 ff. The index measures the 

performance of stocks traded globally that pass rules-based 

screens for adherance to Shari’ah investment guidelines. 

About “shariah risk” see H. Visser, “Islamic Finance in 

Non-Muslim-Majority Jurisdictions: Regulatory Issues”, 

cit., 88 ff. About the role of the Auditing Organisation for 

Islamic Financial Institution, see T. V. Russo, “I contratti 

Shari’a compliant, Valori religiosi e meritevolezza degli 

interessi”, cit., 49 ff.   

[67] M. Ashraf M. and A. Lahsasna, “Proposal for a new 

Sharì ah risk rating approach for Islamic banks”, 

International Journal of Islamic Finance, 2017, 1, 87 ff.; 
A. Musleh Alsartawi, “Performance of Islamic banks: Do 

the frequency of Shari’ah supervisory board meetings and 

independence matter?”, ISRA International Journal of 
Islamic Finance, 2019, vol. 11, No. 2, 303-321.  
[68] The Central Bank of Bahrain has issued capital 

adequacy regulations (Circular n. 52/2017, which came into 

force on 1° February 2017 and fully implemented in 2019) 

in line with Basel III, see GCC Quarterly Review, Q1, 
2017, at www.linklaters.com. About the role of central 

banks, see A. A. Hossain, Central Banking and Monetary 

Policy in Muslim-Majority Countries, Cheltenham: E. 

Elgar, 2015.  

[69] E. Aracil, “Corporate social responsibility of Islamic 

and conventional banks: The influence of institutions in 

emerging countries”, International Journal of Emerging 

Markets, 2019, 14 (4), 2019, 582-600; I. A. Oladapo et al., 
“Perception of stakeholders on governance dimensions of 

the Islamic banking sector”, International Journal of 

Emerging Markets, 2019, 14(4), 601-619; S. El-Halaby et 
al., “The non-economic consequences of disclosure in 

Islamic banks”, International Journal of Emerging 
Markets, 2018, 13(6), 1948-1968. About jurisprudence see 

S. Coopchik, “Judicial Decision-Making in Islamic 

Banking and Finance”, European Journal of Islamic 
Finance, 2015, 2, 1 ff. 

[70] See the Italian banking law “Testo Unico Bancario 

(T.U.B.)”, especially artt. 10 et seq.; T. V. Russo, I contratti 

Shari’a compliant, cit., 140 ff. About collection of savings, 

the principle of the obligation to repay under art. 11 T.U.B. 

is contrary to the typically Islamic current accounts which 

exclude it, but combinations of contracts would be possible, 

obviously according to mechanisms which would have to 

be accepted by the supervisory authorities, see F. Miglietta 

and P. P. Rampino, Gli strumenti di finanza islamica a 

sostegno del Sistema Italia, cit., 69-71. On banking 

activities see G. Gimigliano, “Art. 10”, in S. Bonfatti (a 

cura di), Commentario al Testo Unico Bancario, Pisa: 

Pacini, 2021, 41 ff., and banking authorisation see A. 

Benocci, “Art. 14”, ivi, 74 ff.; C. Brescia Morra, Il diritto 

delle banche, Le regole dell’attività, Bologna: il Mulino, 

2020.  

[71] European Commission, “Banking Package 2021: new 

EU rules to strengthen banks’ resilience and better prepare 

for the future”, 27 October 2021, for the implementation of 

Basel III (also known as Basel IV) agreement that will 

involve the amendment of Directive 2013/36/EU, Reg. 

(EU) n. 575/2013 and separate proposals about the Capital 

Requirements Regulation (CRR) and Capital Requirements 

Directive (CRD IV), at ec.europa.eu. On amendments 

(Commission Delegated Regulation (EU), 20 October 

2021, n. 439/2022) to the CRR see “European Banking 

Institute Report on Economic Policy and Financial 

Regulation Measures: International, EU and Euro Area 

Levels”, 19 March 2022, at www.ebi-europa.eu. 

[72] U. F. Moghul, A socially responsible Islamic finance: 

Character and the common good, London: Palgrave 

Macmillan, 2017; F. Miglietta and P. P. Rampino, Gli 

strumenti di finanza islamica a sostegno del sistema Italia, 

cit., 79 ff.; Forum Finanza Sostenibile (2019), “L’Unione 

europea e la finanza sostenibile, Impatti e prospettive per il 

mercato italiano”, at www.finanzasostenbile.it.  

[73] S. Khavarinezhad and P. P. Biancone, “Future Trends 

and Finance Approaches in Islamic Banking”, European 
Journal of Islamic Finance, 2019, 12, 1 ff.; S. 

Khavarinezhad, P. P.  Biancone, V. Jafari-Sadeghi, 

“Financing in the Islamic System and Sustainable 

Economic Development of Selected Islamic Countries”, 

European Journal of Islamic Finance, 2021, 19, 18-23; V. 
Brescia, A. Adam Sa’ad, R. Bt Hassan, S. Musa Bin Syed 

Jaafar Alhabshi, F. Lanzalonga, “Exploring sustainability 

from the Islamic finance perspective”, European Journal of 
Islamic Finance, 2021, 19, 45 ff.; F. Lanzara, “Islamic 

finance and Sustainable Development Goals. A 

bibliometric analysis from 2000 to 2021”, European 
Journal of Islamic Finance, 2021, 18, 1 ff. 
 

 

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