Basel II - Legal risk and issues of Shari

[English]In most jurisdictions, Islamic banking is to a large extent been governed by the regulatory framework which has been designed for conventional banks. An important element in developing a regulatory framework for Islamic banking involves bridging the twin requirements of Shari’ah compliance and international standards. However, Islamic banking is outside the considerations that inform international standards. This raises questions about the relevance of Basel II on Islamic banking, in view of the unique peculiarities of Islamic financial contracts and instruments.
An important feature of Basle II is the capital allocation of 12 per cent for operational risk, which includes legal risk. Legal risk relates to potential loss arising from an unexpected application of law or regulation or because a governing contract cannot be enforced. The implication of the inclusion of legal risk in Basel II is that every bank must now ensure that the systems and controls for the management of operational risk should adequately cover its legal risk. The nature of legal risks involved in financial institutions’ business varies as determined by the particular circumstance of each institution. The Shari‘ah being the foundation of an Islamic financial institution, it delineates its model or business practice and underlines the nature of its legal risk exposure.
Recent English courts’ decisions underline the need for financial institutions to identify and mitigate legal risks involved in Islamic financing. While the fact that Islamic banking is based on religious principles is not a supervisory matter of concern to regulators in Europe and the United States, it is capable of threatening the consumer protection objective of banking regulation. It is therefore imperative to assess the established system of Shari’ah compliance against the requirements of Basel II as it relates to managing legal risk.

Author: Mansur Noibi



Sommario

Introduction
Basle II – Overview
Legal Risk
Shari’ah Compliance
Application in the UK
Conclusion