The expansion of Islamic finance into new jurisdictions, particularly Western markets, often encounters a complex regulatory landscape.
Regulators, primarily tasked with ensuring “consumer protection at every cost”, may lack familiarity with the nuanced structures and principles of Shariah compliant financial products.
Insights gained with the Hejaz Group have shown me there’s a pragmatic and progressive blueprint for successful engagement with these authorities, with education and collaboration being the key – not confrontation.
Our success in navigating regulatory environments stems from a fundamental understanding: the regulator’s primary concern is safeguarding public trust and maintaining financial stability. They are unlikely to “compromise on that for a person’s religious beliefs or their ethical position”.
Therefore, Hejaz designs its products and services to be fully compliant with the laws of the operating jurisdiction first and foremost, while simultaneously adhering to Shariah principles. This dual commitment ensures that Islamic finance is not seen as an exception to, but rather an integral part of, the existing legal and regulatory framework.
A prime example of this collaborative approach is our experience launching the Sukuk ETF in Australia. The Australian Stock Exchange had no prior framework or definition for Sukuk, a widely recognized Islamic bond in other parts of the world. Instead of demanding regulatory overhaul, we engaged in a process of education, explaining the definition, regulatory implications and international approaches to Sukuk.
This “balanced, pragmatic, progressive approach” is crucial when introducing novel financial instruments. Understand that a regulator will not change an entire regulatory framework for a small segment of the population if the industry is unwilling to adapt. The burden lies on Islamic finance providers to demonstrate how their offerings fit within, and can even enrich, the existing financial ecosystem.
The process often involves more questions and a deeper dive into the Shariah screening processes, adherence to frameworks like AAOIFI and the operational remit of Shariah supervisory boards. For instance, demonstrating how a Murabahah transaction for home finance adheres to consumer protection laws regarding disclosure, risk and default, while also ensuring the absence of Riba, requires meticulous explanation. Similarly, explaining how Sukuk, which represent ownership in tangible assets or usufructs rather than conventional debt, fit into existing securities regulations demands clarity and transparency.
Hejaz’s work in educating regulators has paid dividends in trust and reciprocation – evidenced by the Central Bank of Ireland’s approval of our five Shariah compliant ETFs, including Sukuk and REITs.
Our track record in highly regulated jurisdictions like Australia and Ireland has given us a significant advantage in new markets in the UK and broader Europe. Regulators become a lot more amenable to a known entity, reducing the initial trepidation associated with first-time entrants.
This demonstrates that while the initial hurdles for Islamic finance can be substantial in new markets, building trust through consistent compliance, transparency and education paves the way for broader acceptance and integration.
The collaboration ensures that consumer safeguards inherent in regulatory frameworks are upheld, while the unique ethical and social benefits of Islamic finance are simultaneously introduced. This collaborative spirit, rooted in mutual understanding and a commitment to shared goals of financial stability and consumer welfare, is the cornerstone of successful Islamic finance expansion globally.
Muzzammil Dhedhy is co-founder and executive director of Hejaz Group, Australia
