Système bancaire islamique Ouest : le cas de la Grande-Bretagne

Problems and Challenges Facing

the Islamic Banking System in the

West: The Case of the UK

Yusuf Karbhari
Kamal Naser
Zerrin Shahin

Executive Summary

This study investigates the main problems, challenges, and opportunities facing Islamic

banking in the United Kingdom. The study reports the results of interviews that were

undertaken with senior officials of several key financial institutions who have had

many years of experience in dealing with Islamic banking. Our interviews revealed

that, although by strict definition Islamic banks do not currently exist in the UK,

London is one of the major centers for Islamic banking and finance. It is apparent that

the experience of previously established Islamic institutions, such as Al-Baraka, has

made other institutions realize that it is possible to provide Islamic banking services in

the UK under nonbanking regulations. The interviews also revealed that the main

problem that Islamic banking faces in the UK is heterogeneous clients and potential

clients. Moreover, regulatory hurdles, competition from conventional banks, and lack

of adequately qualified and trained personnel exacerbate the situation. The study concludes

by identifying opportunities such as e-banking that may have a significant

impact on the future of Islamic banking in the UK. © 2004 Wiley Periodicals, Inc.

INTRODUCTION

nlike conventional commercial banks, Islamic banks undertake their operations

without paying or receiving interest. The idea of Islamic banking was first developed

in the 1950s and resulted in the creation of the first generation of Islamic

investment banks in Malaysia and Egypt in the early 1960s. In 1974, Dubai Islamic

Bank was established as the first private interest-free bank. Since then, the idea of

Thunderbird International Business Review, Vol. 46(5) 521–543 • September–October 2004

© 2004 Wiley Periodicals, Inc. • Published online in Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.20023

Yusuf Karbhari is a reader in accounting and director of the Asian Accounting, Finance and

Business Research Unit at Cardiff Business School. He also serves as deputy director of the Cardiff

Business School's prestigious PhD program and researches international accounting and auditing.

E-mail: karbhari@cardiff.ac.uk. Kamal Naser is a senior lecturer in accounting and finance and

coordinator of the Middle East Banking and Accounting Research Unit at Cardiff Business School.

He has also been a visiting lecturer/professor of accounting and finance at Birmingham University,

the University of Qatar, and the American University of Beirut. E-mail: naser@cardiff.ac.uk. Zerrin

Shahin is currently a school teacher at the prestigious King Fahd University of Petroleum and

Minerals, Dhahran, Saudi Arabia.

Islamic banking has become widespread. According to Kahf (1999),

the number of Islamic banks around the globe now exceeds 100.

Moreover, current changes in the world economy, the revolution in

information technology, and globalization, resulting in dramatic

changes in world trade, placed pressure on businesses in general and

banks in particular and forced them to alter their strategies to

respond to these developments. More recently, the World Trade

Organization (WTO) encouraged countries that signed the agreement

to open up their economies to all investors. The WTO agreement

has widespread implications for the banking industry.

Consequently, under the WTO agreement, Islamic banks will find

themselves in direct competition with the internationally well-established

conventional banks, especially since many conventional banks

have realized that Islamic banking provides opportunities to tap into

new markets. Hence, it is not surprising to see a number of conventional

banks such as Barclays, Citibank, HSBC, and ANZ offering

Islamic services.

This study, however, is based on the UK experience, since London is

one of the main centers of Islamic banking. Although the United

Kingdom has around 2 million Muslims living permanently on its soil,

it is a place where wealthy Middle Eastern individuals prefer to invest

their money. In addition, British cities have, over time, hosted thousands

of Arab as well as Muslim students. Hence, one expects to see an Islamic

bank that responds to the demand of these Arabs and Muslims residing

in the United Kingdom. During the 1980s and up to the early 1990s,

Al-Baraka Bank was the only bank adopting Islamic Shariah principles

and was regulated under the Financial Services legislation. Due to a

number of challenges, however, in 1993 the bank gave up its

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