Islamic Finance

3.1

Prudential, Regulatory and

Supervisory Criteria

Tim Plews and Antony Hainsworth, Clifford Chance

Introduction

Islamic financial institutions can, for the most part, be divided into two

types:

1. Those institutions whose entire businesses are conducted in compliance
   with the Shari’a (often referred to as “fully”Islamic financial institutions
   (IFIs); and


2. Those institutions that offer Shari’a-compliant products and/or services,
   but whose businesses as a whole are not conducted in compliance with
   the Shari’a (often referred to as “conventional” financialinstitutions).

In this context, the need for appropriate divisions between conventional

financial activities that the Shari’a would regard as impermissible (eg.

interest-bearing loans) and Shari’a-compliant products and services has led

to the development of the concept of “Islamic windows”. Islamic windows are

appropriately segregated divisions of a conventional financial institution

specializing in Shari’a-compliant products and services.

Licensing models

Financial services regulators can be categorized into three broad types with

regards to the approach that they take in the regulation of Islamic financial

businesses:

1. One-tier system of regulation of Islamic financial business−A
   number of financial services regulators recognize Islamic financial
   activity as a specific category of regulated business and (either under
   formal regulatory rules or as a matter of practice) require any institution
   wishing to carry on such activities to obtain a dedicatedfinancialservices
   licence, and operate as a fully Islamic finance institutions (IFIs) offering