Islamic Finance in Saudi Arabia: Developing the Regulatory Framework
Abalkhil, Waleed Abdulaziz Abdullah
Date: 26 April 2018
University of Exeter
PhD in Law
Saudi Arabia and Islam have had a very close relationship since the establishment of Saudi Arabia. Thus, Saudi Arabia chose Islam to govern all its laws. Since 1952, with the discovery of oil, the country has witnessed a huge development including the establishment of the Saudi Arabian Monetary Authority (SAMA) as a Central Bank. SAMA ...
Saudi Arabia and Islam have had a very close relationship since the establishment of Saudi Arabia. Thus, Saudi Arabia chose Islam to govern all its laws. Since 1952, with the discovery of oil, the country has witnessed a huge development including the establishment of the Saudi Arabian Monetary Authority (SAMA) as a Central Bank. SAMA was expected to only allow financial activities that did not conflict with the teachings of Islamic law, as stated in its Charter. However, since its existence, SAMA has supervised and licensed conventional banks that charge Riba (interest or usury) and all the regulations made by SAMA have been designed to deal with conventional banks. Consequently, there is a difference between the law, Islamic law, and the practice. Over the years a dramatic improvement in Islamic finance has been realised. Many countries and international organisations that specialised in Islamic finance have set especial regulations that suit such finance. Nonetheless, Saudi Arabia as a regulatory body preferred not to join this trend and continued adopting and practising the same regulations that were made for conventional finance. This thesis seeks to develop the regulatory framework towards Islamic finance by sheding light on the legal challenges and difficulties that may encounter Islamic finance in Saudi Arabia, which may prevent the Kingdom of Saudi Arabia from being the leading country for developing Islamic finance. To help in identifying these challenges, an Islamic financial product Sukuk (Islamic bonds) is chosen to be a case study to show some of the challenges in practice. The thesis firstly discusses Islamic principles toward finance, then the legal environment of Saudi Arabia and how Islamic finance is practised in the Kingdom. It then introduces the new development in the legal environment in response to the Saudi Vision 2030 which can be a tool to help solving the obsricales that Saudi Arabia is encountering. Then the thesis discusses some challenges related to sharia boards in financial institutions, such as not having sharia governance as part of the corporate governance of financial institutions that market their products as being compliant with sharia law; in addition, the absence of a Central Sharia Board that should help in ensuring the conformity of financial products to sharia law. The thesis proposes that the regulators should develop and adopt especial regulations framework that could help the development of Islamic finance. The thesis defines Sukuk and shows how it differs from other financial instruments in conventional finance. Then, it identifies some of the challenges that face Sukuk and its development in the country. Moreover, it looks at a very recent development in the Saudi legal system, which is in response to the Saudi Vision 2030 and the recent interest that was shown by decision-makers, such as the Chairman of the CMA, the Minister of Commerce and Industry, the Deputy Minister for Internal Trade, and also both the Governor and Vice-Governor of the SAMA, in response to the Vision 2030 which could contribute to the development of Islamic finance. As far as the researcher is aware, hardly any studies have addressed this issue with respect to the new development that Saudi Arabia is currently witnessing in response to the Saudi Vision 2030 and the recent developments taking place in neighbouring countries which broadly share similar cultural and religious values. Finally, the thesis proposes some recommendations to develop Islamic finance including some guidelines for establishing a Central Sharia Board, and also, a sharia supervisory governance for Islamic financial institutions which should have a positive effect on Islamic finance in the country.
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