Legislative and regulatory frameworki Legislative and regulatory regime
In 2008, the Dutch central bank (DCB) and the Dutch financial services regulatory authority (AFM) conducted a study on Islamic finance in the Netherlands. One of their conclusions was that the existing regulatory framework in the Netherlands can be applied to Islamic finance, but with respect to certain financial supervision-related matters (e.g., market entry, conduct-of-business, capital adequacy and provision of information) the Dutch regulatory framework may require amendments to specifically address Islamic finance products. However, no such legal amendments were introduced. Consequently, there is no legislative and regulatory regime that focuses exclusively on Islamic finance, but instead the existing legislative and regulatory regime for conventional finance also applies to Islamic finance.
The regulatory regime for banks and other financial undertakings (including Islamic banks and other Islamic financial undertakings) is based on both European regulations and Dutch national (financial supervision) laws. These laws are primarily codified in the Dutch Financial Markets Supervision Act (FMSA), which came into force on 1 January 2007. Banks (both conventional and Islamic) established in the Netherlands are required to obtain a banking licence from the European Central Bank (ECB), while the DCB processes licence applications. Further, if (Islamic) banks intend to provide investment services or perform investment activities in the Netherlands, they have to apply for a wider banking and investment firm licence. In general, Dutch branches of foreign (Islamic) banks with activities in the Netherlands are subject to the same licence requirements as banks with registered offices in the Netherlands. However, if the foreign (Islamic) banks have their registered offices in another eurozone country, they may conduct banking activities through their Dutch branches or on a cross-border basis in the Netherlands using their 'European passport': they may conduct banking activities under their ECB banking licence, provided that the ECB has been notified of this. A comparable regulatory regime applies to insurance companies (whether conventional or the Islamic takaful), which also have to obtain a licence in the Netherlands.
The FMSA establishes the rules for the offering of securities in the Netherlands, prospectus approval, public bids and the operation of regulated markets. These rules apply to both the issuance of conventional bonds and shares and the issuance of sukuk. The FMSA also contains extensive rules on the relationship between (Islamic) banks and their customers; (Islamic) banks must comply with certain conduct-of-business rules if they offer loans to customers. In addition, the Dutch Civil Code (DCC) and the Act on Consumer Credit govern the civil law relationship between (Islamic) banks and their customers: according to these laws, (Islamic) banks have to provide detailed information to their customers, there are specific requirements for the contents of loan contracts and customers have additional consumer protection rights to rescind loan contracts under certain circumstances. The relatively new Chapter 2b of Book 7 DCC provides rules on creditworthiness assessments, obligations to provide information to consumers and customers having certain consumer protection rights in cases of early repayments, arrears and foreclosures. Following further recent amendments, Chapters 2a, 2b and 2c of Book 7 DCC provide rules on consumer credit, asset financing and loans, for leasing contracts such as the ijarah and the ijarah wa iqtina, and for a purchase and sale of property in instalments such as the murabahah (as discussed further below); these provisions are now only mandatory if the borrower or lessee is a consumer, but they are not mandatory for professional parties.
While the conclusion of the DCB/AFM study in 2008 was that legal amendments to the FMSA would have been preferred to further facilitate the supervision of Islamic finance products in the Netherlands, no such amendments are required for the structuring of Islamic finance products under Dutch commercial (civil, contract and property) and corporate laws. Dutch commercial and corporate laws are compatible with the structuring of Islamic finance transactions. Partnership contracts such as the musharakah and mudarabah can be structured through a limited partnership contract or a general partnership contract, but also by incorporating stock companies, such as a public limited liability company or a private company with limited liability (BV). The contract of murabahah qualifies as a purchase and sale of property in instalments pursuant to Article 7:84(3) DCC. Also, leasing contracts such as the ijarah can be structured under Dutch law. The ijarah qualifies as a rental agreement under Article 7:201 DCC. Depending on how the ijarah wa iqtina is structured in practice, it may qualify as a rental agreement or as a hire purchase agreement under Articles 7:101 and 7:84(3) DCC. As mentioned above, no mandatory rules under Book 7 DCC that may conflict with Islamic law apply to the murabahah, ijarah and ijarah wa iqtina if these contracts are concluded between professional parties, as will be the case in most Islamic finance transactions (e.g., corporate lending, real estate transactions and debt capital market transactions such as sukuk issuances). If, however, an Islamic bank contemplates offering these Islamic finance products to consumers, certain mandatory rules in Book 7 DCC (e.g., rules on rebate in cases of early repayment) have to be assessed carefully to ensure shariah compliance while structuring these products under Dutch law.
One of the main challenges for sukuk under Dutch law is the lack of trust laws in the Netherlands. In practice, often English law trusts are used in sukuk structures to accommodate the Islamic law requirement that sukuk holders must hold some form of ownership in the underlying asset of the sukuk structure. For example, in the case of a sukuk al-ijarah, whereby a tangible asset is sold and leased back by the originator to a special purpose vehicle (SPV) that issues sukuk, the SPV holds the underlying asset (which is leased back to the originator) in trust for the sukuk holders. As a result, the SPV holds the legal ownership of the underlying asset, while the sukuk holders hold its beneficial ownership. This is market practice in most sukuk structures and the main rationale for the use of English law trusts is, as stated, to meet the Islamic law requirement that sukuk holders must hold some form of ownership. However, the concept of a trust is not accepted under Dutch law. As a matter of fact, Article 3:84(3) DCC contains a 'fiducia prohibition', which prohibits the use of fiduciary security and holding fiduciary title to an asset.
In practice, this may be solved by creating an English law trust that will be recognised in the Netherlands on the basis of the Hague Trust Convention on the Law Applicable to Trusts and their Recognition (the Hague Trust Convention). The Netherlands is a party to the Hague Trust Convention. Consequently, it is obliged to recognise certain elements of a trust created under English law. However, if the significant elements of the trust are more closely connected to the Netherlands, then, under Article 13 of the Hague Trust Convention, the Netherlands is not bound to recognise an English law trust. In cases of this kind, there are alternative ways under Dutch law to deal with the Islamic requirement that sukuk holders must hold some form of ownership of the underlying asset. This may require further explanation to a shariah supervisory board who may be dealing with a sukuk issuance in the Netherlands for the first time (which will be the case, given that so far there have been no sukuk issuances in the Netherlands). If one looks very closely at the Islamic requirements for sukuk, one will notice that the Islamic shariah requires sukuk holders to hold some form of ownership in the underlying asset so that the sukuk holders trade in that asset instead of trading in debt claims while trading their sukuk in secondary markets (which would, otherwise, lead to a violation of the Islamic shariah prohibition on the bay al-dayn). However, under Islamic shariah, the use of trusts or the division of the right of ownership (milkiyyah) into legal and beneficial ownership is not prescribed as a prerequisite for sukuk structures. As stated, the use of English law trusts emerged – and has been accepted – in Islamic finance practice.
In the Netherlands, the Islamic shariah requirement of ownership of sukuk holders can be met – in the case of unsecured sukuk (which are predominantly issued globally) – by transferring the economic ownership of the underlying asset to the sukuk holders. As a result, the sukuk holders do not acquire any in rem rights in the underlying asset, but will contractually be entitled to the economic benefits of the underlying asset. In the case of secured sukuk, the aforesaid may be accompanied by the creation of a collective security arrangement that provides the sukuk holders with security over the underlying asset.ii Regulatory and supervisory authorities
There is no regulatory or supervisory authority that deals exclusively with Islamic finance in the Netherlands. The regulatory and supervisory authorities dealing with conventional products also cover Islamic finance products. The supervision model in the Netherlands focuses on (1) system and prudential supervision, and (2) conduct-of-business supervision. The ECB and DCB are responsible for system and prudential supervision, while the AFM is responsible for conduct-of-business supervision.
System supervision mainly boils down to ensuring the stability of the financial system as a whole. As regards prudential supervision, this covers the granting of licences and being responsible for prudential and integrity supervision of banks, insurers, investment firms, clearing institutions, payment services providers and trust companies. Under the Single Supervisory Mechanism, the ECB is the central prudential supervisor of financial institutions in the eurozone. The ECB is responsible for the prudential supervision of the most significant banks in the Netherlands, while the DCB is responsible for less significant banks.
The AFM is responsible for conduct-of-business supervision. It supervises the operation of the financial markets and strives for efficiency therein. It covers the entire financial market sector (both retail and wholesale). Further, it is responsible for prospectus supervision, listing matters and the trading infrastructure. For example, the AFM would have to approve a prospectus for the issuance of sukuk in the Netherlands.