Legislative and regulatory frameworki Legislative and regulatory regime
Unlike the United Kingdom, where there is a plethora of Islamic financing services, there are no US laws specifically addressing Islamic banking in the US. Moreover, the US market for Islamic financial products is much smaller than that of the United Kingdom, where there are US$19 billion worth of assets owned by Islamic financial institutions, and more than 20 banks, six of which exclusively provide shariah-compliant products. The number of Islamic finance services in the United Kingdom is also larger than in the US. Five of the services in the United Kingdom are shariah-compliant and are behind some of the biggest building projects in London (including the Shard, the Olympic Village, Chelsea Barracks, the Battersea Power Station site), the north-west and the Midlands (more than 6,500 new homes). In fact, although Islamic finance transactions constitute only 1 per cent of global financial assets, about a quarter of the world's population is Muslim, which is a leading indicator of the growth potential in the US. Another unexpected leading indicator that has already shown signs of an uptick in the US market is Brexit, whereby London's euro clearing market is expected to cut almost 40,000 jobs in its banking industry.
The same stringent licensing and supervision standards that are applicable to the conventional US financial institutions also govern financial institutions offering Islamic finance services. Therefore, Islamic financial institutions (IFIs) operate as state-chartered entities subject to state and federal laws regulating corporate governance and banking and insurance operations.
Conventional banking institutions typically use their subsidiaries for Islamic finance transactions. The principal challenge faced by Islamic finance service providers in the US is therefore to offer products that comply with both shariah and the applicable state and federal banking regulations. However, unlike conventional US banking regulation, regulation of Islamic finance in the US is market-driven; federal and state regulators respond on a case-by-case basis to applications and inquiries from IFIs that want to offer Islamic financial products in the US. Consequently, any organiser of a shariah-compliant bank in the US must confront the challenge of introducing new financial products or services to regulators, and must meet significant creditworthiness requirements.
Another regulatory challenge might be the limited number of permissible investments that commercial banks are allowed to make. In the US, any investment made by banks must be limited to fixed-income, interest-bearing securities, which shariah prohibits. Moreover, US consumer credit laws require that commercial banks have reporting and disclosure requirements that may be inconsistent with shariah. For instance, the Truth in Lending Act of 1968 requires that banks disclose annual interest percentage rates, which is strictly prohibited by shariah law. On the other hand, a US financial institution may have a hard time employing murabahah or ijarah structures to finance the purchase of an asset (e.g., a car or home) if required under the state law to qualify as a licensed leasing company or auto lender.ii Supervisory regulatory authorities
As stated above, both federal and state laws regulate the banking industry in the US whether conventional or Islamic. The national regulators include the Board of Governors of the Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), and the state regulators are responsible for banking activities in each state. A bank in the US must be licensed by either the OCC or an applicable state banking authority and is supervised by the Federal Reserve and the FDIC. All deposit accounts offered by US banks are required to be insured by the FDIC, which is intended to ensure the overall 'safety and stability' of financial institutions.
US regulators have issued certain opinions applicable to the Islamic finance industry. Preliminarily, while the Federal Reserve approved shariah-compliant retail financing products in the US, the Federal Reserve focused on the substance of the products. The Federal Reserve subsequently influenced the OCC to issue opinions aimed at reconciling apparent conflicts between shariah and the federal and state laws, and their respective regulations. For example, the US National Bank Act of 1864 prohibits US financial institutions wishing to offer shariah-compliant lending services from purchasing, holding legal title to or possession of real estate to secure debts with terms over five years. The OCC issued two interpretive letters, which addressed the special concerns of clients who would otherwise be forced to choose either their religion or their home or business.
Although certain types of murabahah and ijarah financing are allowed under US laws, the OCC reconciled musharakah and mudarabah's apparent violation of federal regulations that prohibited commercial banks from forming partnerships or holding common stock. The OCC allowed commercial banks to take 'as consideration for a loan a share in the profit, income or earnings from a business or enterprise of a borrower'. This interpretation created an opportunity for commercial banks to derive equity return from a loan deal without relying on interest, despite the still-intact prohibition against making true equity investment. US credit unions have also adopted a communal or partnership model that complies with shariah.
Savings associations can form joint ventures and own properties through a subsidiary servicing company. These institutions may easily obtain real estate financing through murabahah and ijarah structures as well as limited joint venture possibilities through musharakah and mudarabah transactions.