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Overview

Policies

In general terms, what policy has your jurisdiction adopted towards Islamic finance? Are Islamic finance products regulated differently from conventional instruments? What has been the legislative approach?

There are no US laws specifically addressing Islamic finance in the United States, and financial institutions offering Islamic finance products are governed by the same federal and state laws and regulations as those offering conventional instruments. Islamic finance in the United States is market-driven; rather than support or promote Islamic financial products, federal and state regulators respond to applications and inquiries from Islamic financial institutions (IFIs) wishing to offer Islamic financial products on a case-by-case basis. The Federal Reserve has been helpful in organising forums to discuss with prospective issuers and investment bankers alternative ways to advance and grow Islamic finance in the United States.

Market development

How well established is Islamic finance in your jurisdiction? Are Islamic windows permitted in your jurisdiction?

Retail Islamic finance has been well established in the United States since 1997, when the Office of the Comptroller of the Currency (OCC) approved the ijarah structure for home lending because it is ‘functionally equivalent’ to conventional secured real estate lending. In 1999, the OCC approved the use of the murabahah ‘cost plus profit’ structure for home financial products because this structure was deemed to be ‘functionally equivalent’ to conventional real estate mortgage transactions or inventory or equipment lien agreements. However, other than Fannie Mae and Freddy Mac, there is, in general, a paucity of investment capital and liquidity infrastructure in the United States for most kinds of Islamically financed transactions.

There are no US national Islamic financial institutions; rather, IFIs operate as state banking corporations. Conventional financial institutions have established Islamic ‘windows’, but more often use subsidiaries for Islamic finance transactions. The gross annual dollar value of retail Islamic financial transactions in the United States is only approximately US$4 billion, and most Muslims, constituting under 1 per cent of the US population, continue to use conventional financing in their US banking transactions.

Sovereign wealth funds have acquired considerable amounts of US real estate and remain active in this market, but typically use conventional financing for their acquisitions. While there have not been any listings of sukuk on US stock exchanges, publicly held and private Islamic funds are active and offer, buy and trade securities that are ­shariah-compliant. Investment in businesses dealing with haram goods and services may be made and held in the United States, provided they are de minimis and appropriate ‘purification’ is expected with respect to excess haram income.

Legislation

What is the main legislation relevant to Islamic banking, capital markets and insurance?

The United States has not adopted any federal legislation specifically addressing Islamic financing. Islamic banking, capital markets and insurance are subject to the same federal and state law and are subject to the same tax treatment that applies to corresponding conventional instruments. Only two rulings have been issued by the OCC, approving an ijarah and a murabahah structure for home and other retail financial products. IFIs in the United States are state-chartered entities subject to state laws regulating corporate governance and banking and insurance operations. Despite a paucity of legislation and judicial decisions, these structures and deposit accounts have been developed and are being used in the United States by balancing Islamic finance concepts with US legal issues, such as ownership liability, taxation, real estate transfer taxes, bankruptcy and securities laws.

All deposit accounts offered by US banks are required to be insured by the Federal Deposit Insurance Corporation (FDIC), which is intended to assure the overall ‘safety and stability’ of financial institutions. Although no IFI offers interest on its Islamic deposit accounts, the FDIC has approved insuring such accounts on the basis that investment return does not have to be based on interest, but may be based on a profit and loss participation.

State banking agencies regulate IFIs in the United States. Although IFIs may be qualified to do business in different states, the majority of an IFI’s assets are located in the institution’s home state and licensing and other conditions must be satisfied with respect to any state where the IFI wishes to be qualified as a bank or mortgage or loan finance provider. Illinois and some other states have enacted a ‘wild card statute’, which allows IFIs chartered in such states to do anything that is permitted by the OCC to be done by national banks.

Supervision

Principal authorities

Which are the principal authorities charged with the oversight of banking, capital markets and insurance products?

The principal federal regulatory authorities charged with the oversight of US banking are the OCC and the FDIC. State banking authorities govern state-organised financial institutions, including IFIs. State authorities are also responsible for the oversight of insurance companies, as there is no federal insurance regulator. The principal regulatory authorities charged with regulating US capital markets are the Securities and Exchange Commissions, the self-regulatory stock exchanges and state securities authorities.

Guidance

Identify any notable guidance, policy statements or regulations issued by the regulators or other authorities specifically relevant to Islamic finance.

The 1997 and 1999 rulings by the OCC approved the ijarah and murabahah structures for home finance and retail transactions. In addition, states such as New York and Illinois have enacted legislation intended to encourage Islamic finance transactions, such as the elimination of a double real estate transfer tax in an ijarah sale-leaseback transaction.

Central authority

Is there a central authority responsible for ensuring that transactions or products are shariah-compliant? Are IFIs required to set up shariah supervisory boards? May third parties, related parties or fund sponsors provide supervisory board services or must the board be internal?

The United States has no central authority responsible for insuring that transactions or products are shariah-compliant. IFIs in the United States are not required to maintain their own shariah supervisory boards, but may work with the shariah board of another IFI, the Shari’ah Board of America or other scholars.

Board approval

Do members of an institution’s shariah supervisory board require regulatory approval? Are there any other requirements for supervisory board members?

There is no regulatory approval required for the appointment by an IFI of shariah supervisory board members. While the Shari’ah Board of America and other scholars serve in the United States, it is a challenge to find competent shariah scholars able to balance knowledge of shariah law as well as knowledge of US banking and commercial law, the business and customer needs of the IFI and competency in the English language.

Authorisation

What are the requirements for Islamic banks to be authorised to carry out business in your jurisdiction?

There is no nationally chartered Islamic bank in the United States because of the difficulty in complying with national banking laws and federal and state securities regulations. While the OCC has been approached by entities interested in establishing a national Islamic bank, there have been no applications filed with or approved by the OCC.

The existing US Islamic banks, notably Devon Bank and University Islamic Finance Bank, are state-chartered, state-licensed banks, which have applied for and received FDIC insurance for depositors. The OCC and the banking authorities of New York, Illinois and a few other states have approved shariah-compliant structures on a limited basis to finance home and other retail purchases. These states have issued limited rulings eliminating double real estate transfer taxation in shariah-compliant home acquisition financings. The Board of Governors of the Federal Reserve allows US financial institutions to offer shariah-compliant products in foreign countries where they are mandatory or where they are necessary for the financial institution to be competitive.

Foreign involvement

May foreign institutions offer Islamic banking and capital markets services in your jurisdiction? Under what conditions?

Foreign financial institutions may offer in the United States Islamic banking structures approved by the OCC, which include the ijarah and murabahah structures for home mortgages and retail financing. Foreign institutions are required to comply with all applicable federal and state law, including obtaining all requisite state banking and retail lending licences for the offering of approved products in those states where they operate. HSBC Amanah operates in the United States, but does not offer Islamically financed retail products, but only shariah-compliant investment securities options.

Takaful and retakaful operators

What are the requirements for takaful and retakaful operators to gain admission to do business in your jurisdiction?

In 2008, American International Group Inc (AIG) became the first insurance company to offer Islamic homeowners takaful insurance in the United States. Takaful is currently issued through AIG’s underwriting subsidiaries, Risk Specialist Companies Inc and Lexington Insurance Company. The exclusive broker for the product, Islamic financial services firm Zayan Finance, is currently offering takaful in a number of states. AIG maintains a shariah board made up of Islamic scholars who have given legitimacy to the takaful alternative to conventional insurance in the US market.

Takaful operates to a large extent outside the reach of state insurance regulators. Lexington Insurance Company is a ‘surplus lines’ insurer, which means it is only lightly regulated by its headquarter state and is essentially free of review by the state insurance department. It is for this reason that the National Association of Insurance Commissioners has advised consumers to be wary before purchasing such policies. Life insurance through takaful is not permitted as it is not compliant with shariah law’s proscriptions against gharar and maysir.

The ‘establishment clause’ of the First Amendment to the US Constitution presents a serious obstacle to the successful introduction of takaful and retakaful in the United States, as this mandates separation of church and state and prohibits the favouring of one religion over another. In addition, the insurance regulatory regime in the United States poses a problem for the introduction of takaful, as each state determines its own licensing requirements for insurance companies. In order to obtain a licence, an insurance company must demonstrate that it has the experience and management capability to run the company, and that it is financially sound. Insurance companies are also required to justify their premium rates. In addition, insurance companies must meet or exceed the solvency requirements set by the state. Moreover, there are often limits on the types and concentrations of fixed-income investments that must be made with reserves held by insurance companies. Further exacerbating the situation, under takaful, in the case of potential insolvency, the shareholders’ fund must provide an emergency loan to the takaful company to meet existing claim obligations. Capital requirements imposed on US insurance companies may not take into account the separation between policyholder and shareholder funds in takaful insurance. As a result, it is difficult for takaful and retakaful operators to do business effectively and extensively in the United States.

Foreign operators

How can foreign takaful operators become admitted? Can foreign takaful or retakaful operators carry out business in your jurisdiction as non-admitted insurers? Is fronting a possibility?

Foreign takaful and retakaful operators face the same challenges in operating in the United States as domestic operators and would have to qualify their business and satisfy all applicable licensing requirements in any and each state in which they wish to do business.

Disclosure and reporting

Are there any specific disclosure or reporting requirements for takaful, sukuk and Islamic funds?

There are no specific disclosure or reporting requirements for takaful, sukuk or Islamic funds that differ from conventional products under applicable federal or state banking, insurance and securities laws.

Sanctions and remedies

What are the sanctions and remedies available when products have been falsely marketed as shariah-compliant?

In the event that Islamic-structured products have been falsely marketed in the United States as shariah-compliant, there are no special legal sanctions or remedies available under federal or state law. Rather, there are three potential remedies available to an investor.

The first is a contractual remedy, which, depending on the terms on which the product was purchased, may enable the investor to call an event of default (arising from the misrepresentation by the IFI of a material term of the contract) and then accelerate amounts owed by the IFI to the investor.

The second remedy is to institute a civil claim for misrepresentation. For fraudulent and negligent misrepresentation, the claimant may claim rescission of the contract and damages. For innocent misrepresentation, the court has discretion to award damages in lieu of rescission or rescission; the court cannot award both.

The third remedy is only applicable if the relevant product is a securities offering that is made through a public or private offering and where a prospectus or private placement memorandum is issued that is untrue or misleading as to the shariah-compliance of the securities offered. In this circumstance, the person responsible for the prospectus may be liable for damages to a person who has acquired securities to which the prospectus applies and who has suffered loss as a result of any untrue, dishonest or misleading statement in the prospectus or the omission from the prospectus of any material information required under applicable federal or state securities laws. Consequently, not only persons acquiring the sukuk directly upon issue but also those trading the sukuk on the secondary market would be entitled to bring a claim pursuant to these provisions.

Jurisdiction in disputes

Which courts, tribunals or other bodies have jurisdiction to hear Islamic finance disputes?

There are no special courts, tribunals, arbitral or other bodies, which have jurisdiction to hear Islamic finance disputes. Rather, such disputes are subject to resolution before the applicable US federal and state courts in accordance with applicable rules of jurisdiction and venue, and may be subject to arbitral action if required by the terms of a contract between the parties to the dispute.

Contracting concepts

Accommodation of concepts

Mudarabah - profit sharing partnership separating responsibility for capital investment and management.

The mudarabah structure is a type of profit-and-loss sharing (PLS) partnership, which separates responsibility for capital investment and management. This is often compared with venture capitalism in the United States, with the notable exception that in a mudarabah the mana­ger (mudarib) does not share in any loss unless he or she is negligent, and any financial loss is suffered by the investor (rab-al-mal).

The mudarabah structure is also the basis for the deposit product developed by SHAPE and offered to US depositors by University Islamic Financial Bank. The depositors share in the profit of the bank but not any losses that might be incurred as a result of the bank’s investment in a shariah-compliant portfolio. Profit shares are derived from the rental income paid by those obtaining home finance from the bank rather than coming from income on interest-based loans and mortgages. The deposits are structured on a mudarabah basis, with a proportionate share of the profit paid out to the depositors. Mandatory FDIC insurance is provided to all depositors.

Murabahah - cost plus profit agreement.

The murabahah structure is the most popular type of structure with respect to home financing in the United States. The bank purchases the property and resells it to the client at a mark-up. Devon Bank and other IFIs providing Islamic products can design their products to avoid private mortgage insurance for those making relatively low down payments.

Murabahah financing for business, with a term up to seven years, is offered by Devon Bank, with the client making an initial payment to the bank followed by a series of monthly or quarterly payments until the total amount including the mark-up (representing Devon Bank’s profit) is paid. The bank may take a mortgage on the property that has been thus financed, or require other collateral until the obligation has been fully repaid. Payments made by the customer to the bank to the extent that they constitute ‘interest’ are deductible from income tax and includible in the banks’ taxable income. While the murabahah is only valid for a single transaction traditionally, Devon Bank has developed a murabahah ‘guidance line’ that can be used repeatedly for equipment or trade good purchases. In this case, the murabahah resembles a revolving line of credit. While a murabahah ‘guidance line’ is available for the purchase of building materials used in construction, it cannot be used to finance the labour component of construction. One of the advantages of murabahah is that since the bank, rather than the client, is paying the supplier directly, credit support may not be required, as the bank is less likely to default on its obligation than a small or medium-sized business.

The 1999 OCC interpretive letter permitted a bank to offer certain murabahah-based financing products to accommodate the acquisition and construction of Islamic schools, mosques, community centres and businesses. In these transactions, the client identifies the property, inventory or equipment to be purchased, negotiates the purchase rights with the seller, and applies to the bank for financing. If the ordinary credit underwriting critique is satisfied, the client and the bank simultaneously enter into a purchase agreement and a murabahah agreement, where the bank agrees to purchase the asset and immediately sell it to the client at cost plus mark-up.

A murabahah transaction can also be used to refinance a conventional loan with the possibility, depending upon the advice of the rele­vant shariah scholars, that the borrower may be allowed to take cash out in the process, even to pay off interest-bearing obligations.

The nature of a murabahah transaction is such that the purchase price to be paid by the customer does not change if the customer is required to make early payments, for example, in a default situation, or if the customer seeks to prepay the purchase price voluntarily. This feature of a murabahah transaction may create problems under certain US federal and state laws that aim to protect consumers by limiting the interest and finance charges that may be imposed in a consumer transaction. Under US law, the profit element of a murabahah purchase price is treated as interest - taxable to the IFI and deductible by the customer.

Musharakah - profit sharing joint venture partnership agreement.

Musharakah financing in the United States is a ‘rent to own’ financed sale of property by an IFI to its customer. The customer identifies the home he or she would like the bank to purchase on his or her behalf, the customer negotiates the price and all aspects of the purchase and the customer makes any initial payment of earnest money required to reserve the home. The bank purchases the property and the customer agrees to purchase the property from the bank over time, at cost. A portion of the property’s ownership is transferred to the customer with each payment he or she makes. Because he or she is using a property he or she does not own, the customer also pays rent on the bank’s portion of the property. As an equity-based project financing, the customer and the bank are co-owners and, thus, share in any loss realised upon the customer’s sale of the property, based on the bank’s and the customer’s respective percentage of ownership.

Other than a home financing, an IFI and investors may provide musharakah joint venture financing for a project in agreed proportions in the form of cash contributions or contributions in kind. The party providing the management or technical expertise may charge a fee. Many consider musharakah to be the most authentic form of an Islamic contract, as it is based on the PLS system where two or more persons combine their capital or labour, or both, and share in the profit and loss of the venture. A musharakah does not envisage a fixed return, but rather the return is based on the actual profit earned by the venture. Typically, each partner is both the agent and guarantor of the other, although more limited investment partnerships are available. This type of partnership can occur when two or more parties contribute to a capital fund, either with money, contributions in kind or labour. There are no regulations regarding the fair and equal treatment of partners, except shariah principles, which require that such treatment be provided by each partner to each other. The joint venture is typically structured so that the financing party receives its initial investment plus a return that is usually calculated by reference to a floating benchmark such as LIBOR, plus a margin. Losses, however, are shared in accordance with the parties’ initial investment.

There are essentially three types of musharakah currently available in the United States:

  • permanent musharakah - both parties’ interests remain unchanged and each is entitled to receive its share of the profits as long as the joint venture continues its existence. This formulation is used for an ongoing equity investment. Here, the partnership is transparent for tax purposes and the partners are taxed on any profits;
  • diminishing musharakah - sometimes used in residential mortgages, the financing party’s interest in the joint venture is reduced over time because the borrower buys out the bank’s shares. The bank’s return is taxable income to the bank and deductible by the borrower; and
  • temporary musharakah - this is used to provide working capital; the financing party is a partner for a specified period and receives its share of the profits and the rest of its principal contribution at the end of the agreement period.

Musharakah is similar to mudarabah, except that in a mudarabah only the financing party bears the losses associated with the joint venture.

Ijarah - lease to own agreement.

An ijarah is like a hybrid between a conventional operational lease and a finance lease. In this type of transaction, the bank purchases a property and places ownership in a holding subsidiary. Traditionally, title to the property is transferred to the borrower after he or she has paid the full cost of the property over time. The customer pays rent to the bank, which reflects an agreed profit element for the bank, as well as comparable rentals on conventional leases (where interest considerations would be relevant). Unlike a conventional finance lease, the obligations to insure and undertake major maintenance on the leased asset remains with the bank (owner and lessor), although these obligations may be shifted to the borrower (lessee) pursuant to a separate contract to provide services with respect to the leased assets. Further, the lessee is only responsible for the payment of rent while his or her use of the asset continues, and an ijarah cannot begin before construction of the leased facility; if the lessee is no longer able to use a leased asset (eg, total destruction), rental payments must cease. The lease-to-purchase model is known as ijarah wa iqtina.

Under the laws of most states, the transaction is simplified if the client takes immediate title to the property at the time of the initial purchase. For example, in California a client would give a financial institution like LARIBA an undertaking that he or she will repurchase the property in the event of a default, in which event LARIBA authorises the registration of title in the client’s name at the time of LARIBA’s initial purchase of the property.

Vehicles are financed by LARIBA, for typically three to five years, through the ijarah structure with a vehicle financing company; the client has title to the car from the start, and LARIBA holds a first lien on the car. The financing actually involves two agreements: a loan agreement, in which the original capital is to be returned without interest, and a lease agreement, which is the source of LARIBA’s profit. A promis­sory note is also drawn up by which the customer guarantees payment. State law requires the monthly payment stream to be calculated on a traditional amortisation basis, so clients can compare the percentage rate they pay with those offered in conventional financings.

Wadiah - safekeeping agreement.

Wadiah agreements are not commonly used in the United States, but they are not proscribed and should be possible provided that all applicable federal and state regulatory requirements are met.

Products

Securities structuring

Sukuk - Islamic securities. Have sukuk or other Islamic securities been structured and issued in your jurisdiction to comply with Islamic principles, such as the prohibition of interest?

The United States has seen few major sukuk issuances:

  • the East Cameron Gas sukuk, which was the first sukuk al-musharakah in the United States (backed by oil and gas assets);
  • a General Electric sukuk al-ijarah (backed by aircraft leases) in 2009;
  • a Goldman Sachs sukuk al-wakalah in 2014; and
  • a sukuk al-murabaha by the International Finance Facility for Immunization in 2014 on behalf of the US-based Global Vaccine Alliance to fund global immunisation programmes.

In the United States, sukuk have been issued by private or not-for-profit companies, whereas elsewhere in the world the government is the prime issuer. Although the East Cameron sukuk experienced technical difficulties and went into bankruptcy for reasons unrelated to its Islamic structure, the other sukuk are performing well. Both New York and Illinois have initiated legislation to enable sukuk transactions. NYSE Euronext has made available the machinery and process for listing sukuk in the United States, although none is currently listed. A number of ­shariah-compliant stock indices are available in the United States, including the Dow Jones Islamic Index, and eight Islamic mutual funds are currently made available by the Amana Group, the Azzad Funds and others with over US$10 million under management.

While over US$100 billion has been raised through sukuk listed on exchanges in Dubai, Ireland, Luxembourg, Malaysia and the United Kingdom, there are no listings of sukuk on US security exchanges.

Legal position

What is the legal position of sukuk holders in an insolvency or a restructuring? Are sukuk instruments viewed as equity or debt instruments? Have there been any court decisions or legislation declaring whether sukuk holders are deemed to own the underlying assets?

Following the filing by East Cameron for bankruptcy in Louisiana, the issuer sought to argue that the sukuk should be characterised as a ‘secured loan’ and not as a true ‘asset sale’. The court ruled, however, that pursuant to the purchase agreement, title over all leases to the gas and oil properties belonged in the sukuk holders. East Cameron was an ‘asset-backed’ sukuk, while most of the sukuk issued are ‘asset-based’. The East Cameron decision was the first in Islamic finance jurisprudence that declared that an asset-backed structure can indeed protect investors following a default: the sukuk holders were able to take title to the underlying property interests and sell them to recoup in part their losses. Thus, although sukuk instruments are generally considered hybrids of equity and debt, in a case where the sukuk is asset-backed, such as East Cameron, it is likely in light of this precedent that the sukuk holders will be deemed to own or have possessory rights in and to the underlying assets. In other cases, particularly sovereign sukuk, which are asset-based rather than asset-backed, it is questionable whether sukuk holders would be deemed to own the underlying assets. While asset-based transactions give their holders ownership of cash flows, the holders do not own the assets themselves and they do not have a claim on the assets in the event of a default.

The bankruptcy and restructuring of Arcapita, a private equity and investment company based in Bahrain and formerly active in the United States, is instructive as the first court-mandated Islamic finance restructuring. The bankruptcy plan approved by the US District Court in New York was considerably more transparent and workable than many of those hashed out directly between companies and creditors in other parts of the world. This case provided a clear, court-approved restructuring plan, which, for the first time, recognised the validity and enforceability of shariah principles in Islamic finance documents governed by US law.

Of considerable interest is the 2017 judgment of the English High Court in favour of sukuk holders against Dana Gas, which had sought to refuse payment on its sukuk when due by arguing that a change of law after issuance rendered the sukuk shariah-non-compliant. The court noted that the sukuk was declared shariah-compliant when it was issued. Although Dana Gas eventually reached an agreement with its sukuk holders to restructure the sukuk, this case raises new risks for sukuk investors, and may lead them to demand explicit shariah assurances in the documentation and an express waiver of any defence of shariah-non-compliance.

Insurance

Takaful - Islamic insurance. Are there any conventional cooperative or mutual insurance vehicles that are, or could be adapted to be, shariah-compliant?

Although conventional cooperative or mutual insurance vehicles operating in the United States might be adapted to be shariah-compliant, this would require compliance with applicable state law (see questions 10 to 12).

Which lines of insurance are currently covered in the takaful market? Is takaful typically ceded to conventional reinsurers or is retakaful common in practice?

In the United States, the only type of insurance currently offered as takaful is commercial and residential property insurance. Where takaful is the subject of reinsurance, that coverage is typically extended by conventional reinsurance companies. Retakaful is not generally available in the United States.

Miscellaneous

Regulatory obstacles

What are the principal regulatory obstacles facing the Islamic finance industry in your jurisdiction?

A principal challenge facing Islamic financial providers in the United States is offering products that conform to both Islamic religious doctrine and state and federal banking regulations. The same stringent licensing and supervision standards that apply to conventional financial institutions apply to financial institutions offering Islamic banking and financial services. For example, the National Bank Act of 1864, which prohibits banks from the purchase, holding of legal title to or possession of real estate to secure debts due for a period exceeding five years, presents an obstacle to US financial institutions wishing to offer shariah-compliant lending services. This conflict was resolved in part by the OCC’s two interpretive letters, in response to the special needs of clients who otherwise would be forced to choose between adhering to their religion and owning a home or business. Any organiser of a shariah-compliant bank in the United States faces the challenges of introducing new business practices to regulators and satisfying regulatory requirements for significant capital and the requirement that the bank must reasonably be expected to achieve and maintain profitability. There are no meaningful conflicts between generally accepted accounting principles in the United States and AAOIFI-promulgated shariah-compliant accounting standards. Ultimately, there is no reason why a well-managed, legally capitalised and profitable Islamic banking institution cannot be chartered nationally in the United States to operate in a shariah-compliant matter.

Although certain types of murabahah and ijarah financing are permissible, musharakah and mudarabah would appear to violate federal regulations preventing commercial banks from engaging in partnerships or owning common stock. In response, the OCC has recognised that a commercial bank may take ‘as consideration for a loan a share in the profit, income or earnings from a business or enterprise of a borrower’. This means that, even though commercial banks are restricted from making true equity investments, the opportunity exists to structure an equity return from a loan transaction while avoiding reliance on interest.

In addition to commercial banks, US credit unions follow a communal or partnership model consistent with Islamic financial theory. Moreover, savings associations are able to enter into joint ventures and own property through subsidiary servicing companies. These institutions not only have ready access to real estate financing through murabahah and ijarah financing, but limited joint venture possibilities are available to saving associations through the use of musharakah and mudarabah transactions.

But additional regulatory challenges remain. For example, deposits structured according to profit and loss sharing generally are not permitted in the United States, although SHAPE Financial Corporation has developed a modified deposit product offered by University Bank so that principal is guaranteed and the deposit holders share only in bank profits, not losses. The depositor who accepts full repayment in the case of a loss at the bank may not be in compliance with shariah law.

The restrictions placed on the range of permissible investments that commercial banks may hold constitute another regulatory challenge. Banks must limit their investments to fixed-income, interest-bearing securities, which are prohibited by shariah. In order to comply with consumer credit laws, commercial banks must make numerous disclosures in a manner that does not always fit within the principles of Islamic finance. For example, the Truth and Lending Act requires that banks make advance disclosure of annual percentage rates, which are inapplicable to Islamic financing by reason of the prohibition of interest. Moreover, a financial institution that wishes to finance the purchase of a car or home under a murabahah or ijarah structure may face additional hurdles if state laws require the institution to qualify as a licensed leasing company or auto lender.

Shariah law

In what circumstances may shariah law become the governing law for a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of shariah or the conflict of shariah and local law relevant to the finance sector?

Shariah law may not be the governing law for any contract or dispute, as US law does not recognise shariah as a system of national law cap­able of governing a contract. The Convention on the Law Applicable to Contractual Obligations 1980 (the Rome Convention) requires that the governing law of an agreement must be that of a country (or, in the US case, a state). In the United States, court disputes will be dealt with by applying applicable state law (or foreign law, if the governing law of the contract is that of another country), and US courts will not comment on whether an agreement or contract complies with shariah principles.

The restructuring plan approved by the court in the Arcapita case is the first time a US District Court approved a shariah-compliant restructuring plan pursuant to the US Bankruptcy Code. Although certain creditors argued the restructuring murabahah loan to Arcapita was not shariah-compliant, the court took cognisance of Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain, in which the court found similarly that a murabahah agreement was enforceable as a matter of applicable national contract law without regard to the question of whether the agreement was in fact shariah-compliant. The court in Arcapita recognised as applicable the principles of shariah, but did not find any conflict between shariah and applicable governing US bankruptcy and contract law.

If the parties stipulate in their agreement that any dispute is to be determined by enforceable arbitration, the relevant arbitral tribunal can be required by the terms of the agreement to decide disputes with reference to shariah principles.

Institutional takeover

Are there any special considerations for the takeover of an Islamic financial institution, outside the requirements of the general merger control regime?

There are no special rules governing the takeover of an IFI in the United States, other than the requirements of state merger laws and applicable fede­ral and state bank regulatory provisions governing the takeover of any financial institution.

Other notable features

Are there any notable features of the Islamic finance regime and markets for Islamic finance products in your jurisdiction not covered above?

The 2015 participation by Air Products, a US company, in a Saudi Islamically financed infrastructure project, and the 2016 US$219 million shariah-compliant construction and mezzanine loans by Maybank (Malaysia) and Warba Bank (Kuwait) for the construction of a condominium tower in New York may signal a potential awakening interest in the United States in Islamic finance. There has been growing interest in the United States in mezzanine financings structured as murabahah or mudarabah (such as the New York property financing identified above), although these structures present a number of legal and practical issues such as ownership, control and compliance with securities laws. Asset management and household financings are the areas where Islamic financing will continue to be the most prevalent in the United States. US financial institutions regularly serve as arrangers and investors in sukuk issuances in other countries, although not as issuers. The pervasive international geopolitical and economic uncertainty and instability, as well as strong feelings about Islam and terrorism in the United States, raise a serious question as to whether, or when, Islamic finance will see significant growth in the United States.