Examining US approvals of Islamic financing products and the Islamic theory of lawful profit

Abstract

Purpose This paper aims to analyze the legal interpretation of three Islamic financing products considered for approval by US authorities, from the United Bank of Kuwait and Guidance Residential, even though the USA has not enacted any Shari’ah legislation in relation to the Islamic law of transactions (fiqh mu’amalat). Design/methodology/approach This paper primarily adopted qualitative document and content analysis, supported by quantitative numerical analysis, in reviewing legal interpretive letters from the US Office of the Comptroller of Currency and National Administrator of Banks (OCC) and the US Department of Revenue. Findings The research found that in assessing economic substance over legal form, each of the three products involved risk-free transactions and interest. Research limitations/implications The research had access to published OCC, Department of Revenue and US Patent Office material that fully disclosed the mechanics of each of the selected products. Practical implications The implication for the Islamic financial institutions involves Shari’ah compliance risk. When tested against the Islamic normative theory of lawful profit, it confirms that the products are non-compliant. Social implications The social implication is customer awareness of Shari’ah non-compliance in the USA and the impact for other jurisdictions carrying the same products. Originality/value The significance of this research for Islamic banking product design and development is that it enhances the ability to block the legal means to an unlawful outcome (sadd al-dhara’i), thereby avoiding harm (al-darar) attributed to usury (riba), and upholding what is in the public interest (maslahah), to fulfil one of the objectives of the Shari’ah (maqasid al-Shari’ah), which is to protect wealth (hafiz al-mal).

The Implication of Musharakah Mutanaqisah in Malaysian Islamic Banking Arena: A Perspective on Legal Documentation

“…Musharakah Mutanaqisah (MM) is a diminishing partnership concept that comprises three contracts which are Musharakah (partnership), Ijarah (renting) and Bay` (sales) (Abdullah, 2016;Smolo and Hassan, 2011;Yusof et al, 2016). This hybrid contract has been defined by Bank Negara Malaysia (BNM) as "a contract of partnership that allows one (or more) partner(s) to give a right to gradually own his share of the asset to the remaining partners based on agreed terms" (BNM, 2010).…”

“…One critique against BBA is its use of Bay-Al-Inah (buy-back sale), that is forbidden by majority schools of thoughts except by Shafi'is (Smolo and Hassan, 2011). As BBA financing is collateralized, Islamic banks earn more profits with less risk and efforts using BBA mode of finance (Abdullah, 2016;Smolo and Hassan, 2011;Yusof et al, 2016). …”

“…In 1979, the mechanism of MM has been approved by the First International Conference on Islamic Banking, which was held in Dubai (Abdullah, 2016;Bendjilali and Khan, 1995;Smolo and Hassan, 2011). Over the past few decades, the concept of MM for house financing has been widely adopted in United States of America, United Kingdom, Sudan, Pakistan and Malaysia (Abdullah, 2016).…”

“…Theoretically, the main advantage of MM compared to BBA is that the rental rate used is flexible and revisable, enabling the banks to structure client's monthly instalments based on the prevailing economic condition (Abdullah, 2016 Despite the controversial issue of IBR/ BFR and interest rate, industry practitioner said that although charging rental rate in MM has its flexibility, there are some practical and operational issues of rental rates. There are many variables that will affect the usage of rental rates such as accounting treatment, area rental rate differences, fluctuations of rental rate, etc.…”

How popular is Islamic finance in the USA? Findings from Google Trends

“…Islamic finance refers to the financial or banking activities that are conducted according to Sharia principles (Abdullah, 2016;Ali Syed, 2017;Hummel, 2019). It emerged as a global financial system in the last three decades (Mansoor Khan, 2008;Mostafa Khan, 2013).…”