Islamic banking - the feasibilty of establishing an Islamic bank in the United States.

I. INTRODUCTION

This paper is written with three goals: to provide a discussion of banking practices that comply with the religion of Islam, to analyze why investment and banking interests in the United States should be concerned with Islamic banking practices, and to examine the American regulatory

In contrast to what those in the United States might consider traditional banking, Islamic banking derives its rules and practices from religious sources. (1) Having recognized this, the reader should understand that Islamic banking truly is in a developmental stage pertaining to the interaction between (1) Western financial practices which are based, in large part, on the role of interest and (2) the dictates of the Qur'an and the Islamic Prophet Mohammed, which together are interpreted to forbid interest. (2)

Written through the eyes of a "practitioner looking in" (3) at a system of banking based on Shari'a, (4) this paper attempts to identify and discuss the similarities between Islamic and Western banking practices. By focusing on the potential interrelationship between Islamic banking practices and the regulatory banking framework in the United States, the paper concludes that through innovation and regulatory flexibility, the possibility exists for establishing a Shari'a-compliant banking institution in the United States.

II. BANKING ACCORDING TO ISLAMIC PRACTICES

A. Role Of Islamic Tenets And Teaching In A Muslim's Financial Affairs

As an initial proposition, it should be understood that "religious laws in Islam govern all aspects of life." (5) In writing about Islam, Imtiaz Pervez explains:

   [Islam] is a comprehensive way of life, religious and secular; it
   is a set of beliefs and a way of worship; it is a vast and
   integrated system of laws; it is a culture and a civilization; it
   is an economic system and commercial norm; it is a polity and a
   method of governance; it is a society and a family conduct; it
   prescribes for inheritance and divorce, dress and etiquette, food
   and personal hygiene. It is spiritual and human totality; thus
   worldly and other-worldly. (6)

To promote this comprehensive life, Islam forbids Muslims from engaging in activities involving "interest or riba, gambling, pornography, alcohol, drugs, and other things which Islam considers abhorrent." (7) While the existence of such prohibitions restricts certain activities, the broader principles of Islam also must be practiced for a Muslim to live a life that adheres to the will of Allah. Generally speaking, a practitioner of Islam should not act in violation of Shari'a prohibitions while striving at the same time to act in accordance with other general Qur'anic principles.

Because Islamic principles extend to all aspects of a Muslim's life, the financial affairs of each Islamic practitioner are necessarily implicated by Shari'a principles. While Islamic economic principles permit property ownership and wealth accumulation, these concepts differ from how they are understood in some Western, capitalist systems. One definition of Islamic economics sets forth that economics should be "the methodology of how man uses resources and means of production to satisfy all his worldly needs, according to a predetermined God-given code in order to achieve the greatest equity." (8) Arising out of this definition are five unique characteristics of how financial affairs are addressed in the Islamic faith:

1. Man, being an agent and not an original owner, is not a free agent in his exploitation of resources and must use methods and means within a framework given to him in the satisfaction of his economic means.

2. The guiding principle of economic activity is the overall good of society and nature (environmental).

3. Individual man, being part of the overall fabric, must be given consideration for his well being.

4. Equitable reward must be given to man according to his effort (to all according to their efforts, and from all according to their abilities).

5. Certain activities in the exploitation of resources, having over-all [sic] detrimental effects, are proscribed. (9)

Thus, Islam permits the development of wealth, but through socially conscious means. Successful enterprises that earn a profit are laudable, but the practitioner must not forget that Islamic principles direct financial resources should be utilized for bettering the condition and well-being of others. (10)

B. Islamic Prohibition of Interest

Arising out of the Islamic tenet of concern for the community flow the anti-abuse concepts applicable in financial affairs. The primary example of this anti-abuse concept is the Qur'anic prohibition of riba, which "seeks to prevent usurious conditions in exchanges and loans." (11) A literal translation of the Arabic word riba is an "increase," (12) and under Shari'a the term "refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity." (13)

The Qur'anic prohibition of riba reads:

   Those who devour [riba]
   Will not stand except
   As stands one whom
   The Evil One by his touch
   Hath driven to madness
   That is because they say:
   "[Sale] is like usury [(riba)]."
   But Allah hath permitted [sale]
   And forbidden [riba].
   Allah will deprive
   [Riba] of all blessing,
   But will give increase
   For [voluntary] deeds of charity;
   For He loveth not
   Creatures ungrateful
   And wicked. (14)

The Qur'an goes on to warn:

   That they took [riba],
   Though they were forbidden;
   And that they devoured
   Men's substance wrongfully--
   We have prepared for those
   Among them who reject Faith
   A grievous punishment. (15)

Although minority positions differ, the traditional Islamic view of the prohibition of riba is that it includes interest. "There is a consensus among Muslim scholars that this prohibition extends to any and all forms of interest and there is no difference between interest-bearing funds for purposes of consumption or investment." (16)

The prohibition of riba does not mean that money may not be lent under Islamic law; the prohibition simply forbids unearned profit (or stated otherwise, profit without expected, normal business risk). According to Islamic jurists, the prohibition of riba is aimed at avoiding "the illegality of all forms of gain or profit which were unearned in the sense that they resulted from speculative or risky transactions and could not be precisely calculated in advance by the contracting parties." (17) Thus, and in summary, riba represents unearned profit and squarely includes interest under traditional Islamic thought. (18)

C. Development of The Islamic Banking Movement

The modern Islamic banking institution is a relatively recent development. Its existence rises directly out of the Islamization movement:

   Recently, however, under a growing trend of religious
   conservativism, many Islamic countries have realized that
   continuing to follow Western banking and finance methods undermines
   their adherence to Islamic ideals. Because of this surge in
   Islamization, a movement to reform the practices of financial
   institutions in many Islamic countries has developed. (19)

In fact, the trend of reforming financial practices in Islamic countries has expanded into the establishment of Shari'a-compliant financial institutions (20) in the United Kingdom, the United States, and non-Islamic countries found in Europe. (21) Estimates are that more than two hundred and fifty Islamic financial institutions operate throughout the world. (22)

The Islamic banking movement is the embodiment of proactive efforts by Muslim practitioners to direct their money toward financial institutions adhering to Islamic principles. (23) "The Islamic banking phenomenon appears in a positive light: the search for new institutions which incorporate a real or hypostatised Islamic financial tradition in which interest is shunned." (24) The establishment of Islamic banks in the modern age began with the creation of the first "Islamic Bank," as that term is now used, in Egypt in 1960. (25) Commentators recognize, though, that the "industry" of Islamic banks and Islamic financial institutions truly began to develop in the 1970s. (26)

In less than forty years, Islamic banking has grown from a mere idea into a substantial subset of the financial industry. Islamic financial institutions are approaching the mark of managing $200 billion in assets worldwide, and growth rates indicate that this mark will soon be surpassed. (27) The appeal of Islamic banking has taken root worldwide, and as discussed below in Part IV, one can hypothesize that a Shari'a-compliant bank established in the United States has the potential to flourish as it establishes new ground by serving the banking interests of practicing Muslims. Before examining the prospect of a Shari'a-compliant U.S. bank, however, this paper next examines the financial techniques and practices utilized by Islamic financial institutions to follow Islamic dictates.

D. Financial Techniques And Practices Compliant with Islamic Banking Requirements

It has been stated that "[i]n the Islamic bank, the seventh century meets the 21st, as the partnering of investors and entrepreneurs continues to be an effective and economically viable technique." (28) This quote highlights the reliance of Islamic banking practices on tradition (29) while still recognizing the viability of the partnership model at the base of financial transactions in a banking arena. (30) Not every partnership arrangement and apparently riba-free transaction, however, is consistent with Islamic teachings.

An important aspect of the Islamic banking movement is the implementation of a system to insure that the actions of Islamic banking institutions comply with Shari'a. In practice, the business side of a bank works in tandem with a supervisory board of religious advisors to review proposed financial transactions. (31) These supervisory boards exist to provide guidance on religious law to the bankers of the institution. Typically, when confronted with a novel question, the banker presents a question to the Shari'a Board and a fatwa, or statement of guidance interpreting Islamic law, is returned. Efforts have been undertaken to compile and index these fatwas to help develop uniformity in the relatively young field of Islamic banking. (32)

Through the use of Shari'a boards and the process of trial and error, Islamic financial institutions today have developed several tools for the carrying out of interest-free banking transactions based on this partnership model. (33) These tools allow a financial institution to invest its funds in compliance with Shari'a principles, for the benefit of the institution's shareholders and customers. (34) For the sake of clarity, each tool is discussed below:

1. Murabaha (Financing on a "Cost-Plus" Basis) (35)

A murabaha, although typically used as a finance method, "is actually a sale contract." (36) In a typical murabaha transaction, the financial institution acts as a middle-man and purchases a good requested by its customer; the financial institution then turns around and sells the good to the customer at the acquisition cost plus a profit. (37) The customer agrees to pay for the good over a stated period in installments, but if there is a default (unlike in traditional financing) the customer is only liable to the financial institution for the contracted sale price (not any fees or interest calculations otherwise available in typical financing arrangements). (38)

A key component of murabaha financing is the requirement that the financial institution actually own the good before transferring title to its customer. (39) This is because the financial institution assumes some risk to justify its profit, making the profit more than just disguised interest. The customer could always refuse to accept the good obtained for it by the financial institution, causing the financial institution to find an alternative buyer with the accompanying costs of storage, marketing, and overhead. (40) As a result, murabaha financing is available to trusted customers of a financial institution (41) and to those that provide some form of guarantee or collateral. (42)

2. Ba'i Bithaman Ajil (De, fred Payment Financing)

Ba'i bithaman ajil involves a credit sale of goods on a deferred payment basis. (43) At the request of its customer, the financial institution purchases an existing contract to buy certain assets on a deferred payment schedule and then sells the goods back to the customer at an agreed upon price, including a profit. The payments by the financial institution to the original supplier of the goods are progressive, as the goods are manufactured or purchased. The financial institution's customer "can repay in lump sum or make installment payments over an agreed-upon period." (44)

3. Istisna (Commissioned Manufacturing)

Similar to ba'i bithaman ajil transactions, istisna contracts involve the payments by a financial institution to a developer or contractor as a job (typically involving construction or manufacturing) is completed. (45)

4. Ijara (Lease Financing)

Ijara is a leasing arrangement whereby the financial institution "purchases an asset and leases it to a Client." (46) Most typically used with regard to equipment, the financial institution owns the asset throughout the lease period and the customer pays the financial institution a rental fee. (47) The customer may purchase the asset either during or at the end of the lease period, but the customer is not required to do so. (48) There are differences between a conventional lease and ijara, in that with the ijara:

   1) a lease/hire begins the day the asset is delivered to the client
   (not the date the contract is signed as with the [conventional
   lease]), 2) the lessee is not liable for the full rent if the asset
   is destroyed (the bank takes out insurance on the asset and factors
   in the cost of insurance at the time the rent is fixed), and 3) the
   purchase at the end of the contract cannot be made binding. (49)

Even with these slight differences, the ijara is fairly similar to traditional lease financing.

5. Musharaka (Partnership Arrangement)

Musharaka means "partnership" and typically involves a business undertaking where the financial institution provides a percentage of the capital needed by its customer with the understanding that the financial institution and customer will proportionately share in profits and losses in accordance with a formula agreed upon before the transaction is consummated. (50) The customer contributes to the business undertaking by providing some capital and sweat equity represented by its management efforts and "know-how." (51)

6. Mudaraba (Venture Capital Transactions)

Like musharaka transactions, mudaraba involve business undertakings where the financial institution provides capital to an entrepreneur, but in the mudaraba transaction the financial institution provides all of the capital and the customer provides only sweat equity and know-how. (52) The financial institution is guaranteed an agreed upon percentage of the profits and bears all of the risk of monetary loss. (53) The entrepreneur serves as the financial institution's agent for investing and utilizing the funds in the venture. (54)

Often, a manager, called a Mudarib, is appointed to manage the business venture at the base of the mudaraba:

   In many cases the bank acts as a Mudarib for a fee. The bank also
   acts as a Mudarib in relation to its deposits in investing the
   depositors' money in various schemes assuming the role of the
   capital provider. The Mudarib may be held liable for losses from
   actions that are beyond those originally provided for in the
   contract. (55)

Just as with traditional venture capitalism, this is a "high risk" mode of financing. As such, a financial institution must use "extraordinary efforts to carefully scrutinize [the] feasibility and projections" provided by the customer along with undertaking stringent credit analyses and risk assessments. (56) In part due to the increased risk and in part due to the capital requirements, "under the most optimistic accounts, mudaraba schemes represent less than 10% of [worldwide Islamic] banking operations. (57)

7. Qarde Hasan (Benevolent Financing)

Qarde hasan financing occurs when the financial institution provides a loan free of charge, typically with the intent to provide financial assistance to ailing institutions or to provide humanitarian assistance to individuals. (58) In exchange, the customer provides an unconditional obligation that the financial institution will be repaid, and often collateral is required. (59) The financial institution may also "charge a small fee to cover its administrative costs." (60)

Arising out of the communal aspect existing in the Islamic approach to economics, qarde hasanah "are for the benefit of the individual and the society at large." (61) Essentially, qarde hasanah represent loans to deserving persons and entities with the only requirement being repayment of the principal and administrative fees. (62) Such loans "do not constitute a significant source of financing by Islamic banks" and fall into the charitable activities of these institutions. (63)

The financial tools set forth above serve to promote the growth of principal without implicating the forbidden use of riba. Notably, not all of these tools will be available in the banking system of the United States, but some are remarkably similar to financial vehicles already approved by banking regulators, and as such, easily can be utilized in conformance with existing regulations.

III. WHY SHOULD INVESTMENT AND BANKING INTERESTS IN THE UNITED STATES BE CONCERNED WITH ISLAMIC BANKING PRACTICES?

Over one billion people worldwide are believed to be followers of the Islamic faith. (64) Nationally, as reported by President William Clinton to Congress in January 2000, "The Muslim religion is the fastest-growing faith in the United States (the number of Muslims in the US ... is put at 5 to 6 million)." (65)

The financial field of Islamic banking is estimated to be "growing 15% a year." (66) Worldwide, the relatively new concept of formalizing Islamic banking practices in Islamic banks was estimated, by 1997, at "close to $100 billion in deposits and investments." (67) Other estimates from 1998 are that Islamic banks had assets approximating $181 billion. (68) It is true that these figures of total assets, when considered from a worldwide perspective, are small in relation to total banking assets, but the figures are significant, especially when one notes that the asset base has been steadily increasing.

As recognized above, (69) the Islamic banking movement is gaining momentum worldwide. (70) This also means that alternatives to traditional Western, interest-based banking are becoming available to Muslims in the United States who have a desire to comply with the strictures of Islamic financial practices; until recently, such persons had no convenient method to conduct their financial affairs with a non-western style financial institution. Now that financial services are available through the internet, (71) Islamic practitioners are no longer limited to the banking and investment vehicles offered by the financial advisor down the block who may or may not know of the existence of an Islamic lending or investment tool.

One commentator writes:

   The phenomenon of globalization extends the ramifications of the
   riba prohibition beyond the circles of Islamic scholars and
   jurists, and Muslim and Islamic countries to international
   investors and businesses who are parties to transnational
   transactions. In 1997, Pakistan, Iran, Turkey, Malaysia, and
   Indonesia were among seven Muslim countries who formed the D-7, a
   group whose goal is "to promote mutual economic cooperation,
   build a common market, and develop capital markets" according to the
   principles of Islamic law. Being well-versed in such fields is of
   immense help to the foreign lawyer; each transaction performed
   contributes to and shapes the fledgling legal specialization of
   Islamic banking and finance. (72)

Like foreign attorneys, United States lawyers and bankers will benefit from an understanding of Islamic banking practices and be able to participate in additional transactions if they help charter Islamic banks in the United States or associate with these banks once established.

Helping facilitate Islamic banking practices might also serve to introduce bankers and attorneys to clientele beyond individuals who identify themselves as Muslim. Importantly, Islamic banking is more than interest-free banking; it involves financial endeavors aimed at the social good. As recognized, "Islamic banking should not be applied from a rigorously legalistic viewpoint, especially regarding interest." (73) Instead, "it should emphasize the application of social justice in the financial realm, a notion that has been forgotten by Western banking institutions." (74) Thus, a customer base of socially-conscious customers who may or may not be Muslim can potentially be tapped through the marketing efforts of a bank complying with Islamic banking practices. (75)

Certainly, a true Islamic bank in the United States would serve a niche in the banking world. Although several approaches are possible, it seems plausible that a community banking institution could establish local branches in areas with large Muslim customer bases, or alternatively, a national model could be followed with a reliance on internet and electronic media portals. The initial entrants into this market could conceivably gain a crucial marketing and customer base advantage. Additionally, if an Islamic bank is established in accordance with applicable banking rules and regulations, the bank could separate itself from other Islamic financial institutions by advertising that it complies with the "safety and soundness" regulatory regime of the United States banking system.

IV. REGULATORY REQUIREMENTS FOR ESTABLISHING AND OPERATING AN "ISLAMIC BANK" IN THE UNITED STATES

Operating a financial institution that is both compliant with Qur'anic dictates and in line with banking regulations established in the Western world requires an understanding of where the boundaries of riba-free Islamic banking and interest-based Western banking cross, so that operational efforts can be aimed at the areas of common ground. (76) This is not an easy task, especially because of the highly regulated nature of banking.

The Institute of Islamic Banking and Insurance recognizes the challenges faced by a Shan'a-compliant bank in the West:

   Having to work by the regulations of a non-Muslim government has a
   serious hampering effect on the growth of Islamic banks. For example
   some countries have taken the position that a bank is an institution
   that accepts deposits and guarantees a stated return on those
   deposits, except on current accounts. Therefore, an Islamic
   financial institution, since it does not guarantee a stated return,
   cannot, by definition, be recognized as a bank in those
   countries. (77)

While some Western banking regulatory regimes have taken the above-stated hard line position concerning bank deposits, (78) banking regulators in the United States appear open to the possibility of an Islamic financial institution operating as a chartered "bank" under their regulatory authority.

Notably, this openness co-exists with guarded realism concerning the challenges that will arise when Islamic practices are put to work in a regulatory system geared toward interest-based banking. As a representative of the Federal Reserve Bank of New York stated in 1996 during the Islamic Finance and Investment Conference:

   The primary message that I want you to take with you today is that
   as bank supervisors we have an open mind on how to approach any
   issues you may raise. Islamic bankers have been quite ingenious in
   developing financial transactions that suit their needs: we bank
   supervisors, too, can be ingenious and will want to work with any
   of you should you decide that you want to engage in Islamic banking
   in the United States. That is not to say that all issues can be
   resolved to your satisfaction. But our doors are open; indeed, that
   is the American way. (79)

A word of caution, however, must be issued to potential founders of an Islamic bank in the United States: choose the regulatory regime under which you will operate wisely, (80) because bank supervising entities and individual regulators are likely to have different views as to the propriety of the methods utilized by an Islamic bank. (81) It can be hypothesized that a regulatory body with significant resources and manpower, such as the Federal Reserve Bank, is much more likely than other regulatory agencies to take part in the serious and lengthy dialogue necessary to mold a banking regulatory regime around what will be "new" banking practices in the United States' banking system. (82) This is not to say that an application for the establishment of an Islamic bank will be rejected out of hand by any banking supervisory authority, but a bank's organizers will want to insure that they have a positive working relationship and dialogue with the future regulators of the bank from the very beginning of the enterprise.

A. Banking Practices In The United States

1. What Is A "Bank" In The United States?

There is a crucial definitional distinction that must be understood when it comes to banking in the United States, as compared to banking in some other areas of the world. In the United States, a "bank" is a statutorily defined term in various state and federal codes. Although the definitions vary to some degree, generally speaking "[t]he word 'bank,' in an act authorizing [a] bank commissioner to make rules for management of all banks, means a bank under such commissioner's supervision and does not refer to cooperative associations." (83) This means that a company conducting what some may deem "Islamic banking" is not a "bank" in the United States until the company complies with the statutory and regulatory requirements of becoming a bank.

Notably, what most Americans think of as their local corner bank may be a commercial bank, or it may be another deposit-gathering institution such as a savings association or credit union. It is this deposit-gathering aspect of banking that seems key to the creation of a Shari'a compliant banking institution in the United States, because absent the ability to gather deposits from customers wishing to manage their financial affairs according to the Qur'an, the institution is doing little more than investing the organizers' capital. The ability of a financial institution to accept deposits is restricted until the institution obtains a charter. (84) In fact, a company holding itself out as a bank, savings association or credit union without being chartered as such acts in violation of the law and subjects itself to repercussions from both federal and state banking regulators. (85)

2. Regulatory Framework For "Banks"

The United States banking system is a complex regulatory framework involving both a dual state-federal chartering system, and a myriad of institution-type-specific restrictions defining the banking activities in which an entity (taking the form of a commercial bank, savings association or credit union) may engage. Thus, a prospective banking institution will find itself weaving a regulatory maze that this paper can only begin to touch upon in general terms.

The dual banking system of the United States allows for a depository institution to "be organized either under state or federal law." (86) This is important because a banking institution's charter, be it state or federal, indicates the body of law that defines the institution's operating scope while also designating the institution's primary regulators. As a practical matter, the distinction between the scope of permissible activities between the state and federal systems "has dissipated in recent years, now that most of the differences among the states with respect to charter power have been federally preempted." (87)

Which regulatory agencies have authority over a banking institution depends on how the institution is chartered and operated. For example, while a national bank is primarily regulated by the Office of the Comptroller of the Currency ("OCC"), it is also regulated by the Board of Governors of the Federal Reserve System, and is automatically a member of the Federal Deposit Insurance Corporation ("FDIC"). (88) In contrast, a state bank is primarily regulated by its respective State Banking Commissioner but also may be regulated by the FDIC if insured, as is typical, and/or by the Federal Reserve if the state bank has applied for membership in the Federal Reserve System. (89) The regulatory scheme changes if the banking institution is a savings association, whose principal regulator is the Director of the Office of Thrift Supervision ("DOTS"), or a credit union, whose regulation may be shared by the National Credit Union Administration ("NCUA"). (90)

3 Distinction Between Commercial Banks, Savings Associations And Credit Unions

Commercial banks, generally speaking, "are empowered to offer a full range of banking services, including demand deposit accounts (for example, checking accounts) for business and personal use, savings and time deposits, investment and loan services, and the like." (91) A commercial bank is chartered under federal law, and also typically under state law, with the charge that it may exercise "all such incidental powers as shall be necessary to carry on the business of banking." (92) These powers are limited, however, and must be expressly approved by statute, (93) judicial finding or regulatory ruling. Thus, before a commercial bank engages in a financial activity, it must insure that the activity has been pre-approved under existing law, or the bank must seek a determination from its regulator that the activity in which it wishes to engage is permissible for commercial banks.

The laundry list of permissible activities for a commercial bank includes equipment leasing activities, limited securities and insurance transactions, and trust operations. (94) Commercial banks, however, are not permitted to enter into partnerships or joint ventures in order to prevent exposing the bank to the unlimited liability caused by others. (95) Additionally, the ownership of real estate (96) and common stock (97) are statutorily excluded from permissible banking activities.

The category of savings associations includes both Savings Banks and Savings and Loan Associations ("S&Ls"). Savings Banks are a relatively early form of savings association (98) developed to promote savings among individuals who had modest means. (99) "[T]hey have traditionally been limited by statute to noncommercial deposit and lending activities" and can be established either as mutual associations for the benefit of members or as corporate entities for the benefit of their shareholders. (100) S&Ls, historically, were intended to engage in thrift operations of a consumer and local nature, and their "main [statutory] purpose ... is the financing of homes." (101) The scope of banking operations made available to S&Ls has been broadened through legislation, and while there is some overlap with commercial banking activities, an S&L still has a statutorily charged community purpose. (102) Like savings banks, S&Ls may be either mutual or stock entities.

As part of their community focus, savings associations are permitted to invest in real estate. (103) Typically, a savings association establishes a service corporation subsidiary in accordance with 12 C.F.R. [section] 559 (2001). This regulation pre-approves the following real estate related activities of the service corporation:

(1) Acquiring real estate for prompt development or subdivision, for construction of improvements, for resale or leasing to others for such construction, or for use as manufactured home sites, in accordance with a prudent program of property development;

(2) Acquiring improved real estate or manufactured homes to be held for rental or resale, for remodeling, renovating, or demolishing and rebuilding for sale or rental, or to be used for offices and related facilities of a stockholder of the service corporation;

(3) Maintaining and managing real estate; and

(4) Real estate brokerage for property owned by a savings association that owns capital stock of the service corporation, the service corporation, or a lower-tier entity in which the service corporation invests. (104)

This language significantly distinguishes savings association activities from those of commercial banks.

Credit Unions are often lumped into the thrift category with savings associations, but they deserve separate treatment. Credit unions are intended to allow their members to leverage the effects of pooled savings, (105) thereby "facilitating the supply of consumer credit" to credit union members. (106) Formation restrictions limit membership "to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community, or rural district." (107) Concerning credit unions, one commentator writes:

   Like the savings associations, credit unions have traditionally
   been limited by statute to involvement in noncommercial deposit and
   consumer lending activities. However, while the savings associations
   have tended to expand their activities to the point where they may
   rival commercial banks in the offering of certain types of products
   and services in certain geographic markets, credit unions have to a
   greater extent maintained their original role. They specialize in
   providing more modest financial services to member/customers
   delineated in relatively narrow terms. (108)

Also distinguishing credit unions from savings associations are the entities' respective regulators. The former's principal regulator is the National Credit Union Administration while the latter's principal regulator is the Director of the Office of Thrift Supervision.

4. Regulatory Hurdles To Formation Of A Banking Institution In The United States

Regardless of the regulator or form of the banking institution, there are general concerns shared by regulators regarding both the viability of individual banking institutions and how the strength of individual banking institutions affects the viability of the entire banking system in the United States. These concerns are taken into account as the charter application of a proposed banking institution is evaluated. For example, before chartering a national bank, the Office of the Comptroller of the Currency is required to evaluate whether the proposed bank:

i Has organizers who are familiar with national banking laws and regulations;

ii Has competent management, including a board of directors, with ability and experience relevant to the types of services to be provided;

iii. Has capital that is sufficient to support the projected volume and type of business;

iv. Can reasonably be expected to achieve and maintain profitability; and

v. Will be operated in a safe and sound manner. (109)

Additionally, before chartering a bank the OCC may also consider the "risk to the Federal deposit insurance fund" and "whether the proposed bank's corporate powers are consistent with the purposes of the Federal Deposit Insurance Act and National Bank Act." (110)

Of particular concern to organizers of a Shari'a-compliant bank, because such a bank would be introducing new business practices to regulators, should be the factors set out above addressing capital and profitability. (111) The regulatory capital minimum, not including organizational expenses, is normally "in excess of $1,000,000." (112) Concerning profit, it is expected "that the bank [will] achieve profitability between its second and fourth years of business." (113)

B. Establishing A Shari'a Compliant 'Bank" in the United States

At the time of the writing of this paper, the author is not aware of any financial institutions principally operating in the United States that are compliant with both Islamic banking requirements and the laws of the United States governing banks, savings associations, or credit unions. There have been inroads into the American financial market by companies following Islamic banking practices (114) and outroads by American financial institutions establishing Islamic banking subsidiaries beyond the shores of the United States, (115) but an institution complying with Islamic banking practices within the United States has yet to be deemed a "bank."

This does not mean that the establishment of a Shari'a compliant banking institution is impossible in the United States. To the contrary, Islamic banking institutions can be established. The key will be developing a business plan that meets the capital and profitability thresholds required by banking regulators. As part of this plan, an Islamic banking institution's organizers will have to select the regulatory scheme that best permits the institution to provide financial services likely to be used by its customers.

Not all Islamic banking tools currently used in other parts of the world are consistent with American banking requirements. The permissibility of instituting certain Islamic-compliant financial practices will depend upon the institutional framework under which the banking institution is established.

Ironically, although a commercial bank serves to promote the widest array of banking services in the pro-interest Western banking model, it may prove to be restrictive as a principal format for establishing an Islamic bank. The traditional restrictions on a commercial bank's ability to own property for investment purposes will effectively serve to restrict the availability of murabaha (cost-plus financing), ba'i bithaman ajil (deferred payment financing), and istisna (commissioned manufacturing). However, ijara (lease financing) agreements will be permissible, as operating commercial banks commonly negotiate equipment leases. (116) And while musharaka (partnership arrangements) and mudaraba (venture capital transactions) would appear to violate the restrictions preventing commercial banks from engaging in partnerships or owning common stock, the Comptroller of the Currency has recognized 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." (117) This means that even though commercial banks are restricted from making true equity investments, the opportunity exists to structure an equity return from loan transactions while avoiding a reliance on interest.

Just as commercial banks may serve to provide a financial framework for carefully structured interest-free products, so too may credit unions. A credit union, with the statutory aim of promoting credit transactions on behalf of its members, follows a communal/partnership model consistent with Islamic financial theory. This consistency permits the operational philosophy of Islamic banking to easily transfer to the institution, but the riba-free transactions will be limited in much the same way they are limited in the commercial bank format.

However, an especially interesting form for the potential establishment of an Islamic banking institution is the savings association. This is because savings associations are able to enter into joint ventures and own property through subsidiary servicing companies. An Islamic banking institution with a business plan aimed at real estate financing should be able to easily adapt the savings association to its purposes. Murabaha, ba'i bithaman ajil, istisna, and ijara financing all seem permissible with regard to equipment and real property when a savings association utilizes a servicing company. Moreover, the limited joint venture possibilities available to savings associations open up the use of structured musharaka and mudaraba transactions. The statutory goals of promoting savings and home ownership may ultimately limit the business lines of an Islamic savings association, but because the tenets of Islamic economics mirror the general purposes of savings associations (wealth accumulation and home ownership), a natural business match appears to exist.

Thus, the potential organizers of an Islamic banking institution in the United States should be encouraged. While no institutional framework exists for the promotion of all the Islamic, non-interest financial tools, several options exist for the promotion of Islamic banking. The ultimate banking form selected (commercial bank, savings association or credit union) by a banking institution's organizers should be chosen to promote the banking institution's business plan.

V. CONCLUSION

Islamic financial institutions have established a world presence over the last three decades, and indications are that the asset base of these Islamic institutions will continue to grow. It seems only a matter of time until an Islamic banking institution, compliant with Shari'a practices, will be established in the United States. Doing so will mean that the banking institution's organizers will forge new ground with banking regulators and customers.

As demonstrated, a deposit gathering institution in the United States following Islamic tenets may take one of several forms, including that of a commercial bank, savings association or credit union. While the selected corporate form must align with the business plan of the organizers, a well-positioned Shari'a-compliant banking institution will be able to both fill a vacancy in the U.S. banking system and promote the growth of interest-free investment vehicles for everyday uses.

Ultimately, there is no apparent reason why a well-managed Islamic banking institution cannot be chartered in the United States. Furthermore, when such an institution is established, it will have great potential for success and profitability.

APPENDIX: List of Terms and Definitions Pertinent to Islamic Banking

1. Ba'i bithaman ajil: A credit sale of goods on a deferred payment basis. At the request of its customer, the financial institution purchases an existing contract to buy certain assets on a deferred payment schedule and then sells the goods back to the customer at an agreed upon price, including a profit.

2. Fatwa: A statement of guidance interpreting Islamic law prepared by Islamic scholars.

3. Ijara: A leasing arrangement whereby a financial institution purchases an asset and leases it to its customer.

4. Istisna: Transactions involving the payment by a financial institution to a developer or contractor as a job (typically involving construction or manufacturing) is completed.

5. Fiqh: Human comprehension of Shari'a (divine law)

6. Mudaraba: A transaction between a financial institution and its customer akin to a venture capital transaction. The financial institution provides all of the capital and, as such, assumes all of the risk of Joss. The customer acts as the financial institution's agent in utilizing the funds and also provides sweat equity (including know-how). The financial institution and customer share profits in accordance with a contractually stated percentage formula.

7. Murabaha: Financing by a financial institution on a "costplus" basis. The financial institution obtains title to a good on behalf of its customer, and then sells the good to the customer via installment payments at a contractually pre-arranged cost (set at the original cost of the good plus a reasonable profit for the financing institution).

8. Musharaka: Translated "partnership," a musharaka financing typically involves a business undertaking where the financial institution provides a percentage of the capital needed by its customer with the understanding that the financial institution and customer will proportionately share in profits and losses in accordance with a formula agreed upon before the transaction is consummated. The customer provides a percentage of the capital and sweat equity (know-how and management).

9. Shari'a: Divine law, perfect and immutable, as set forth in the Q,ur'an and the Sunna (recorded teachings of the Prophet Mohammed).

10. Sunna: Teachings of the Islamic Prophet Mohammed, recorded in writing only after having been deemed valid by religious scholars in the decades after the death of the Prophet Mohammed.

11. Qarde hasan: Financing that occurs when the financial institution provides a loan free of charge, typically with the intent to provide financial assistance to ailing institutions or to provide humanitarian assistance to individuals.

12. Qur'an: The holy book of the Islamic faith. The Qur'an is understood by Muslims to be the infallible word of God (Allah) providing instruction in both the religious and daily aspects of one's life.

13. Riba: Traditionally translated as "usury," the concept of riba includes interest and other forms of profit or gain that are not earned from work efforts.

(1) See generally Jean-Francois Seznec, Ethics, Islamic Banking and the Global Financial Market, 23 FLETCHER F. WORLD AFF. 161 (1999) ("The Islamic financial system derives its rules from religious sources, while the traditional banking system's rules originated in the market.").

(2) "The chief difference between the capitalist and Islamic systems is that the Islamic system of banking and finance is interest-free." Hesham M. Sharawy, Note, Understanding the Islamic Prohibition of Interest: A Guide to Aid Economic Cooperation Between the Islamic and Western Worlds, 29 GA.J. INT'L, & COMP. L. 153, 154 (2000).

(3) The phrase "practitioner looking in" was specifically selected, as opposed to the phrase "outsider looking in." Islamic banking practices are not limited to members of the Islamic faith. In fact, as argued in this paper, the typical American banker and transactional attorney would benefit from an understanding of Islamic banking practices in order to better serve his or her customers/clients. Though this paper is written as an introduction to the issues surrounding Islamic banking, even a novice-like understanding of Islamic banking practices might prove useful to the attorney or banker in understanding the rationale underlying the next deal that might come through the door.

(4) Shari'a (alternatively spelled Shari'ahi) is defined literally as "the Way" and represents the divine law as revealed in the Qur'an and the teachings of the Prophet Mohammed, as recorded in the Sunna. See Michael J.T. McMillen, Islamic Shari'ah-Compliant Project Finance: Collateral Security and Financing Structure Case Studies, 24 FORDHAM INT'L, L.J. 1184, 1189 (2001). Attached as an Appendix to this paper is a brief glossary of terms pertinent to Islamic banking; the terms in the glossary are defined and cited throughout the paper but are provided in a compiled format for easy reference by the reader.

(5) Gohar Bilal, Islamic Finance:Alternatives to the Western Model, 23 FLETCHER F. WORLD AFF. 145, 146 (1999).

(6) Imtiaz Pervez, Islamic Banking and Finance, reprinted in INFORMATION SOURCES ON ISLAMIC BANKING AND ECONOMICS 1980-1990 at 8,9 (S. Nazim Ali & Naseem N. Ali eds. 1994).

(7) Muazzam Ali, Publisher's Note to 1 A COMPENDIUM OF LEGAL OPINIONS ON THE OPERATIONS OF ISLAMIC BANKS iv (Yusuf Talal DeLorenzo ed., 1997).

(8) HRH PRINCE MUHAMMAD AL-FAISAL AL-SAUD, ISLAM AND THE WEST: TOWARDS A NEW INTERNATIONAL ECONOMIC ORDER (Speech given at UNESCO in Paris on Nov. 14, 1985), reprinted in JOURNEY TOWARDS ISLAMIC BANKING: A COLLECTION OF ARTICLES TALKS AND DISCUSSIONS BY HRH PRINCE MUHAMMAD AL-FAISAL AL-SAUD AND MUAZZAM ALI ON ISLAMIC: BANKING AND FINANCE 35, 36 (Shahzad Sheikh ed., 1996).

(9) Id.

(10) The salient features of Islamic financial practices have been summed up by the Institute of Islamic Banking and Insurance as follows:

1. While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity which are morally or socially injurious.

2. While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.

3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.

4. While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.

5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

The Institute of Islamic Banking and Insurance, ISLAMIC BANKING--What is Islamic Banking?, available at http://www.islamic-banking.com/ ibanking/whatib.php (last visited Oct. 12, 2001).

(11) Barbara L. Seniawski, Note, Riba Today: Social Equity, The Economy, and Doing Business Under Islamic Law, 39 COLUM. J. TRANSNAT'L L. 701,702 (2001).

(12) Id. at 708 ("[Riba] represents a situation of unjust enrichment. Thus, riba arises from an unequal (unfair) exchange, namely, an increase over the principal amount lent or the quantity traded."). Seniawski goes on to argue that charging an interest rate less than that of inflation is outside the scope of riba and thus should not be a forbidden Islamic practice. Id. at 709. This position appears to be at odds with the traditional interpretation of riba put forth by Islamic scholars. See infra discussion at Part II.B.

(13) FUAD AlL-OMAR & MOHAM M ED ABDEL-HAQ ISLAMIC BANKING: THEORY, PRACTICE; & CHALLENGES 8 (1996) (also stating, "Riba is an Arabic word meaning, literally, increase, addition, expansion or growth, but it is not increase or growth as such which Islam has prohibited."). See also Fatwa of Kuwait Finance House, al Fatawa al Shar'iyah, in 2 A COMPENDIUM OF LEGAL OPINIONSON THE OPERATIONS OF ISLAMIC BANKS 125, Question 270 (Yusuf Talal DeLorenzo ed., 1997) (Stating in partial response to the question, "What is the riba that is prohibited by the Qur'an?" that "Perhaps the most reasonable definition of the riba (prohibited) in the Shari'ah is that it is excess for which no compensation is given in the contract.").

(14) Seniawski, supra note 11, at 708. (quoting THE MEANING OF THE HOLY QUR'AN, II:27576 76 ('Abdullah Yusuf Ali trans., new rev'd ed. 1991)). The Qur'an also reads:

   O ye who believe!
   Fear Allah, and give up
   What remains of your demand
   For [riba], if ye are
   Indeed believers.
   If ye do it not,
   Take notice of war
   From Allah and His Messenger:
   But if ye turn back,
   Ye shall have
   Your capital sums.
   Deal not unjustly,
   And ye shall not
   Be dealt with unjustly.

Id. (quoting THE MEANING OF THE HOLY QUR'AN; II:278-79 ('Abdullah Yusuf Ali trans., new rev'd ed. 1991)).

(15) Id. (quoting THE MEANING OF THE HOLY QUR'AN, IV:161 ('Abdullah Yusuf Ali trans., new rev'd ed. 1991)).

(16) AL-OMAR & ABDEL-HAQ supra note 13, at 7.

(17) McMillen, supra note 4, at n. 2 (quoting NOEL J. COULSON, COMMERCIAL LAW IN THE GULF STATES: THE ISLAMIC LEGAL TRADITION 11 (1984)).

(18) See AL-OMAR & ABDEL-HAO., supra note 13, at 8 ("In recent times, the fiqh (Islamic jurisprudence) Academy of the Islamic Conference, held in 1986, supported the restrictive interpretation of riba which had been adopted by the early jurists, condemning all interestbearing transactions as void."). See also Seniawski, supra note 11, at 715-16 (recognizing that both the Pakistani Federal Shariat Court [in Ur-Rahman Faisal v. Secretary, Ministry of Law, Justice, & Parl. Affairs, Gov't of Pak., 44 P.L.D. 1 (1992)] and the Egyptian Supreme Constitutional Court [in Rector of the Azhar University v. President of the Republic, Case No. 1 (Sup. Constitutional Ct.)(Egypt), reprinted in SUPREME CONSTITUTIONAL COURT (EGYPT)-SHARI'A AND RIBA: DECISIONS IN CASE NO. 20 OF JUDICIAL YEAR NO. 1, 1 Arab L.Q. 100 (1985)] while interpreting national laws based on Shari'a determined that interest falls under the definition of riba and is therefore prohibited; Chibli Mallat, Commercial Law in the Middle East: Between Classical Transactions and Modem Business, 48 AM.J. COMP. L. 81, 125-28 (2000) (discussing the Ur-Rahman Faisal case and the rationale of the Pakistani Federal Shariat Court, including the fact that before ruling the court analyzed answers from 16 questions posed to "distinguished 'ulama, scholars, economists and bankers'" concerning riba and banking practices).

(19) Sharawy, supra note 2, at 156.

(20) The reader should keep in mind that financial institutions are not necessarily "banks" as that term is defined by banking regulations in non-Islamic countries. See infra discussion at Part IV.A. Islamic financial institutions can include banks, investment entities, investing partnerships, mutual fund management companies, etc. See, e.g., IBFNET: Islamic Financial Institutions, at http://islamic-finance.net/bank.html (last visited Apr. 25, 2002) (providing links to a sampling of Islamic Financial Institutions that provide various Shari'a-compliant products).

(21) See The Institute of Islamic Banking and Insurance, ISLAMIC BANKING--Status of Islamic banking, available at http://www.islamic-banking.com/ibanking/statusib.php (last visited Oct. 23, 2001).

(22) Id.

(23) The Institute of Islamic Banking and Insurance writes:

   The revival of Islamic banking [as practiced predominantly in the
   Muslim world throughout the Middle Ages] coincided with the
   world-wide celebration of the advent of the 15th Century of Islamic
   calendar (Hijra) in 1976. At the same time financial resources of
   Muslims, particularly those of oil producing countries, received a
   boost due to rationalization of the oil prices, which had hitherto
   been under the control of foreign oil Corporations. These events
   led Muslims to strive to model their lives in accordance with the
   ethics and philosophy of Islam.

The Institute of Islamic Banking and Insurance, ISLAMIC BANKING--What is Islamic Banking?, available at http://www.islamic-banking.com/ibanking/whatib.php (last visited Oct. 23, 2001).

(24) Chibli Mallat, Commercial Law in the Middle East: Between Classical Transactions and Modem Business, 48 AM.J. COMP. L. 81,124 (2000). Mallat goes on to state:

   The flight into Islamic banking is arguably one direct means which
   society has adopted to revive an abandoned commercial tradition.
   The advocacy is a clear one, and runs along the following lines:
   let's go back to the tradition in its pure form, get rid of
   interest, and establish a riba-free Islamic banking system. With
   such an ambitious challenge, immediate problems were bound to arise,
   both on the governmental level and in private ventures.

Id.

(25) See Bilal, supra note 5, at 145 (recognizing that the first modern Islamic bank was established in Egypt in 1960 and closed in 1967 due to political reasons, but that the establishment of the bank "had an important impact on further development of Islamic finance").

(26) id.

(27) See infra discussion at Part III.

(28) Munir Barakat & Eugene Sarver, Comment: Western Banks Taking 1st Steps Into Islam's 'No Interest' World, AM. BANKER,Jan. 30, 1997, at 9.

(29) Concerning the applicability of tradition in Islamic banking, one commentator writes:

   The practitioners of Islamic finance must follow four basic rules
   to develop, innovate and offer Islamic financial products: 1)
   avoid interest or unlawful gain, called "riba;" 2) avoid excessive
   risk taking, called "gharar;" 3) recognize that money is not a
   commodity; 4) recognize that money has no time value, that is to
   say, money doesn't change in value as time passes.

Bilal, supra note 5, at 146.

(30) See id. ("[I]slamic banking is based on the philosophy of partnership.").

(31) As summarized by one commentator:

   [I]t is important to note that most significant Islamic financial
   institutions have Shari'ah supervisory boards, committees, and
   advisors ("Shari'ah Boards"), comprised of one or more Islamic
   scholars that have particular expertise in economic and financial
   transactions. These Shari'ah Boards will often examine in detail
   both the structure of a proposed transaction or financial product
   and the documentation giving effect to that transaction or
   product.... Given that Shari'ah Board determinations are fiqh
   (human comprehension of Shari'ah, the divine law), there can be
   variations in interpretation and implementation from one Shari'ah
   Board to another with a multiplicity of views on a specific issue.
   These variations occur even though Shari'ah scholars in this period
   strive to achieve a consensus on difficult and novel issues, such
   as those involved in the development of new financial instruments
   and products. Islamic investors, be they financial institutions or
   individual investors, rely heavily on the involvement of Shari'ah
   Boards in the structuring and documentation of a transaction or
   financial product and may request that the Shari'ah Board's fatwa
   of approval be provided before an investment is made.

McMillen, supra note 4, at 1190-91.

(32) See, e.g., ACOMPENDIUM OF LEGAL OPINIONS ON THE OPERATION OF ISLAMIC BANKS (Yusuf Talal DeLorenzo ed., 1997). As recognized in the preceding note, however, variations in fatwas are possible. See McMillen, supra note 4, at 1190-91.

(33) Otherwise stated, the "Islamic financial system allows for the replacement of interest by a return obtained from investment activities and operations that actually generate wealth." Pervez, supra note 6, at 13.

(34) See ABDELGADIR BANAGA ET AL., EXTERNAL AUDIT AND CORPORATE GOVERNANCE IN ISLAMIC BANKS: A JOINT PRACTITIONER-ACADEMIC RESEARCH STUDY 13 (1994). See also James M. Fry & J. Michael Taylor, Foreign Direct Investment in Arab Countries: A Guide to Better Understanding Islamic Financial Doctrine, 4 PERMANENT CT. ARB./PEACE PALACE PAPERS (Int'l Bureau Permanent Ct. Arb. ed., forthcoming 2002) (providing a general summary of Islamiccompliant investment vehicles available to investors in the Middle East).

(35) Sharawy, supra note 2, at 170 ("One of the most commonly used methods of financing is the murabaha, or financing on a 'cost-plus' basis.").

(36) Bilal, supra note 5, at 153.

(37) See BANAGA ET AL., supra note 34, at 13.

(38) See Bilal, supra note 5, at 153.

(39) See BANAGA ET AL., supra note 34, at 13.

(40) "Although [murabaha] appears to permit interest under disguise, it is a permissible form of finance because '[t]he bank's profit premium is justified by the risk it incurs by allowing the client to refuse to accept a commodity procured on their behalf by the bank.'" Sharawy, supra note 2, at 170 (quoting SHAHRUKH RAFI KHAN', PROFIT AND LOSS SHARING: AN ISLAMIC EXPERIMENT IN FINANCE AND BANKING 64 (1987)). See also Mallat, supra note 24, at 22 (recognizing that the risks assumed by the bank as a title holder in the goods distinguish murabaha from traditional interest-based financing).

(41) See Mallat, supra note 24, at 131 ("[T]he main vehicle or "product" of Islamic banks is the so-called murabaha, which is none other than a facilitation by the bank of short-term loans, mostly in commercial export-import operations, for their most trusted clients.").

(42) See BANAGA ET AL., supra note 34, at 13-14 ("The applicant may be asked to provide some form of guarantee. Some banks may also require postdated cheques. The applicant may be required to make a down-payment as a margin deposit to show his commitment.").

(43) See Bilal, supra note 5, at 154.

(44) Id.

(45) Id.

(46) Pervez, supra note 6, at 23.

(47) See Bilal, supra note 5, at 154. See also Sharawy, supra note 2, at 171.

(48) See Pervez, supra note 6, at 24 ("Subject to fulfillment of certain conditions, the Client has the option to purchase the asset during the term of the lease. The optional purchase price declines over the term of the agreement. As the customer is not obliged to purchase the asset financed under the Ijara contract at the expiry of the lease, Islamic bank will not normally takes [sic] substantial risk with respect to its residual value at the lease tail-end.").

(49) Bilal, supra note 5, at 154.

(50) See BANAGA ET AL., supra note 34, at 14-15.

(51) See Pervez, supra note 6, at 21.

(52) See id. at 18-19.

(53) See Sharawy, supra note 2, at 169 ("In exchange for the use of the capital, the entrepreneur agrees to give a specified share of future profits to the investors, who in turn are exclusively responsible for any loss to the capital while in the care of the entrepreneur.").

(54) See Bilal, supra note 5, at 156 (also recognizing that "the structure of the mudaraba contract provides an opportunity to participate in large projects, sharing in both the risks and profits.").

(55) See BANAGA ET AL., supra note 34, at 15.

(56) See Pervez, supra note 6, at 19.

(57) Mallat, supra note 24, at 131.

(58) See Pervez, supra note 6, at 23.

(59) See id.

(60) See BANAGA ET AL., supra note 34, at 16.

(61) SHAHID HASAN SIDDIQUI, ISLAMIC BANKING: GENESIS & RATIONALE; EVOLUTION & REVIEW; PROSPECTS & CHALLENGES 53 (1994).

(62) Id.

(63) Id.

(64) See Barakat & Sarver, supra note 28, at 9 (estimating the number of Muslims world-wide to be one billion); Jennifer Weitzman, New Portal Points Muslims to Approved Providers, AM. BANKER, Mar. 30, 2000, at 14 (estimating the number of Muslims world-wide to be 1.2 billion).

(65) Islam Fastest Growing Religion in United States: Clinton, PRESS TRUST INDIA LTD., Jan. 10, 2000, available at 2000 WL 4607383 at *1.

(66) Barakat & Sarver, supra note 28, at 9.

(67) Id. See also Mallat, supra note 24, at 124 (quoting Ibrahim Warde, Islamic Finance in the Global Economy (2000)[manuscript quoted before published]) ("As of early 1999, Islamic financial institutions, (including banks and non-banks, securities finns, mutual funds, insurance companies, etc.) were present in more than 70 countries. Their assets exceeded the 200 billion dollars mark.").

(68) Bilal, supra note 5, at 145.

(69) See supra Part II.C (discussing the development of the Islamic Banking Movement).

(70) Barakat & Sarver, supra note 28, at 9 ("There are now [as of 1997] about 150 banks and financial institutions that are fully, or partially, Islamic - with their own boards of wise men who ensure that bank practices adhere to religious law.").

(71) See, e.g., Weitzman, supra note 64, at 9 (discussing the establishment of the London-based Islamic financial portal IslamiQ.com and stating that the "portal includes IslamiQmoney.com, a source for Islamic banking, finance, and insurance products and services.").

(72) Seniawski, supra note 11, at 719-20 (quoting Zamir Iqbal, Islamic Banking Gains Momentum, Expands Market and Competes with Conventional Banking in Arab States, 21 MIDDLE E. EXEC. REP. 9, 21 (1998).

(73) Seznec, supra note 1, at 164.

(74) Id.

(75) From a global and systemic analysis, the argument can also be made that the success of Islamic banking is important for relations between the Islamic and non-Islamic world. Quoting Nabil Saleh:

   I hasten to say that those who anticipate failure of the system
   [i.e., the Islamic system] with eagerness, should think twice
   before they start rejoicing, for its collapse, if it ever occurs
   will develop resentment, frustration and a further mistrust of
   Western standards and values. Only religious radicalism will reap
   advantage from such a situation, and the divorce between East and
   West will be nearly complete in case the financial and economic
   systems collide and their legal systems segregate. Religions,
   cultures and languages being already distinct, no common ground or
   interest would remain to bring the two worlds near each other.

William M. Ballantyne, Whither Arab Commercial Laws: The Law of God or of Mammon?, 23 MIDDLE E. EXEC. REP. 8 (2000) (quoting Nabil A. Saleh, Financial Transactions and the Islamic Theory of Obligations and Contracts, ISLAMIC LAW AND FINANCE (Chibli Mallat ed., 1988)).

(76) "For private institutions (and individuals), the challenge is to set up a system of banking which does not acknowledge any form of fixed fee on any transaction. A deposit or a loan of, say, 9% yield per annum would be illegal [under Islamic law]." Mallat, supra note 24, at 129.

(77) Institute of Islamic Banking & Insurance, ISLAMIC BANKING AND ITS PROBLEMS 10 (1993) (also stating, "In the USA, the position has not been stated so clearly and those who have looked into the many regulations of financial institutions in the States feel that there is room to manoeuver [sic]. However, the establishment of Islamic banks has not yet been facilitated there.").

(78) During a speech to the Arab Bankers' Association in London in 1984, Sir Leigh Pemberton, a Governor of the Bank of England, is reported to have stated: "Islamic banking is a perfectly acceptable mode of financing but it does not fall within the definition of what constitutes banking in the UK." As such, "The Bank of England is not legally able to authorize under the Banking Act, an institution which does not take deposits as defined under that Act." A.L.M. Abdul Gafoor, Islamic Banking [section] 4.4.1, available at http://users.bart.nl/~abdul/chap4.html (last visited Oct. 12, 2001) (article excerpted from A.L.M. ABDUL GAFOOOR, INTEREST-FREE COMMERCIAL BANKING [section] 4 (1995)).

(79) See Islamic Finance In the United States--The Regulatory Framework, available at http:/www.ny.frb.org/pihome/news/speeches/ep960523.html (last visited Oct. 12, 2001) (Remarks by Ernest T. Patrikis, First Vice President, Federal Reserve Bank of New York before the Islamic Finance and Investment Conference in New York, New York on May 23, 1996) [hereinafter "Patrikis Remarks"].

(80) See infra discussion regarding the various regulatory regimes applicable to banks in the United States. By way of example, a bank applying for a charter must decide whether it will be a national or state bank (i.e., regulated by the OCC or a State Banking Agency), whether it will become a member of the Federal Reserve System (i.e., primarily regulated by the FDIC or Federal Reserve), and whether its activities will be performed in conjunction with an affiliate entity that may come under the regulatory scope of another agency (i.e., investment activities may give rise to SEC or NASD examinations).

(81) In direct contrast to the open-minded approach taken by the Federal Reserve Bank of New York are the comments of Charles Schotta, who, while serving as the U.S. Deputy Assistant Secretary of the Treasury for Arabian Peninsula Affairs, stated:

   The principle of operating as a partner, in which profits and losses
   of enterprises are shared, appears sufficiently at odds with U.S.
   practice and regulations as to make it unlikely that the Islamic
   financial institutions can operate here as commercial banks or
   thrift institutions. In addition, the prohibition of interest,
   while itself occasioning little or no regulatory objection, would
   appear to represent a substantial competitive disadvantage for
   such institutions.

See Mallat, supra note 24, at 131 (quoting Charles Schotta, Islamic Banking and the U.S. Regulatory Climate, PROCEEDINGS, ISLAMIC BANKING AND FINANCE CONFERENCE, Washington DC, 25-26 Dec. 1986, at 1).

(82) "As you will see, there are few clear answers to many issues. What this means is, if you decide to pursue Islamic banking in the United States, that you, the bankers, and we, the bank supervisors, will have to have a dialogue on those issues. We view that dialogue as a way of jointly working out problems." See Patrikis Remarks, supra note 79.

(83) 1A MICHIE ON BANKS AND BANKING Ch. 1 [section] 2, at 10 (Lexis Law Publishing ed., 1999 Replacement Volume).

(84) PATRICIA A. MCCOY, BANKING LAW MANUAL [section] 3.01 (2d ed. 2000).

(85) See generally 1A MICHIE ON BANKS AND BANKING Ch. 1 [section] 10, at 149 (1999 Replacement Volume) (recognizing that operating without being properly licensed can void the transaction and cause the financial institution to lose its fights to collect the principal, fees, etc).

(86) MILTON R. SCHROEDER, THE LAW AND REGULATION OF FINANCIAL INSTITUTIONS [paragraph] 2.01 (1995).

(87) MCCOY, supra note 84, at [section] 3.01.

(88) See SCHROEDER, supra note 86, at [paragraph] 2.01 [1].

(89) See id. at [paragraph] 2.01[2].

(90) See 1 MICHAEL P. MALLOY, BANKING LAW AND REGULATION [section] 1.3 (2001 Supp.).

(91) Id. at [section] 1.2.2.

(92) McCoy, supra note 84, at [section] 5.02[2] (quoting the National Bank Act, 12 U.S.C. [section] 24 (Seventh)).

(93) For example, the National Bank Act mentions five traditional banking powers: discounting and negotiating notes, receiving deposits, trading currency, making loans on personal security, and circulating notes. See id.

(94) See id. at [section] 5.02[4]. It is worth noting that on November 12, 1999, President William Clinton signed into law the Financial Services Modernization Act of 1999. See Pub. L. No. 106-102 (1999)["Gramm-Leach-Bliley Act"]. The Act repealed portions of the GlassSteagall Act of 1933, which served to establish barriers between banking and securities underwriting activities. See 12 U.S.C. [section] 377 (repealed by Pub. L. No. 106-102, at [section] 101(a)). The Gramm-Leach-Bliley Act allows the creation of financial holding companies that are entitled to hold various financial subsidiaries engaged in different financial activities such as banking, insurance, and securities-related activities. See generally Pub. L. No. 106-102. Organizers of an Islamic banking institution will want to consider whether to establish a financial holding company and various subsidiaries under the Gramm-Leach-Bliley Act in order to maximize potential business lines.

(95) See SCHROEDER, supra note 86, at [paragraph] 4.03[1] [b].

(96) See, e.g., National Bank Act, 12 U.S.C. [section] 29 (strictly limiting the real estate a bank may own, i.e., a bank is permitted to own (1) its own premises and (2) real estate obtained through its lending (i.e., foreclosure), but only for a short period).

(97) See National Bank Act, 12 U.S.C. [section] 24 (Seventh).

(98) See MALLOY, supra note 90, at [section] 1.2.3.

(99) See SCHROEDER, supra note 86, at [paragraph] 2.01 [5] [c].

(100) MALLOY, supra note 90, at [section] 1.2.3.

(101) Id. at [section] 1.2.4 (quoting State v. Minnesota Fed. Say. & Loan Ass'n, 15 N.W. 2d 568, 574 (Minn. 1944)).

(102) See id.

(103) See, e.g., 12 C.F.R. [section] 560.37 (2001) ("A federal savings association may invest in real estate (improved or unimproved) ... for rental or sale...."). See also 12 C.F.R. [section] 559.4(e) (2001) (setting forth that a pre-approved activity of service corporation subsidiaries of savings associations includes the ownership of real estate for re-sale).

(104) 12 C.F.R. [section] 559.4(e)(2001)

(105) See SCHROEDER, supra note 86, at [paragraph] 2.01 [5] [b].

(106) JONATHAN R. MACEY & GEOFFREY P. MILLER, BANKING LAW AND REGULATION 29 (2d ed, 1997).

(107) See SCHROEDER, supra note 86, at [paragraph] 2.01 [5] [bi (quoting 12 U.S.C. [section] 1759).

(108) MALLOY, supra note 90, at [section] 1.2.5.

(109) 12 C.F.R. [section] 5.20(f)(2)(i)(2001).

(110) 12 C.F.R. [section] 5.20(f)(2)(ii)(2001).

(111) See 12 C.F.R. [section] 5.20(f)(2)(i)(C)-(D) (2001).

(112) MALLOY, supra note 90, at [section] 2.2.1.

(113) Id. at [section] 2.2.1 (going on to state, "Accordingly, the application must include pro forma balance sheets and income statements based on the organizing group's plans for operating the bank. These projections should reflect the anticipated mix of assets and liabilities, planned fixed asset investment, volume of business, type and quantity of services to be offered, convenience and suitability of the selected site of the proposed bank, anticipated number of employees, and remuneration of officers.").

(114) See Sheryl Jean, Program May Help Muslims Pay Homeownership: Faith Prohibits Normal Borrowing for a Mortgage, CHI. TRIB., Sep. 9, 2001, at 7B (Freddie Mac has begun buying interest free lease-purchase agreements). But see Amy L. Anderson, Islamic Funds Seem Ready to Emerge in U.S. Market, AM. BANKER, Dec. 27, 1999, at 8 (In a discussion about the potential introduction of new Islamic mutual funds, recognizing: "Mutual funds that cater to Islamic investors have proven popular in Europe and the Middle East and could be poised for success in the United States." However, also recognizing: "Islamic mutual funds have made few inroads in the U.S. market. There are only two such funds, compared with a plethora of funds catering to other religious beliefs, particularly Christianity.").

(115) For example, Citicorp launched a wholly-owned subsidiary, called Citi Islamic Investment Bank, in Bahrain during July 1996. The new subsidiary of Citicorp was started with $20 million in capital and was developed to be compliant with Islamic laws. Interestingly, Citicorp has had a traditional (interest based) commercial banking presence in Bahrain since 1970. See Citicorp Launches an Investment Bank in Bahrain, A.M. BANKER, July 10, 1996, at 4. See also Munir Barakat and Eugene Sarver, Comment: Western Banks Taking 1st Steps Into Islam's (No Interest' World, A.M. BANKER, Jan. 30, 1997, at 9 ("A number of large banks, such as Chase Manhattan Corp., Citicorp, and Bankers Trust New York Corp., have conformed their practices to Islamic requirements in countries as far-flung as Saudi Arabia and Malaysia.... Other Western financial institutions involved in offering Islamic banks [business opportunities through special divisions] include Chase Manhattan Corp., J.P. Morgan & Co., Republic New York Corp., Goldman, Sachs & Co., Arab American Bank, and Bankers Trust."); Jennifer Witzman, New Portal Points Muslims to Approved Providers, AM. BANKER, March 30, 2000, at 14 (discussing the creation of a London-based financial portal, IslamiQ.com, a source for Islamic banking and a resource where "[u]sers can receive lists of financial services companies in the Middle East, the United Kingdom, or the United States that adhere to Islamic principles.").

(116) To the extent that murabaha, ba'ibithaman ajil and istisna transactions avoid real estate and mimic lease financing, they may be permissible. The ultimate availability of these financial vehicles to commercial banks will depend on particular factual situations and the flexibility of regulators.

(117) SCHROEDER, supra note 86, at [paragraph] 4.03[1][c] (quoting 12 C.F.R. [section] 7.7312 (1993) and recognizing that a new regulation continuing the same policies but replacing [section] 7.7312 is to be codified at 12 C.F.R. [section] 7.1006). Schroeder goes on to note, "The Comptroller has expressed the opinion that a national bank is permitted under a loan agreement to accept stock warrants in addition to or in lieu of interest on loans as a so-called 'equity-kicker.'" Id., at [paragraph] 4.03[1][c] n. 182.

F. Michael Taylor Associate, King & Spalding, Washington, DC. This paper was written while Mr. Taylor was a Fellow of the Institute of International Economic Law at Georgetown University Law Center, where he also was completing an LL.M. in International and Comparative Law. Mr. Taylor received a B.A. from Duke University and a J.D. from the University of Alabama. The author wishes to thank Dr. Mohamed Mattar.