Printer Friendly

Islamic finance: the United Kingdom's drive to become the global Islamic finance hub and the United States' irrational indifference to Islamic finance.

I. INTRODUCTION

In the wake of September 11, 2001, Islamic finance has become synonymous with the concept of "terror financing" in the United States rather than an alternative approach to financing and banking. (1) The recent economic crash, which was fueled by practices prohibited in Islam, has led many outside of the United States to view Islamic finance as an alternative financing approach. (2) This change in perspective is causing Islamic finance to grow annually at a rate of fifteen to twenty percent since 2002. (3) In 2004, the United Kingdom signaled to the world its commitment to become the western hub of Islamic finance by granting approval to the Islamic Bank of Britain (IBB), the first retail Islamic bank in Europe, to operate in the United Kingdom. (4) The United States lags behind the United Kingdom in cultivating Islamic finance and thereby risks missing an opportunity to be a significant force in a consistently growing market that is estimated to be worth anywhere from $700 billion to $1.5 trillion. (5)

This note argues that the United States must do more to fuel the growth of the Islamic finance industry by emulating the steps the United Kingdom has taken to nurture the Islamic finance industry. (6) Part II of this note discusses the origins, sources and key concepts of Islamic finance. (7) Part III of this note discusses the history and present state of Islamic finance in the United Kingdom and the United States. (8) Part IV of this note discusses the steps the United States must take to recognize and cultivate Islamic finance as the United Kingdom has done. (9) Finally, this note concludes with recognizing that the United States has great potential to expand the Islamic finance industry if it proactively integrates Islamic finance into its existing tax and regulatory scheme. (10)

II. Origins, Sources and Core Principles of Islamic Finance Law

A. Origins of Islamic Finance Law

1. Shari 'ah--Just Islamic Law or Something More?

Shari 'ah, the "foundation of Islamic Finance," means the "road to the watering place" or "the path leading to the water," but loosely can be understood to mean Islamic law. (11) The primary source of Shari 'ah is the Holy Qur 'an. (12) In addition to the Holy Qur 'an, the sunnah ("well-trodden path") and hadiths (reports) are primary sources of Shari 'ah. (13)

2. Fiqh--Islamic Jurisprudence

Fiqh (Islamic Jurisprudence) is the exercise of "deducing and applying the principles and injunctions of Shari 'ah, and the sum total of the deductions by particular jurists." (14) Fiqh allows legal scholars to draw detailed practical rules from the Holy Qur 'an, sunnah, and hadiths. (15) The majority of legal scholars employ ijma (consensus on judgments). (16) They also use qiyas (analogical reasoning). (17) In drafting detailed practical rules, Shari'ah scholars use both resources to take into account contemporary changes in all aspects of life. (18)

B. Core Principles Underlying Islamic Finance

Shari 'ah compliance requires one to engage in an exercise to avoid violating the four major prohibitions of Shari 'ah (19) Shari 'ah prescribes four major prohibitions that all Islamic finance products or transactions must follow to be deemed Shari 'ah-compliant. (20) The four major prohibitions involved are: riba (interest or usury), gharar (uncertainty), maisir (excessive risk or gambling), and haram (investing in products and industries forbidden to Muslims). (21)

First, riba is the charging or receipt of interest and usury by

investors and lenders. (22) The two rationales that underlie the prohibition against riba are no intrinsic value in money and unfairness in manipulating "poorer members of society by unscrupulous merchants." (23) Second, gharar is the prohibition against excessive uncertainty or risk. (24) Gharar allows some level of risk but prohibits excessive and disproportionate risk and any speculative trading and transactions. (25) The prohibition against gharar tends to forbid major western financial products such as forward contracts, swap agreements, hedges, options, derivatives, and financial insurance. (26)

Third, maisir is the prohibition against gambling. (27) In most commercial transactions, there is some component of gambling but maisir prohibits gambling that gives rise to "an effortless gain." (28) Finally, haram is the prohibition against investing in forbidden industries or products. (29) The following industries are examples of haram industries: alcohol, pornography, gambling, weapons/defense, prostitution, and financial services dependent on payment of interest. (30)

C. Shari 'ah-Compliant Finance Concepts

There are seven major Islamic finance concepts that are Shari 'ah-compliant. (31) This note will focus on providing a cursory overview of only the following five Shari'ah-compliant finance concepts: ijara, musharaka, mudaraba, murabaha, and sukuk. (32) Ijara is a finance lease in which the bank purchases the asset and subsequently, for a rental fee, leases an asset to the customer. (33) Musharaka is a partnership in which both the customer and financial institution provide capital and share in the profits and losses based on an agreement between the parties before the transaction is finalized. (34)

Mudaraba is comparable to a venture capital financing or profit-sharing type of financial structure. (35) In a mudaraba financing, the investors provide all capital and the "borrower" manages the venture and puts up sweat equity. (36) Mudaraba and musharaka are similar in regards to splitting profits on a predetermined formula, but only the party providing financial capital in a mudaraba bears all the losses. (37) A murabaha is a mark-up contract and is the most

"common form of Islamic finance." (38) In a murabaha contract, a bank or other financial institution purchases the asset and sells it to the ultimate buyer at a contractually pre-arranged cost on an installment basis. (39)

Finally, sukuks are loosely defined as "Islamic bonds" but in reality, they are similar to equipment trust certificates or investment certificates because of their ownership attributes. (40) Sukuks differ from "equity, notes, and bonds" because they are not "debts of the issuer; they are fractional or proportional interests in underlying assets, usufructs, services, projects, or investment activities." (41) Moreover, the underlying assets or activities of sukuks must be Shari'ah-compliant for the sukuks to be considered valid under Shari 'ah law. (42)

III. ISLAMIC FIANNCE IN THE UNITED KINGDOM AND THE UNITED STATES

A. Islamic Fiannce in the United Kingdom

1. History of Islamic Finance in the United Kingdom

The U.K. Islamic finance market began in the 1980s by providing wholesale Shari 'ah-compliant services and products. (43) Islamic finance in the United Kingdom mainly consisted of commodity murabaha-type transactions and no retail products were available in the 1980s. (44) Retail products, such as home financing, appeared in the United Kingdom in the 1990s through offerings by banks from the Middle East and South Asia. (45) The retail products, however, fell outside the regulatory framework; thus, consumers investing in retail Islamic finance products lacked the protection that consumers investing in conventional finance products enjoyed. (46) Lord Edward George, Governor of the Bank of United Kingdom in 1995, recognized the importance of Islamic banking and "the need to put Islamic banking in the context of London's tradition of competitive innovation." (47) The Islamic finance market grew slowly from the 1990s to the early 2000s, but has grown significantly since the early 2000s because of the United Kingdom's proactive approach in nurturing the Islamic finance market. (48)

In 2000, the Bank of United Kingdom established a group with Her Majesty's Treasury to investigate the obstacles facing the Islamic finance industry in the United Kingdom. (49) Subsequently, the Bank of United Kingdom recognized the potential value of Islamic finance, marking the beginning of the industry's significant growth within the United Kingdom. (50) Lord George chaired a high-level working group with representatives from the City and national government, the Muslim Community, and the Financial Services Authority (FSA) to examine the barriers to Islamic finance in the United Kingdom. (51) Moreover, while speaking at a conference organized by the Muslim Council of Britain, Chancellor Gordon Brown explicitly stated that the United Kingdom was in a position to become "a gateway for Islamic trade and finance." (52)

2. Financial Services Authority--Sole Financial Regulator of the United Kingdom

The FSA, an independent, non-governmental organization, was created in 1997 to regulate the U.K. financial industry. (53) The FSA became the sole regulator of the financial industry in 2000 in accordance with the Financial Services and Markets Act (FSMA). (54) As the sole regulator, the FSA can provide a consistent analysis of Islamic financial institutions and products and their potential to operate within the larger system. (55) FSA has made it clear that all authorized financial institutions operating in the United Kingdom are subject to the FSMA. (56)

3. Significant Tax & Legislative Changes Geared to Fuel the

Growth of Islamic Finance.

The United Kingdom has introduced a series of tax and legislative changes to help transform the United Kingdom into the global hub of Islamic finance. (57) The first major obstacle to Islamic finance in the United Kingdom was the Stamp Duty Land Tax (SDLT) on murabaha-structured mortgages. (58) The United Kingdom charged a SDLT on the sale of every property. (59) Islamic mortgages were double-taxed because murabaha transactions require the property be sold first to the bank and then transferred to the homebuyer upon full payment. (60) In 2003, the United Kingdom passed the Finance Act of 2003, exempting, on a limited basis, "alternative property finance" from the SDLT, thereby eliminating the double taxation of murabaha-structured mortgages. (61)

Second, the Finance Act of 2005 legislated murabaha, referred to in the legislation as purchase and resale arrangements, and mudaraba, referred to in the legislation as a profit-share return arrangement. (62) Under a purchase and resale arrangement, the profit earned on the sale of the asset is equal to charging interest and therefore taxed as a loan. (63) In a profit-share return arrangement, the return for the investor is "taxed as if it were interest and the legislation switches off the tax rules that might otherwise treat it as a distribution, so the deposit-taker receives a deduction for the payment." (64)

Third, the Finance Act of 2006 legislated diminishing musharaka transactions, or diminishing shared ownership transactions. (65) Diminishing musharaka financing is "a form of property or other asset financing under which the borrower progressively acquires the lender's share in the asset and pays a rent or financing charge at the same time for the share of the assets the lender retains." (66) Homebuyers may use the diminishing musharaka financing structure to purchase homes. (67)

Finally, the Finance Act of 2007 sought to facilitate sukuk issuance, known as alternative finance investment bonds, in the United Kingdom. (68) One important purpose of the Finance Act of 2007 was to treat sukuks as conventional bonds and apply the same applicable tax treatment. (69) Additionally, the Finance Act of 2007 brought ijara-based contracts, referred to in the legislation as Home Purchase Plans (HPPs), within the FSA's regulatory framework. (70)

4. Effect of Tax & Legislative Changes on the Development of Islamic Finance.

Upon the enactment of the Finance Act of 2003, the IBB opened for business and made the concept of interest-free commercial banking a reality. (71) In approving the application for the IBB, the FSA's major obstacle was defining a deposit. (72) The FSA required depositors to be entitled to full repayment while Shari 'ah principles required the depositor to accept the risk of loss of original capital. (73) The FSA resolved the deposit issue by requiring depositors to be legally entitled to full repayment of original capital but providing depositors the option of opting out of the deposit protection. (74) The FSA's approval of IBB legitimized Islamic banking practices within Western banking circles. (75) Additionally, many wholesale banks in the United Kingdom, such as Barclays and HSBC, now offer Shari 'ah-compliant financial services. (76) A number of fund managers, law firms and accounting firms have followed suit, offering Islamic services as well. (77)

Moreover, the United Kingdom established the world's first secondary market for sukuk offerings that has led to a significant growth in sukuk offerings in the United Kingdom. (78) As of January 2007, the U.K.'s sukuk secondary market has increased U.K. trade volume to approximately $2 billion. (79) The London Stock Exchange (LSE) has become the "premier listing venue for Shariah [sic]compliant products globally." (80) As of November 2007, fourteen issuers chose the LSE to list their sukuk, raising over 5 billion [pounds sterling]. (81)

Finally, the growth of Islamic finance in the United Kingdom has highlighted a significant need for more Shari'ah scholars with an expertise in both finance and fiqh. (82) Shari 'ah scholars issue a fatwa (religious ruling) if they deem an Islamic finance product to be Shari 'ah-compliant. (83) Currently, about one hundred such experts are available, but the industry relies heavily on approximately a dozen out of the hundred experts. (84) The United Kingdom has made significant progress in increasing the supply of Shari 'ah scholars by launching the Islamic Finance Council Scholar Professional Development Program. (85)

B. Islamic Finance in the United States

1. History of Islamic Finance in the United States

Although modern Islamic finance, as a whole, can trace its origins back to the 1950s, Islamic finance in the United States is a nascent industry that began with the establishment of the American Finance House LARIBA (LARIBA) in 1987. (86) LARIBA is the oldest Islamic finance organization in the United States funded primarily by U.S. Muslims. (87) From 1985 until 1997, the Federal Reserve authorized leading U.S. financial institutions to "offer murabaha and ijara products in countries, such as Pakistan and the Sudan, that had mandated that all financing activities in those countries be provided on an Islamic basis." (88) Within the United States, however, no Islamic financing product was both publicly approved by a "U.S. regulatory agency and sanctioned by a board of Islamic scholars" prior to 1997. (89) Islamic providers were unable to offer products that conformed to both Islamic religious doctrine and state and federal banking regulation. (90)

The principal challenge facing Shari 'ah-driven providers arose from a provision in the National Bank Act of 1864 (NBA) that prohibits banks "from the purchase, holding of legal title, or possession of real estate to secure any debts due it for a period exceeding five years."91 On its face, the NBA seems to prohibit Shari'ah-compliant mortgage products, but two interpretive letters issued by the Office of the Comptroller of the Currency (OCC) recognized the concepts of ijara and murabaha92 In 1997, the OCC issued Interpretive Letter No. 806 which concludes that an ijara-based mortgage is "functionally equivalent to, and in substance has the characteristics of a conventional real estate mortgage." (93)

Subsequently, in 1999, the OCC issued Interpretive Letter No. 867 recognizing that murabaha-based mortgages were "functionally equivalent to ... a real estate mortgage transaction." (94) The OCC, in issuing both interpretive letters, gave precedence to the "economic substance of the transaction, rather than its form," commonly referred to as the "substance-over-form" doctrine.95 The September 11 attacks, however, overshadowed the significance of the OCC Interpretive Letters and led many Gulf-based investors to withdraw their capital from the United States.96 Nonetheless, Islamic financial institutions worked with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to make Shari 'ah-compliant mortgages eligible for sale on the secondary market. (97)

Freddie Mac and Fannie Mae control almost ninety percent of the secondary market for home mortgages in the United States. (98) Freddie Mac, in 2001, financed approximately $11 million of Shari 'ah-compliant home financing contracts. (99) Fannie Mae followed quickly and in December 2002 "announced an investment of $10 million in Islamic home financing with LARIBA" (100) Freddie Mac has continued to buy Shari 'ah-compliant mortgages from various institutions such as Devon Bank, Guidance Residential, University Bank, and LARIBA. (101) As of 2007, Freddie Mac had reportedly purchased more than $250 million in Shari'ah-compliant mortgages. (102) Islamic finance institutions have access to meet growing demand by selling Shari 'ah-compliant mortgages to Freddie Mac and Fannie Mae, which are the "secondary market conduits between mortgage lenders and investors." (103)

2. Hints of Regulatory Acceptance of Islamic Finance in the United States?

Persian Gulf based bankers and investors have sought open US support of Islamic finance similar to the support Prime Minister Gordon Brown and other UK regulators have shown to the industry. (104) In 1996, Ernest T. Patrikis, then First Vice President of the Federal Reserve Bank of New York, expressed the U.S. regulators' willingness to work with Islamic Bankers on the condition that the Bankers agree to engage in Islamic banking in the United States. (105) The next display of public support occurred in May of 2004 when John B. Taylor, Under Secretary of the U.S. Treasury, recognized the important economic role Islamic finance played and the need to understand its tenets to promulgate effective regulations. (106) During his speech, Taylor announced the creation of an Islamic Finance Scholar-in-Residence program at the U.S Department of Treasury to enhance understanding of both domestic and international Islamic finance. (107) In November 2008, the U.S. Treasury Department hosted a seminar in Washington D.C. called "Islamic Finance 101" to discuss the "provisioning of Islamic finance products in the [United States]." (108)

3. U.S. Tax Code--An Immovable Mountain in the Way of Islamic Finance?

Although the OCC interpretive letters and comments by U.S. regulators removed some obstacles to Islamic finance, they failed to address the disparate tax treatment of Islamic finance products. (109) In the United States, the cornerstone of homeownership is the ability to deduct the interest paid on the debt used to purchase a home from taxable income. (110) Financial institutions in the United States use ijara, murabaha, and musharaka financing structures to provide Shari 'ah-compliant mortgages. (111) Under the mortgage alternative loan transaction, the Internal Revenue Service (IRS) grants an ijara-based mortgage as a traditional mortgage and grants the same tax advantages of a traditional mortgage. (112) The IRS, however, treats murabaha- and musharaka-based mortgages differently and does not afford the same tax advantages to homebuyers electing home financing based on either of these two structures. (113)

In a murabaha-based mortgage, the IRS does not allow the homebuyer to deduct interest that arises from home indebtedness on a primary-residence. (114) The homebuyer, however, would still be able to exclude the imputed rental income and "the exclusion of gain on the sale of a principal residence." (115) Under conventional mortgage financing models, a musharaka arrangement is comparable to a partnership arrangement and therefore the homebuyer is not indebted at any point in time. (116) As the homebuyer is a partner in the arrangement, he pays no interest and therefore cannot deduct any interest. (117) Additionally, the homebuyer can neither exclude the imputed rental income nor any gain realized on the sale of residence. (118)

In addition to federal tax considerations, Shari 'ah-compliant mortgages must take into account tax treatment of the mortgages on the state level. (119) Unlike a conventional mortgage, a murabaha and ijara mortgage would be subject to property transfer taxes twice. (120) Most states tax when the bank first purchases the property and again when the homebuyer pays off the bank and the bank transfers the property to the homeowner. (121)

U.S. taxpayers, however, may be able to overcome the tax disadvantages under tax laws because of the substance-over-form doctrine. (122) The taxpayer must assert that the "economic substance of the transactions is different from the form of the transaction, and thus, the tax treatment should be based on the substance of the transaction and not the form." (123) For instance, the IRS Commissioner utilizes the substance-over-form doctrine to overrule sham transactions. (124) Predictably, a taxpayer's ability to invoke the substance-over-form doctrine has been much more difficult than the IRS Commissioner's ability to invoke the doctrine. (125) Taxpayers have an uphill battle proving that the economic substance of a transaction varies from the form or may be precluded completely from challenging the form of the transaction. (126)

4. Federal Deposit Insurance Corporation's (FDIC) Insurance An Obstacle in Providing Shari 'ah-Compliant Deposit Accounts.

The Muslim population in the United States is estimated to be anywhere from two to seven million. (127) One of the most basic products offered by conventional banks is a deposit account protected by the Federal Deposit Insurance Corporation's (FDIC) insurance. (128) A Shari 'ah-compliant deposit account requires the bank and depositor to share in the profits and losses, a concept that is contrary to the current U.S. regulatory framework. (129) FDIC insurance allows the bank and depositor to share profits but, contrary to Shari 'ah principles, protects the depositor from losses. (130) The FDIC currently does not allow depositors to waive the insurance on depositary arrangements. (131)

5. Overview of Sukuk Offerings in United States.

Shari'ah-compliant finance is a "promising yet largely untapped resource for financing in the oil and gas industry." (132) Islamic finance is compatible with oil and gas assets because investors can share in the profits and losses, and the assets are not haram (prohibition against investing in forbidden industries). (133) In July 2006, the East Cameron Gas Company (East Cameron) offered the first sukuks in the United States worth $165.7 million and marketed to Muslim and non-Muslim investors. (134) East Cameron's sukuk offering represented a "groundbreaking event" for the Islamic finance industry because it "entailed the creative application of traditional U.S. oil [law] and gas law to an Islamic financing." (135) In October 2008, East Cameron filed for Chapter 11 bankruptcy placing the future of sukuk offerings in the United States at jeopardy depending on how sukuks will function in the bankruptcy proceedings. (136)

IV. ANALYSIS

Islamic finance in the United Kingdom has grown significantly because of changes made to the U.K. regulatory and tax schemes. (137) The United States, however, has not made any regulatory or tax changes to cultivate the Islamic finance industry. (138) This section seeks to highlight the steps the United States needs to take to cultivate Islamic finance and the potential for growth of Islamic finance in the United States. (139)

A. Difference between U.S Regulators and U.K Regulators in Supporting Islamic Finance

While the U.K regulators have actively supported the Islamic finance industry, U.S. regulators have passively supported it. (140) U.S. regulators have expressed their willingness to cultivate Islamic finance only if Islamic bankers take the initiative, unlike the United Kingdom that has proactively sought out Islamic finance business. (141) The United Kingdom specifically created groups with the FSA and Her Majesty's Treasury to demarcate and remove obstacles limiting growth in the Islamic finance industry. (142) In contrast, the only proactive step the United States has taken is the creation of the Islamic Scholar-in-Residence Program at the U.S. Department of Treasury. (143) The purpose of the Islamic Scholar-in-Residence program was simply to provide U.S. regulators with a better understanding of Islamic finance. (144)

U.S. regulators must provide more direct support for Islamic finance or risk becoming a minor player in a major financial industry. (145) The United States must create working groups that will be able to identify barriers to Islamic finance and recommend constructive changes to incorporate Islamic finance into the current regulatory scheme as the United Kingdom has done. (146) The Bank of United Kingdom, FSA, and Her Majesty's Treasury created groups that set forth recommendations to remove barriers to Islamic finance within the United Kingdom. (147) Similarly, the U.S. Department of Treasury must take the initiative to cultivate Islamic finance by proposing new rules and regulations to accommodate Islamic finance. (148) Islamic finance is a growing industry that requires direct support from U.S. regulators to incentivize Islamic bankers to bring their business back to the United States. (149)

B. Need for Application of Similar Tax Treatment to Shari 'ah-Compliant Mortgages as Conventional Mortgages

Compared to conventional mortgages, Shari 'ah-compliant mortgages in the United States stand at a tax disadvantage on both the federal and state level. (150) The federal tax treatment of Shari 'ah-compliant mortgages differs based on the type of structure employed by the transaction. (151) Additionally, individuals must account for state taxes when utilizing Shari 'ah-compliant mortgages. (152) Finally, individuals seeking to purchase homes with Shari 'ah-compliant mortgages may invoke the "substance over form" doctrine to receive favorable tax treatment but each individual homebuyer must invoke it. (153) The United States must enact the following changes for it to emulate the United Kingdom's system of Islamic finance and recognize the potential of Islamic finance. (154)

1. Tax Treatment of Shari 'ah-Compliant Mortgages

Islamic financial institutions in the United States primarily utilize ijara-, murabaha-, and musharaka-based mortgages and, consequently, are subject to debilitating federal tax treatment. (155) Similarly, Islamic financial institutions in the United Kingdom utilize ijara-, murabaha-, musharaka-, and mudaraba-based mortgages. (156) Islamic mortgages in the United States are at a significant disadvantage because of the lack of recognition by the U.S. tax authorities of Shari 'ah driven property financing in the tax code. (157) In order for Islamic finance to thrive in the United States, Congress must amend the tax code to provide exemptions for Shari 'ah-compliant mortgages similar to the United Kingdom's legislative and tax code choices. (158)

The United States has recognized ijara-based mortgages as equivalent to traditional mortgages in terms of tax treatment. (159) The United States, however, has yet to grant the same tax treatment to murabaha- and musharaka-based mortgages. (160) The United Kingdom legislated the tax treatment of murabaha- and musharaka based mortgages in the Finance Acts of 2005 and 2006. (161) The United States must pass similar legislation that recognizes murabaha- and musharaka-based mortgages as conventional mortgages and provide the same tax treatment. (162)

A homebuyer seeking to purchase a home using a murabaha-based mortgage is unable to deduct the interest that accrues from home indebtedness on a primary residence. (163) Whereas in the United Kingdom, the Finance Act of 2005 specifically treats the profit on the sale of the house as interest and taxes the profit as if the seller granted a loan to the buyer. (164) As a result, the buyer is allowed to deduct the payment of interest for tax purposes. (165) The United States should emulate the United Kingdom by recognizing the additional charge paid by the buyer, which is profit to the seller, for the house as an interest payment, and allow for a deduction in taxable income. (166) Murabaha-based mortgages, however, still have the ability to exclude the imputed rental income and the gain on the sale of the primary residence. (167) To bring murabaha-based mortgages in line with conventional mortgages, the United States must allow the deduction of interest, to the exclusion of imputed rental income, and capital gain on the sale of the primary residence. (168)

As opposed to ijara- and murabaha- based mortgages, individuals seeking to utilize musharaka-based mortgages are at an extreme tax disadvantage. (169) On one hand, the United Kingdom

recognized musharaka-based mortgages in the Finance Act of 2006 and subsequently taxed them as they would a conventional mortgage. (170) On the other hand, the United States does not allow any tax deductions or exclusions whatsoever by a homeowner utilizing a musharaka-based mortgage. (171) The United States must recognize musharaka-based mortgages as equivalent to conventional mortgages as the United Kingdom has done and provide similar tax treatment. (172)

In addition to the lack of equality in federal tax treatment, Shari'ah-compliant mortgages are subject to disparate state tax treatment. (173) Upon the elimination of the double SDLT by the Finance Act of 2003, Islamic finance in the United Kingdom experienced significant growth highlighted by the launch of IBB. (174) Most states in the United States still subject Shari 'ah-compliant mortgages to double tax similar to what the United Kingdom had done with the SDLT. (175) The United Kingdom, however, recognized almost seven years ago that the double SDLT was preventing individuals who were seeking to purchase homes in accordance with religious ideals. (176) All of the fifty states must enact legislation that eliminates double taxation when the bank purchases property and then subsequently transfers to the homeowner upon full payment. (177)

The state of New York has recognized the inequity of charging a double property transfer tax on Shari 'ah-based mortgages. (178) Although New York has recognized the inequity in tax treatment, it still determines the imposition of the property transfer tax on a case

by-case basis. (179) New York's recognition of the inequitable tax treatment provides legitimacy to Shari'ah-compliant mortgages; the burden, however, is still on the homeowner to prove to the authorities that the financial structure employed is equivalent to a conventional mortgage. (180) The United Kingdom passed the Finance Act of 2003 removing any doubt about the SDLT on Shari 'ah-compliant mortgages. (181) Homeowners will only be able to purchase homes with Shari 'ah-compliant mortgages if the federal government and state governments acknowledge the inequitable tax treatment and act to remove the tax barriers deterring the use of Shari 'ah-compliant mortgages. (182)

Currently, federal and state tax treatments of Shari 'ah-compliant mortgages are major obstacles to the growth of Islamic finance in the United States but, to avoid the double tax, taxpayers can invoke the substance-over-form doctrine. (183) The NBA was an obstacle to Islamic finance because it prohibited banks from owning real estate but the OCC interpretive letters eliminated that barrier. (184) The OCC interpretive letters provided some support for ijara- and murabaha-based mortgages by stating that both concepts were functionally equivalent to conventional mortgages. (185) The interpretive letters can be relied on presently, but the OCC reserves the right to change its opinion. (186)

The OCC's recognition of ijara- and murabaha-based mortgages provides Islamic financial institutions support in arguing for similar tax treatment. (187) The crux of the substance-over-form doctrine allows a taxpayer to successfully argue that the economic substance of the transaction is different from the form of the transaction in order to justify receiving tax treatment similar to that of conventional mortgages. (188) Ultimately, the taxpayer is at a considerable disadvantage to the IRS Commissioner when invoking the "substance over form" doctrine. (189) On its face, the doctrine provides taxpayers an avenue for receiving favorable tax treatment, but in reality, the IRS Commissioner utilizes the doctrine to hold taxpayers to the consequences of the form they chose. (190) For Islamic finance to grow in the United States, the U.S. government must pass tax legislation similar to the United Kingdom to avoid leaving the taxpayer at the mercy of the substance-over-form doctrine. (191)

2. Potential for Growth in Shari 'ah-Compliant Mortgages in U.S. Secondary Markets

There is potential for growth in Shari 'ah-compliant mortgages in the United States if the United States enacts tax legislation to place Shari'ah-compliant mortgages on the same footing as conventional mortgages. (192) The United Kingdom has already done so successfully by enacting favorable legislation fueling domestic and international growth of Islamic finance. (193) As a result, the IBB became a reality after the passage of the Finance Act of 2003 removed the double SDLT. (194) As a result of the United Kingdom's effort to turn London into a "gateway" for Islamic finance, the LSE is becoming the exchange of global choice for international sukuk listings. (195)

The United States is in a position to achieve success similar to the United Kingdom because the United States already has a secondary market for Shari 'ah-compliant mortgages. (196) The United States has a Muslim population between two and seven million and thus the United States has the potential to increase the Shari 'ah-compliant mortgage market if the United States applies the conventional mortgages tax treatment to Shari'ah-compliant mortgages. (197) Additionally, Freddie Mac and Fannie Mae's willingness to purchase Islamic home loans will provide Islamic financial institutions with necessary capital to meet growing demand. (198) While the access to Freddie Mac and Fannie Mae provides the necessary capital, the disparate tax treatment of Shari'ah-compliant mortgages has essentially limited the growth of Islamic finance. (199) Consequently, Shari 'ah-compliant mortgages have growth potential if U.S. tax regulations allow for deduction of interest and exclusion of imputed rental income and gain on sale of primary residence. (200)

3. Deposit Accounts and Opt-out Provision from FDIC Insurance

Both conventional and Islamic banks in the United States offer deposit accounts that are not Shari 'ah-compliant because of FDIC insurance. (201) The United Kingdom faced a similar dilemma in regards to deposits accounts when the FSA was in the process of approving IBB's application. (202) The inability to opt out of FDIC insurance prevents depositors seeking Shari'ah-compliant deposit accounts from opening such deposit accounts. (203) The FSA dealt with the issue of full repayment of deposits by allowing depositors to opt out of the deposit protection after opening the deposit account. (204) FSA's opt-out clause has led to the IBB managing more than $250 million in deposits as of 2008. (205) The FDIC should include a similar opt-out provision for depositors seeking to deposit money into Shari 'ah-compliant deposit accounts. (206) With the Muslim population in the millions, there is great potential for growth in Shari'ah-compliant deposit accounts that pay no riba and allow depositors to share in the losses. (207)

4. Sukuks and Potential for Growth in United States

Sukuk (Islamic bond) offerings in the United Kingdom have consistently grown since the establishment of the sukuk secondary market. (208) Sukuks have been offered in the United States but on a very limited basis. (209) Sukuk offerings in the United States have so far been limited to the oil and gas industry. (210) The United Kingdom specifically sought to develop LSE into the premier listing venue for sukuk offerings and has succeeded in developing LSE into the listing venue for global sukuk offerings. (211) East Cameron's sukuk offering highlights the potential for sukuk offering in the United States. (212)

The significant growth in LSE's sukuk listings from January 2007 to November 2007 provides a model for the growth potential of Islamic finance. (213) Islamic finance could grow exponentially in the United States because oil and gas assets are compatible with principles of Shari 'ah. (214) Many viewed the sukuk offering by East Cameron as a "groundbreaking event," but East Cameron's Chapter 11 bankruptcy filing places the entire sector at jeopardy. (215) The United States must follow the United Kingdom's example and establish a secondary market for sukuk offerings. (216)

5. Training of Shari 'ah Scholars to Fuel Growth of Islamic Finance

Finally, the United States severely lacks any formal training programs for Shari'ah scholars who are experts in both financial jurisprudence and fiqh. (217) The training of Shari 'ah scholars is another area in which the United Kingdom has a considerable lead on the United States. (218) The shortage of Shari 'ah scholars who are well versed in financial jurisprudence and fiqh severely limits the growth of Islamic finance in any country. (219) The Islamic Finance Council Scholar Professional Development Program has significantly increased the number of Shari 'ah scholars in the United Kingdom. (220) Therefore, the United States should launch a program similar to the Islamic Finance Council Scholar Professional Development Program to increase the number of Shari 'ah scholars and thereby expand the size of the U.S. Islamic finance market. (221)

V. CONCLUSION

Islamic finance in the United States faces a great number of challenges but there is also potential for the nascent industry to grow. (222) U.S. regulators must publicly support the Islamic finance industry as the regulators in the United Kingdom have done to fuel the growth of the industry or risk the loss of significant investments. (223) The current U.S. tax regime severely disadvantages potential homeowners seeking to purchase homes using Shari'ah-compliant mortgages. (224) The cornerstone of home ownership in the United States is the ability to deduct interest from taxable income base and all individuals who seek to own a home should be able to take advantage of the deduction regardless of the financial structure used to obtain a mortgage. (225)

The United Kingdom's passage of numerous laws intended to place Shari'ah-compliant institutions and products on the same footing as conventional institutions and products has propelled the United Kingdom to the forefront of western countries that cater to the Islamic finance market. (226) If the United States hopes to catch up with the United Kingdom, it must enact legislation that removes barriers to the growth of the Islamic finance industry. East Cameron's sukuk offering highlights the interest of not only Muslim investors but also non-Muslim investors in Shari 'ah-compliant products. (227) Moreover, access to Freddie Mac and Fannie Mae would provide Shari'ah-compliant mortgages the necessary access to capital to be viable alternatives to conventional mortgages. (228) Even with all of the potential for growth in the United States for Islamic finance, the United States may not realize this potential if it does not invest in programs that train Shari 'ah scholars to be experts in both financial jurisprudence and fiqh. (229) Therefore, if the United States wants to become a hub for Islamic finance, it must emulate the United Kingdom's regulatory support, tax changes, opt-out provision for deposit account insurance, creation of secondary market for sukuk offerings, and training for Shari'ah scholars. (230)

(1.) See Daniel Bases, U.S. Islamic Finance Market Underserved, Reuters, Feb. 8, 2008 (describing perception of Islamic finance in United States as comparable to terror financing); see also Landon Thomas, Jr., Islamic Finance and Its Critics, N.Y. Times, Aug. 9, 2007 (discussing general tendency of United States to connect businesses of established Muslim financiers with Islamic extremism); Theodore Karasik, Frederic Wehrey & Steven Strom, Islamic Finance in a Global Context: Opportunities and Challenges, 7 Chi. J. Int'L L. 379, 382 (2007) (recognizing Islamic finance as "functional, competitive, for-profit and ... thriving" alternative).

(2.) See Zeti A. Aziz, Enhancing Interlinkages and Opportunities: The Role of Islamic Finance, in 18 Islamic Finance: Global Trends and Challenges 5, 7 (Nat'l Bureau of Asian Research ed.) (2008) (quantifying annual growth rate of Islamic finance at fifteen to twenty percent); see also Christopher F. Richardson, Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field, 42 Tex. Int'L L.J. 119, 123 (2006) [hereinafter Islamic Finance Opportunities] (stating Islamic finance industry is growing annually by fifteen percent).

(3.) See Aziz, supra note 2, at 7 (discussing annual growth of Islamic Finance); see also Islamic Finance Opportunities, supra note 2, at 123 (stating Islamic finance industry is growing annually by fifteen percent).

(4.) See Sina A. Muscati, Late Payment in Islamic Finance, 6 UCLA J. Islamic & Near E. L. 47, 48 (2007) (characterizing London as important Islamic banking hub); J. Michael Taylor, Islamic Commercial Banking--Moving into the Mainstream?, 18 Transnat'l L. 417, 421-22 (2005) [hereinafter Islamic

Commercial Banking] (discussing creation of Islamic Bank of Britain as "watershed event" in commercial banking); see also Kilian Balz, Islamic Finance for European Muslims: The Diversity Management of Shari 'ah-Compliant Transactions, 7 Chi. J. Int'L L. 551, 551 (2007) (recognizing United Kingdom's approval of IBB and confinement of European Islamic retail finance to United Kingdom).

(5.) See infra note 6 (suggesting United States must follow United Kingdom's lead or risk losing out to European countries); see also Cole B. Richins, Student Commentary, Shari 'ah Compliant Securities: American Lawyers Meet Islamic Finance, 33 J. Legal Prof. 135, 138 (2008) (estimating Islamic investment market and Muslim capital to be worth $750 billion); Aziz, supra note 3, at 7 (noting total Islamic finance assets exceed $1 trillion); Stella Dawson, John Irish & Daliah Merzaban, UBS Sees Growth in Islamic Finance, Reuters, (Apr. 16, 2009) (estimating Islamic finance industry to be worth between $700 billion to $1 trillion).

(6.) See Nickolas C. Jensen, Note, Avoiding Another Subprime Mortgage Bust Through Greater Risk and Profit Sharing and Social Equity in Home Financing: An Analysis of Islamic Finance and its Potential as a Successful Alternative to Traditional Mortgages in the United States, 25 Ariz. J. Int'L & Comp. L. 825, 855 (2008) (suggesting other western countries should follow United Kingdom's lead when it comes to Islamic finance); Lionel Laurent, Contenders for the Crown, Forbes, (Apr. 21, 2008) (discussing London's potential as Islamic finance hub and United States' ambivalence to Shari 'ah-compliant products); see also Mushtak Parker, Experts Focus on Islamic Finance Amid U.S. Skepticism, Arab News, (May 19, 2008), (asserting United States could lose out to European countries in Islamic finance); Islamic Finance Opportunities, supra note 3, at 123 (noting deep involvement by European and Asian banks in Islamic finance industry). But see Islamic Commercial Banking, supra note 4, at 427-28 (discussing hints of regulatory acceptance of Islamic Finance by U.S. regulators).

(7.) See infra Part II (discussing origins, sources, and contemporary revival of Islamic finance).

(8.) See infra Part III (discussing history and present state of Islamic Finance in United Kingdom and United States).

(9.) See infra Part IV (discussing steps United States must take to catch up to United Kingdom).

(10.) See infra Part V (concluding United States must do more to cultivate Islamic finance industry).

(11.) See Jensen, supra note 6, at 826 (describing Shari'ah as foundation of Islamic finance law); Sami Zubaida, Law and Power in the Islamic World 10-11 (2005) (stating Shari'ah covers all aspects of life). Shari'ah can be characterized as a "total discourse wherein all kinds of institutions find simultaneous expression: religious, legal, moral, and economic." Zubaida, supra at 11; Mohammad H. Kamali, Shari'ah Law: An Introduction 14 (2008) (noting literal translation of Shari 'ah and common usage). Literally, Shari 'ah means "the path to the watering-place, the clear path to be followed and the path which the believer has to tread in order to obtain guidance in this world and deliverance in the next." Kamali, supra. Shari 'ah, in a practical sense, refers to "commands, prohibitions, guidance and principles that God has addressed to mankind." Id.; Arshad A. Ahmed, Shari 'ah-Compliant Financing: Ideals and Realities, in Commercial Real Estate Financing 2009: How the World Changed 89, 93 (2009) (recognizing Shari 'ah means more than just Islamic law); Frank Griffel et al., Shari'a[h] : Islamic Law in the Contemporary Context 2 (Abbas Amanat & Frank Griffel eds., 2007) (discussing origins of current definition of Shari'ah). Shari'ah can be approximately translated to mean "Islamic religious law." Griffel et al., supra. The word Shari 'ah "evolved as a technical term in the early period of Islam during the seventh and eighth centuries." Id.

(12.) See Hunt Janin & Andre Kahlmeyer, Islamic Law: The Shari'a[h] from Muhammad's Time to the Present 16 (2007) (discussing origins of Holy Qur'an). The translation of the Arabic word Qur'an is recitation. Id. at 11. As an expression of reverence, Muslims always include "peace be upon him" (p.b.u.h) as a suffix to Prophet Muhammad's name. Id.; Zubaida, supra note 11, at 12 (recognizing Holy Qur'an as ultimate source of Shari 'ah); Nathan Piper, Note, Assessing the Potential for Shari 'ah-Compliant Project Finance in India, 47 Colum. J. Transnat'l L. 418, 422-23 (2009)(discussing role of Holy Qur'an in Muslim life); Irshad Abdal-Haqq, Islamic Law: An Overview of its Origins and Elements, in Understanding Islamic Law: From Classical to Contemporary 1, 11 (Hisham M. Ramadan ed., 2006) (stating Holy Qur'an is

much more than just book of law). The Holy Qur 'an is the primary cornerstone of Islamic law and includes specific injunctions. Abdal-Haqq, supra. The injunctions can be categorized into subject areas of laws such as ethics, criminal, business transactions, domestic relations, inheritance, and rules of engagement in war. Id.; see also Kamali, supra note 11, at 22 (stating Holy Qur 'an not open to interpretation when it is clear and unequivocal); Piper, supra, at 422 (discussing revelation of Holy Qur'an to Prophet Muhammad (p.b.u.h)); Zubaida, supra note 11, at 13 (recognizing Prophet Muhammad's (p.b.u.h) divine authority). Prophet Muhammad (p.b.u.h) is a "privileged interpreter of the Qur'an, and his actions and pronouncements are canonical." Zubaida, supra. ; Abdal-Haqq, supra, at 12 (recognizing equality in Islamic law of Prophet Muhammad's (p.b.u.h) actions and speech). Prophet Muhammad's (p.b.u.h) actions and speech constitute "the exemplificatiton of the message of Islam," and thus "accorded equal validity in Islamic law." Abdal-Haqq, supra.; see also id. at 13 (elaborating on meaning of sunnah and hadith). "Hadith refers to a report of what [Prophet] Muhammad [p.b.u.h] said, that is, an actual verbal expression or opinion on a subject. Sunnah implies the mode of life he lived, the examples he set through his actions, sayings, judgments, and attitudes--his practices and traditions." Id.; Kamali, supra note 11, at 19 (noting primary sources of Shari'ah are Holy Qur'an and sunnah).

(13.) See Abdal-Haqq, supra note 12, at 15 (noting sunnah is second most important source of Shari 'ah); Kamali, supra note 11, at 23 (recognizing importance of sunnah); Zubaida, supra note 11, at 13 (defining sunnah). Sunnah is defined as "an exemplary mode of conduct, to be followed and imitated." Zubaida, supra. ; see Janin & Kahlmeyer, supra note 12, at 2 (defining hadith); see also Amanat, supra note 11, at 3 (discussing importance of hadith in

Shari 'ah). Although the Holy Qur'an is the core to Islamic law, a majority of the rulings in Shari 'ah are "derive[d] from the practice of Prophet Muhammad [p.b.u.h]." Amanat, supra.

(14.) See Abdal-Haqq, supra note 12, at 5 (defining fiqh). The term fiqh can be used to refer to the "collective body of deductions" or "of an individual or tribunal being engaged in fiqh, [the process of deducing and applying the law]." Id. at 14; see also Zubaida, supra note 11, at 16 (recognizing fiqh as a "systematic body of jurisprudence"). Private scholars developed fiqh through the use of "distinctive modes of reasoning and argument." Zubaida, supra.

(15.) See Amanat, supra note 11, at 3 (describing exercise of fiqh as human activity); see also Islamic Finance Opportunities, supra note 2, at 124 (noting fiqh as act of drawing detailed practical rules); Ahmed, supra note 11, at 94 (defining fiqh as Islamic jurisprudence).

(16.) See Taylor, supra note 4, at 418 (defining ijma).Ijma "plays a vital role in Islamic thought." Janin & Kahlmeyer, supra note 12, at 20 (discussing legitimacy of ijma). The importance of ijma is evident in the following hadith: "[M]y people [the Islamic Community, umma] will never agree upon an error." Id. Therefore, a judgment or rule that has been achieved through ijma is viewed as a legitimate judgment or rule. Id.; see also Kamali, supra note 11, at 19 (discussing ijma as one of two resources for fiqh).

(17.) See Janin& Kahlmeyer, supra note 12, at 21 (defining qiyas as analogical reasoning). Qiyas means "strict analogical deductions drawn from the [Holy] Qur'an, the sunna[h], and ijma." Id. Qiyas allow scholars to "apply traditional religious law to contemporary issues and therefore reach decisions on them." Id. Additionally, Qiyas also prohibits all alcoholic beverages. Id. The Holy Qur'an prohibits wine and "by analogy, if wine made from grapes is forbidden, [then] wine made from dates must therefore be forbidden as well." Id.

(18.) See Kamali, supra note 11, at 19 (acknowledging majority of scholars employ ijma and qiyas in interpretation of Holy Qur'an, sunnah and hadith); see also Chris P. Sioufi, Finance Strategy Challenges in the United Arab Emirates and Other Middle Eastern Nations, in Banking and Finance Client Strategies in the Middle East and Africa: Leading Lawyers on Protecting Clients, Meeting Compliance Challenges, and Navigating the Local Legal and Judicial Systems 7 (2009), available at 2009 WL 2512015 at *1 (discussing use of ijma and qiyas).

(19.) See Jensen, supra note 6, at 830 (characterizing Shari 'ah compliance as prohibition-driven exercise); see also Piper, supra note 12, at 424 (acknowledging Shari 'ah imposes restrictions); Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice 46 (Cambridge University Press 2006) [hereinafter Law, Economics, and Practice] (stating Islamic finance is prohibition-driven).

(20.) See Jensen, supra note 6, at 830 (noting Shari 'ah requires compliance with four major prohibitions).

(21.) See id. (setting forth four major prohibitions in Shari 'ah).The consensus among Muslim scholars is that the Holy Qur 'an prohibits riba, gharar, maisir and haram. Shahzad Q. Qadri, Islamic Banking: An Introduction, Bus. L. Today, JulyAug. 2008, at 59 (2008) [hereinafter Islamic Banking: An Introduction] (setting forth four prohibitions of Shari'ah).

(22.) See Islamic Finance Opportunities, supra note 3, at 125 (defining riba and its stature in Shari 'ah). The prohibition against riba in Islamic law arises from the premise that one should not accumulate wealth merely from lending money but instead accumulate it as a product of work. Id. at 125-26. There are varying types of riba, "the least of which is equivalent [in sin] to committing incest, and the worst of which is equivalent [in sin] to destroying the honor of a Muslim." Id. at 125; see also Muscati, supra note 4, at 49 (noting interpretation of riba encompasses both interest and usury); Islamic Finance Opportunities, supra note 3, at 126 (observing riba is deeply rooted in Islam); Mahmoud A. El-Gamal, A Basic Guide to Contemporary Islamic Banking and Finance 1, 4 (2000), http://www.ruf.rice.edu/~elgamal/files/primer.pdf http://www.ruf.rice.edu/~elgamal/files/primer.pdf [hereinafter Contemporary Islamic Banking and Finance] (discussing Prophet Muhammad's (p.b.u.h) explicit prohibition of riba). In one of the hadiths, it was noted that "The Messenger of Allah [Prophet Muhammad (p.b.u.h)] cursed the one who devours riba, the one who pays it, the one who witnesses it, and the one who documents it." El-Gamal, supra.

(23.) See Islamic Finance Opportunities, supra note 3, at 126 (discussing two rationales underlying prohibition of riba). "In Islam, money itself is not considered to have any intrinsic value; currency should only have value as a medium of exchange, and one should not make money merely off the use of money." Id. The social justice component of the riba prohibition is "avoiding the exploitation of poorer members of society by unscrupulous merchants...." Id.; see Angelo L. Rosa, Keeping the Faith: The Islamic Prohibition Against Interest and Excessive Risk can be Respected with Specially Designed Funding Instruments, L.A. Law, Fed. 2007, at 22 (2005) (observing money lacks intrinsic value in Islam).

(24.) See Haider A. Hamoudi, The Muezzin's Call and the Dow Jones Bell: On the Necessity of Realism in the Study of Islamic Law, 56 Am. J. Comp. L. 423, 441 (2008) (discussing and defining gharar); Karasik et al, supra note 1, at 382 (discussing prohibition against gharar). Gharar can be understood to mean "excessive uncertainty or risk." Karasik et al, supra.; see also Law, Economics, and Practice, supra note 19, at 60 (defining prohibition against gharar as prohibition against excessive risk and uncertainty); Islamic Finance Opportunities, supra note 3, at 127 (discussing hadith prohibiting gharar). The prohibition against gharar can be attributed to a hadith of Prophet Muhammad (p.b.u.h) that prohibited "the sale of unborn livestock or unripened fruit on trees, or the payment of a fixed price upfront for a fisherman's prospective catch." Islamic Finance Opportunities, supra; see Jensen, supra note 6, at 834 (rooting prohibition against gharar in hadith).

(25.) See Islamic Finance Opportunities, supra note 3, at 127 (suggesting some level of risk allowed in Islam). While Western finance and Islamic finance have many differences, one similarity is that "some level of risk remains a fundamental aspect of commercial life and risk allocation a necessary component of Islamic finance." Id.; see also Law, Economics, and Practice, supra note 19, at 59

(discussing allowance of minor gharar).

(26.) See Islamic Finance Opportunities, supra note 3, at 127 (discussing effect of gharar on conventional western finance products).

(27.) See Islamic Banking: An Introduction, supra note 21 (defining maisir); Jensen, supra note 6, at 830 (discussing maisir). The Holy Qur'an explicitly bans gambling by stating: "They ask you (O Muhammad) concerning alcoholic drink and gambling. Say: 'In them is a great sin, and (some) benefit for men, but the sin of them is greater than their benefit.'" Holy Qur'an II:219 available at http://transliteration.org/quran/website_CD/MixNoble/Fram2E.htm ("2 AlBaqarah" Hyperlink; then scroll down to 2:219 under printed format) (discussing ban against gambling).

(28.) See Jonathan I. Marshall & Ahmed Al-Bassam, Islamic Finance--A Challenge to the "Conventional" System?, MONDO VlSIONE HANDBOOK, http://www.mondovisione.com/index.cfm?section=articles&action=detail&id=689 55 (last visited Nov. 30, 2010) (discussing prohibition against maisir). "The prohibited speculation under the Shari'ah is not general commercial speculation, which is normally evident in most commercial transactions. Rather it is one involving an effortless gain similar to a gambling scheme or activity." Id.

(29.) See Islamic Banking: An Introduction, supra note 21, at 59 (defining haram). "Islamic law prohibits investing in businesses that are considered unlawful haram." Id. The prohibition of haram arises from Islam's position that certain industries and activities are prohibited because of their detrimental effect on society and individuals. See Karasik et al., supra note 1, at 382 (noting prohibition against unlawful haram activities); Islamic Finance Opportunities, supra note 2, at 126 (discussing rationale for deeming certain industries and activities as haram).

(30.) See Islamic Finance Opportunities, supra note 2, at 126 (setting forth non-exhaustive list of industries and activities deemed to be haram).Businesses engaging in the sale of "alcohol or pork, or producing gossip columns or pornography" are deemed to be haram. Islamic Banking: An Introduction, supra note 21, at 59 (listing examples of haram industries).

(31.) See Ayman H. Abdel-Khaleq & Christopher F. Richardson, New Horizons

for Islamic Securities: Emerging Trends in Sukuk Offerings, 7 Chi. J. Int'L L. 409, 411-12 (2009) [hereinafter New Horizons for Islamic Securities] (discussing seven major Shari'ah-compliant instruments).

(32.) See id. (setting forth list of Shari'ah-compliant instruments); see also Islamic Finance Opportunities, supra note 2, at 128-31 (listing seven major Islamic financial instruments); Taylor, supra note 4, at 420 (defining istisna 'a as commissioned manufacturing and not discussed in note).

(33.) See Rosa, supra note 23, at 24 (defining ijara as finance lease); see also Islamic Finance Opportunities, supra note 2, at 128 (stating ijara is Islamic finance lease or sale-leaseback); Richins, supra note 5, at 142 (discussing how ijara operates). An ijara "consist[s] of an investor purchasing a specified asset and then leasing it to the [original] company for fixed payments, with the total amount of payments combining to be more than the original sales price of the purchased asset." Id.

(34.) See Islamic Commerical Banking, supra note 4, at 420 (describing how musharaka operates); see also Islamic Finance Opportunities, supra note 2, at 129 (stating musharaka translates into "partnership" or "sharing" in Arabic); Islamic Commercial Banking, supra note 4, at 420 (indicating customer provides management efforts and expertise while financial institution provides capital needed based on formula).

(35.) See Islamic Finance Opportunities, supra note 2, at 129 (describing concept of mudaraba and concept of venture capital financing); see also Piper, supra note 12, at 426 (describing mudaraba as profit-sharing).

(36.) See Islamic Finance Opportunities, supra note 2, at 129 (describing how mudaraba operates); see also Taylor, supra note 4, at 420 (noting investors provide all capital and customer provides knowledge and sweat equity).

(37.) See Taylor, supra note 4, at 420 (stating profits in mudaraba investment are split up between parties based on predetermined formula); see also Piper supra note 12, at 426-27 (stating profit and losses must be allocated between parties based on percentage of investment). The parties share profits based on a contractually-defined percentages basis. Piper supra note 12, at 426-27. The losses, however, are allocated based upon the amount of capital put up by each party. Id. Therefore, only the party putting up financial capital is responsible for the loss,

whereas the party supplying human capital is protected. Id.

(38.) Rosa supra note 23, at 24 (defining murabaha as mark-up contract); Islamic Finance Opportunities, supra note 3, at 130 (noting murabaha is most common form of Islamic finance).

(39.) See Taylor, supra note 4, at 420 (describing how bank or financial institution calculates profit in murahaba contract). The bank or financial institution will sell the goods to the customer at a prearranged cost which includes the "original cost of the good plus a reasonable profit for the financial institution." Id. (emphasis added); see Rosa, supra note 23, at 24 (discussing how murabaha contracts operate); see also Piper, supra note 12, at 428 (describing various payment schedules used in murahaba contracts). "A payment schedule is established with either installments on a schedule of three to twelve months or a one-time future payment in full." Piper, supra.

(40.) See Rodney Wilson, Overview of the Sukuk Market, in Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk 3 (Nathif J. Adam and Abdulkader Thomas eds., 2004) (stating sukuk are investment certificates not conventional bonds); see also Michael J.T. McMillen, Contractual Enforceability Issues: Sukuk and Capital Markets Development, 7 Chi. J. Int'L L. 427, 427-28 (2007) (discussing sukuks comparables in western finance).

(41.) See McMillen, supra note 40, at 429 (describing difference of sukuk from equity, notes, and bonds). Sukuks are "certificates of equal value put to use as common shares and rights in tangible assets, usufructs, and services, or as equity in a project or investment activity." See Piper, supra note 12, at 433 (discussing how sukuks differ from equity shares and debt instruments).

(42.) See Piper, supra note 12, at 433 (stating activities or assets underlying sukuk must also be Shari 'ah-compliant); McMillen, supra note 40, at 429 (discussing need for underlying business or activity to be Shari'ah-compliant for sukuk to be Shari'ah-compliant).

(43.) See Michael Ainley et al., Financial Services Authority, Islamic Finance in the UK: Regulations and Challenges 1, 6 (2007), http://www.fsa.gov.uk/pubs/other/islamic_finance.pdf [hereinafter Islamic Finance in the UK] (noting Islamic finance in United Kingdom began in 1980s); UK Trade & Investment, The City: UK Excellence in Islamic Finance 1,6 (2007), [hereinafter UK Excellence in Islamic Finance], available at http://www.londonstockexchange.com/specialist-issuers/islamic/ islamicfinance.pdf (stating United Kingdom has been providing Islamic financial services for thirty years).

(44.) See Islamic Finance in the UK, supra note 43, at 6 (observing existence of only wholesale Islamic finance market in United Kingdom). Islamic finance products in the 1980s were aimed at only wholesale and high-net-worth investors.

Id.

(45.) See id. (stating retail products first appeared in 1990s).

(46.) See id. (discussing lack of consumer protection for consumers investing in Islamic finance products).

(47.) Id. at 8.

(48.) See HM Treasury, The Development of Islamic Finance in the UK: The Government's Perspective 1, 8 (2008) [hereinafter Department of Islamic Finance], available at http://www.hm

treasury.gov.uk/d/islamic_finance101208.pdf (stating Islamic finance in United Kingdom has grown significantly since early 2000s). As of December 2008, the United Kingdom had over eighteen billion dollars in Shari 'ah-compliant assets. Id.; see also Islamic Finance in the UK, supra, note 43, at 6 (noting United Kingdom's purposeful approach in developing Islamic finance); Jensen, supra note 6, at 855 (stating United Kingdom has already taken several proactive steps to nurture Islamic finance); Karasik et al., supra note 1, at 389 (stating U.K. government has been active driver of Islamic finance growth).

(49.) See Development of Islamic Finance, supra note 48, at 10 (discussing creation of working group to determine obstacles facing Islamic finance).

(50.) See id. at 3 (discussing Bank of United Kingdom's identification of potential of Islamic finance sector).

(51.) See Islamic Finance in the UK, supra note 43, at 8 (discussing objectives of group created to determine barriers to Islamic finance). The Financial Services Authority (FSA) working group was created to discuss how to integrate Islamic financing transactions into the United Kingdom's legal and financial system. Id.

(52.) See UK's Brown backs Islamic Finance, BBC News (June 13, 2006, 11:25:10 GMT), http://news.bbc.co.uk/2/hi/business/5074068.stm (discussing Prime Minister Gordon Brown's goal of making United Kingdom "gateway" of Islamic finance); Islamic Banking: An Introduction, supra note 21, at 61 (recognizing Prime Minister Gordon Brown's goal of making London gateway for Islamic finance); see also Islamic Finance in the UK, supra note 43, at 8 (discussing tax and legislative changes made by United Kingdom government to foster investment); Growth and Diversification in Islamic Finance, KPMG Financial Services (2007), at 1, available at

http://us.kpmg.com/microsite/FSLibraryDotCom/docs/Growth%20and%20Diversi fication%20in%20Islamic%finance.pdf (observing tax changes in United Kingdom created enabling framework for development for Islamic finance). The United Kingdom has been a leader in introducing enabling legislation for U.K. Muslims and others interested in Islamic ethical finance to gain access to products and companies that adhere to Islamic principles. Growth and Diversification in Islamic Finance, supra. at 10.

(53.) See Fin. Servs. Auth., http://www.fsa.gov.uk/Pages/About/Who/History/index.shtml (last visited Sept. 22, 2010) [hereinafter Financial Services Authority History] (describing inception of FSA).

(54.) See Financial Services and Markets Act, 2000, c. 8, [section][section]1-2, Sch. 1 (Eng.) (establishing FSA as single regulator of U.K.'s financial industry); Financial Services Authority History, supra note 53 (stating FSA is single regulator of U.K.'s financial industry); see also Islamic Finance in the UK, supra note 43, at 8 (stating FSA was created by combining eleven different regulators).

(55.) See Islamic Finance in the UK, supra note 43, at 8 (discussing advantages of FSA as single regulatory body).

(56.) See id. at 11 (discussing FSA's non-discriminatory regime); see also Development of Islamic Finance, supra note 48, at 10 (recognizing FSA's application of same standard to Islamic and conventional financial institutions).

(57.) See Islamic Finance in the UK, supra note 43, at 8 (discussing series of tax and legislative changes by United Kingdom).

(58.) See Jensen, supra note 6, at 851 (noting Stamp Duty was obstacle to competitiveness of Islamic mortgages); Islamic Finance in the UK, supra note 43, at 8 (articulating effect of Stamp Duty Land Tax on Islamic mortgages).

(59.) See Jensen, supra note 6, at 851 (stating United Kingdom charged Stamp Duty Land Tax on every property sale).

(60.) See id. (recognizing murabaha transaction involves two sales subjecting it to double tax); see also Islamic Finance in the UK, supra note 43, at 8 (recognizing Islamic mortgages were subject to multiple payments of Stamp Duty Land Tax).

(61.) Finance Act, 2003, c. 14, [section]73 (Eng.) (abolishing double stamp duty land tax on Islamic mortgages); see Jensen, supra note 6, at 851 (recognizing limited exemption from double taxation for Islamic mortgages under Finance Act 2003); Balz, supra note 4, at 562 (acknowledging amendment to United Kingdom tax law explicitly exempts Islamic mortgages from double taxation).

(62.) Finance Act, 2005, c.7, [section][section] 47, 49, Sch. 2 (Eng.) (recognizing murabahaand mudaraba-based mortgages); see Development of Islamic Finance, supra note 48, at 16 (noting Finance Act 2005 recognizes murabaha and mudaraba structures).

(63.) See Development of Islamic Finance, supra note 48, at 16 (discussing tax implications under Finance Act 2005 for murabaha).

(64.) Id. (discussing tax implications under Finance Act 2005 for mudaraba).

(65.) See Finance Act, 2006, c.25, [section]96 (Eng.) (addressing diminishing musharaka or shared ownership arrangements); Development of Islamic Finance, supra note 48, at 16 (discussing legislation of diminishing musharaka in Finance Act 2006).

(66.) See Development of Islamic Finance, supra note 48, at 16 (describing how diminishing musharaka financing agreement operates).

(67.) See id. (acknowledging diminishing musharaka financing agreements used to purchase homes).

(68.) See Finance Act, 2007, c. 11, [section] 53 (Eng.) (recognizing sukuk issuance in United Kingdom); Development of Islamic Finance, supra note 48, at 16 (discussing effect of Finance Act 2007 on sukuk issuance in United Kingdom).

(69.) See Development of Islamic Finance, supra note 48, at 16 (identifying Finance Act 2007's treatment of sukuk as conventional debt instrument).

(70.) See Islamic Finance in the UK, supra note 43, at 18 (noting Finance Act 2007 recognized ijara-based contracts).

(71.) See Taylor, supra note 4, at 417 (recognizing IBB first Islamic bank in London). IBB offers a range of retail and business banking services. Id.

(72.) See Islamic Finance in the UK, supra note 43, at 14 (contrasting IBB definition of "deposit" with definition required under FSA regulations). The United Kingdom defined deposit "as a sum of money paid on terms under which it will be repaid either on demand or in circumstances agreed by parties." Id.

(73.) See Islamic Finance in the UK, supra note 43, at 14 (acknowledging deposit accounts had to satisfy FSA and Shari 'ah principles).

(74.) See id. (discussing solution in defining deposit). As of 2008, IBB managed more than $250 million in customer deposits. UK Excellence in Islamic Finance, supra note 43, at 10 (discussing assets of IBB).

(75.) See Taylor, supra note 4, at 421-22 (stipulating approval of IBB was significant moment in growth of Islamic finance in United Kingdom); see also id.

at 426 (declaring IBB provides legitimacy to Islamic finance banking).

(76.) See Sioufi, supra note 18, at 3 (discussing existence of various Islamic oriented firms in United Kingdom); see also Rosa, supra note 23, at 27 (noting large financial institutions have significant Islamic finance divisions in United Kingdom). The market has led to significant growth in sukuk offerings. Rosa, supra.

(77.) See UK Excellence in Islamic Finance, supra note 43, at 2 (discussing existence of fund managers, accounting and law firms offering islamic services).

(78.) See Islamic Finance in the UK, supra note 43, at 21 (discussing United Kingdom's establishment of world's secondary market for sukuk).

(79.) See id. at 24 (noting significant growth of sukuk market due to secondary market).

(80.) UK Excellence in Islamic Finance, supra note 43, at 14.

(81.) See id. (discussing London Stock Exchange as exchange of choice for sukuk issuers).

(82.) See Development of Islamic Finance, supra note 48, at 26; Karasik et al., supra note 1, at 390 (noting shortage of qualified Shari 'ah scholars is constraining growth of Islamic finance); Islamic Finance in the UK, supra note 43, at 17 (discussing significance of Shari 'ah scholars to growth of Islamic finance industry).

(83.) See Shaykh Yusuf Talal DeLorenzo, Shari 'ah Compliance Risk, 7 Chi. J. Int'L L. 397, 399 (2007) (discussing purpose of Shari 'ah scholars in Islamic finance). Shari'ah scholars "convene for the purpose of ensuring that financial products and services offered to consumers and investors are compliant with the rules and principles of the Shari'ah." Id.

(84.) See Development of Islamic Finance, supra note 48, at 26 (stating twelve Shari'ah experts relied on most from pool of one hundred experts worldwide);

Karasik et al., supra note 1, at 390 (noting only twelve Shari 'ah scholars relied upon worldwide).

(85.) See Islamic Finance Council UK, Scholar CPD, http://www.islamicfinancecounciluk.com/scholar-cpd (last visited Sept. 30, 2010) (discussing launch of Islamic Finance Council Scholar Professional Development Program). The Islamic Finance Council and Securities and Investment Institute launched the Scholar Professional Development Program with the goal of providing Shari'ah scholars with "a comprehensive and up to date understanding of conventional financial markets, covering both key fundamental mechanics and contemporary issues" that they need to able to practice in the UK. Id.

(86.) See Joseph DiVanna, A Brief History of Islamic Banking, World Islamic Economic Forum Foundation,

http://www.wief.org.my/archive/articles/174.html (last visited Sept. 30, 2010) (tracing origins of modern Islamic finance to 1950s and 1960s); LARIBA, https://www.lariba.com/default.htm (last visited Sept. 30, 2010) (stating American Finance House LARIBA has been "[s]erving the community since 1987"); see also Shirley Chiu et al., Islamic Finance in the United States: A Small But Growing Industry, Chicago Fed Letter, May 2005, at 2, available at http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2005/ cflmay2005_214/pdf (noting American Finance House LARIBA began in 1987). The contemporary revival of Islamic finance can be traced back to the 1950s and 1960s because of Islamic financial institutions that were created in Pakistan and Egypt. DiVanna, supra. The Pakistan Islamic financial institution was created in the 1950s to supply capital to smaller landowners and was repaid with no interest but included an added charge to cover the bank's operating expenses. Id. In Egypt, the Mit Ghamr Village Bank was created in the 1960s as a mutual savings bank that adhered to Shari'ah principles. Id.

(87.) See Chiu, supra note 86 (recognizing American Finance House LARIBA as oldest Islamic finance organization in United States).

(88.) See Isam Salah, Legal Issues Arising in Islamic Finance Transactions in the US, in Islamic Finance in North America 2009 56, 58 (2009), available at http://yasaarmedia.com/Yasaar_Media_Islamic_Finance_in_North_America_2009. pdf (discussing Federal Reserve's approval of U.S. financial institutions offering Islamic products outside of country).

(89.) See Chiu, supra note 86 (discussing lack of joint approval from U.S. regulatory agency and Shari 'ah board prior to 1997)."The Federal Reserve views itself as a watchdog whose duty is to prevent problems from developing in the market. Furthermore, they have made it clear that Islamic finance's religious foundation is irrelevant to the oversight of the industry." Kyle Gaffaney, Student Article, Buying a Home can be Difficult for Muslims in the United States, 21 Loy. Consumer L. Rev. 557, 568 (2009) (noting lack of official stance on Shari 'ah-compliant financial service by Federal Reserve).

(90.) See Gaffaney, supra note 89, at 568. According to Attorney Shahzad Qadri, the "primary challenge is for institutions to offer products that conform not only to Shari 'ah but also to state and federal banking regulations." Shahzad Qadri, Islamic Finance: An Alternative, 28 No. 1 Banking & Fin. Services Pol'Y Rep. 9, 11 (2009) [hereinafter Islamic Finance: An Alternative] (discussing primary challenge faced by providers of Islamic products).

(91.) National Bank Act, ch. 106, 13 stat. 99 (1864) (current version at 12 U.S.C. [section] 29 (2006)) (forbidding banks from holding possession or title of real estate for longer than five years); Kim Tacy, Islamic Finance: A Growing Industry in the United States, 10 N.C. Banking Inst. 355, 370 (2006) (discussing origins of challenge facing Islamic financial institutions).

(92.) See Shayerah Ilias, Cong. Research Serv., RS22931, Islamic Finance: Overview and Policy Concerns 5 (2009), available at http://fas.org/sgp/crs/misc/RS22931.pdf (discussing recognition of ijara- and murabaha-based mortgages by two interpretive letters); Omar A. Hashmi, Comment, Islamic Financing in the United States: Solution or Deception?, 52 How. L. J. 709, 729-30 (2009) (noting Office of Comptroller of Currency issued two interpretive letters of significance to Islamic finance). The letters are merely an avenue for the OCC to provide its view on an issue. See Office of the Comptroller of the Currency, CRA Interpretations, http://www.occ.treas.gov/cra/craintrp.htm (last visited Sept. 30, 2010) (discussing

definition and weight of interpretive letters). The opinions contained therein are subject to change. Id.

(93.) Officer of the Comptroller of Currency, Interpretive Letter No. 806 (1997), http://occ.gov/interp/dec97/int806.pdf (last visited Oct. 13, 2010) (recognizing ijara-based mortgages); see Chiu, supra note 86 (discussing significance of Interpretive Letter #806 to ijara-based mortgages); Huda Ahmed, Not Interested in Interest? The Case for Equity-Based Financing in U.S. Banking Law, 2 Entprl. Bus. L. J. 479, 498 (2007) (discussing issue which led to issuance of Interpretive Letter #806). The OCC issued Interpretive Letter #806 to the Bank of Kuwait (UBK). Id. UBK sought to extend its mortgage lending business to Muslims. Ahmed, supra.

(94.) Office of the Comptroller of Currency, Interpretive Letter No. 867 (1999), http://www.occ.gov/interp/nov99/int867.pdf (last visited Oct. 13, 2010) (noting murabaha-based mortgages equivalent to real estate mortgage transaction); see Hashmi, supra note 92, at 729 (stating murabaha-based mortgages are permissible).

(95.) See Hashmi, supra note 92, at 730 (discussing reasoning behind each interpretive letter).Courts have been inconsistent in determining whether substance or form prevails. See Jensen, supra note 6, at 848 (discussing substance-overform" doctrine).

(96.) See Abdi Shayesteh, Islamic Banks in the United States: Breaking Through the Barriers, NewHorizon, Apr-June 2009, at 36, (explaining Gulf-based capital withdrawal from United States after September 11 attacks).

(97.) See Chian Wu, Islamic Banking: Signs of Sustainable Growth, 16 Minn. J. Intl L. 233, 248 (2007) (noting efforts to develop Islamic mortgages for sale on secondary market).

(98.) See id. at 247(recognizing Freddie Mac and Fannie Mae control ninety percent of secondary market); see also Federal National Mortgage Association,

http://www.fanniemae.com/kb/index?page=home&c=aboutus (last visited Nov. 15, 2010) (discussing creation and purpose of Federal National Mortgage Association); Federal Home Loan Mortgage Corporation, http://www.freddiemac.com/corporate/about_freddie.html (last visited Nov. 15, 2010) (describing creation and purpose of Federal Home Loan Mortgage Corporation). The Federal National Mortgage Association (Fannie Mae) "was established as a federal agency in 1938, and was chartered by Congress in 1968 as a private shareholder-owned company." Federal National Mortgage Association, supra. Fannie Mae operates in the U.S. secondary market by working with "mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates." Id. The Federal Home Loan Mortgage Corporation (Freddie Mac), "one of America's biggest buyers of home mortgages, is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing." Id.

(99.) See Wu, supra note 97, at 248 (discussing Freddie Mac's foray into Islamic mortgage financing); Paul Wiseman, Islamic Loans Turn Profit for Banks in USA, USA TODAY, Mar. 28, 2008 (noting Freddie Mac has bought Shari 'ah-compliant mortgages since 2001).

(100.) See Wu, supra note 97, at 248(discussing Fannie Mae's investment in LARIBA).

(101.) See Wiseman, supra note 99 (discussing banks selling Shari 'ah-compliant mortgages to Freddie Mac).

(102.) See Ilias, supra note 92, at 4 (quantifying amount of Shari 'ah-compliant mortgages Freddie Mac has purchased as of 2007).

(103.) See Wu, supra note 97, at 247 (noting secondary markets provide liquidity to Islamic and conventional lenders). Wu goes on to describe the role of Fannie Mae and Freddy Mac as, "secondary market conduits between mortgage lenders and investors." Id.

(104.) See Shayesteh, supra note 96, at 36 (discussing need for direct declaration of support for Islamic finance in United States).

(105.) See Ernest T. Patrikis, First Vice President, Federal Reserve Bank of N.Y., Islamic Finance in the United States--The Regulatory Framework, Remarks Before the Islamic Finance and Investment Conference (May 23, 1996), http://www.newyorkfed.org/newsevents/speeches_archive/1996/ep960523.html (last visited October 13, 2010); see also Taylor, supra note 4, at 427 (acknowledging Patrikis' support for developing Islamic finance in United States).

(106.) See John B. Taylor, Under Secretary of the Treasury, Understanding and Supporting Islamic Finance: Product Differentiation and International Standards, Keynote Address at the Forum on Islamic Finance Harvard University (May 8, 2004),http://www.treasury.gov/press/releases/js1543.htm. (speaking on importance of Islamic finance in United States); Taylor, supra note 4, at 427 (discussing John B. Taylor's remarks regarding Islamic Finance).

(107.) See Taylor, supra note 4, at 428 (discussing creation and purpose of Islamic Finance Scholar-in-Residence program). Dr. Mahmoud El-Gamal was appointed to serve as the first Islamic Finance Scholar-in-Residence. See Press Release, U.S. Department of the Treasury, Treasury Launches New Islamic Finance Scholar-in-Residence Program (June 2, 2004), available at http://www.treas.gov/press/releases/js1706.htm (discussing launch of Scholar-in-Residence Program). The Scholar-in-Residence will serve "as a principal advisor on Islamic Finance to senior Treasury officials and he will liaise with international organizations that are seeking to create standards for and monitor Islamic finance." Id. "The purpose of the Islamic Finance Scholar-in-Residence program is to promote broader awareness of Islamic finance practices internationally and domestically for U.S. government policymakers, regulators, and the public at large." Id.

(108.) See Shayesteh, supra note 96, at 37 (discussing Islamic Finance 101 seminar in Washington D.C.).

(109.) See Salah, supra note 86, at 59 (stating tax treatment is another obstacle to Islamic finance).

(110.) See Gaffaney, supra note 89, at 566 (recognizing importance of interest deductibility in U.S. homeownership); Jensen, supra note 6, at 843 (discussing Congressional assistance to homeowners through interest deductibility); see also Roberta Mann, Is Sharif's Castle Deductible? Islam and the Tax Treatment of Mortgage Debt, 17 Wm. & Mary Bill Rts. J. 1139, 1145 (2009) (acknowledging Internal Revenue Code tax benefits to homeowners).

(111.) See Tacy, supra note 91, at 367 (discussing use of ijara-based mortgages in United States); see also Jensen, supra, note 6 at 846-47 (describing use of murabaha- and musharaka- financing structures for home mortgages in United States); cf. Mann, supra note 110, at 1148-50 (arguing murabaha, ijara and musharaka mortgages equivalent to conventional mortgages in substance).

(112.) See Tacy, supra note 91, at 367 (discussing tax treatment of ijara-based mortgages).

(113.) See Jensen, supra note 6, at 846-48 (discussing tax treatment of murabaha and musharaka mortgages).

(114.) See id. at 846-47 (discussing inability of homebuyers to deduct interest incurred from home indebtedness).

(115.) Id. at 847 (noting ability to exclude gain and rental income).

(116.) See id. (noting musharaka arrangement is partnership not lender-borrower relationship).

(117.) See id. (acknowledging homebuyer is not indebted in musharaka-based mortgage and therefore pays no interest).

(118.) See id. (acknowledging inability to take advantage of imputed rental income and gain exclusion). The homeowner pays rent to the partnership and the rent is not imputed to the homebuyer, but the partnership. Id.

(119.) See Salah, supra note 88, at 59 (discussing double taxation of Shari 'ahcompliant mortgages by states).

(120.) See id. (discussing double property transfer tax in murabaha- and ijarabased mortgages).

(121.) See id. (discussing potential for double tax problem in property sales). But see id. (discussing New York's solution to double property transfer tax issue). The tax authorities in New York tax have recognized the inequity of imposing a second tax payment on a Shari 'ah-compliant structure when the substance of the transaction is the equivalent of a conventional financing, and rulings have been issued on a case-by-case basis to eliminate this double tax burden.

Id.

(122.) See Jensen, supra note 6, at 848 (discussing substance-over-form doctrine); Gaffaney, supra note 89, at 566 (discussing mechanics of substance-over-form doctrine). "The substance over form principle established by the U.S. government allows the [Internal Revenue Service] IRS to tax a transaction according to its substance." Gaffaney, supra at 566-67.

(123.) See Gaffaney, supra note 89, at 566-67 (stating what taxpayer must argue when invoking substance-over-form doctrine).

(124.) See id. (recognizing IRS Commissioner primarily uses substance-over-form doctrine).

(125.) See id. (recognizing taxpayer's difficulty in invoking substance over form doctrine); see also id. at 567 (stating substance over form doctrine is not "two-way street"). Taxpayers are "bound to the consequences of the form they have chosen for a transaction." Id.

(126.) See Jensen, supra note 6, at 849 (recognizing difficulty faced by taxpayer in invoking substance-over-form doctrine).

(127.) See Tacy, supra note 91, at 365 (discussing estimated Muslim population in United States); Ilias, supra note 92, at 3 (stating Muslim population estimated to be between five to seven million); Chiu, supra note 86 (stating Muslim population estimated to be at 2.1 million).

(128.) See Salah, supra note 88, at 61 (noting Federal Deposit Insurance Corporation's offers insurance protecting deposit accounts).

(129.) See William L. Rutledge, Executive Vice President, Fed. Res. Bank of N.Y., Remarks at the 2005 Arab Bankers Association of North American (ABANA) Conference on Islamic Finance: Players, Products & Innovations in New York City (Apr. 19, 2005),

http://ny.fbr.org/newsevents/speech/2005/rut050422.html (recognizing profit-andloss sharing deposit accounts are contrary to concept of deposit protection); see also Salah, supra note 88, at 61 (acknowledging primary issue with deposit accounts is protection offered by FDIC insurance); Sulman A. Bhatti, Note, The Shari 'ah and The Challenge and Opportunity of Embracing Finance "Without Interest," 2010 Colum. Bus. L. Rev. 205, 236 (2010) (recognizing primary issue with Shari'ah-compliant deposit accounts is FDIC insurance).

(130.) See Salah, supra note 88, at 61 (stating current depositary arrangements

are not Shari 'ah-compliant); see also Bhatti, supra note 129, at 236-237 (recognizing current U.S. approach to deposit accounts not conducive to Shari 'ah-compliant deposit accounts).

(131.) See id. (noting U.S. regulators have not allowed customers to waive deposit insurance); see also Bhatti, supra note 129, at 237 (noting lack of FDIC-approval of deposit products with the "possibility of loss").

(132.) See Islamic Finance Opportunities, supra note 2, at 132 (recognizing potential for Islamic finance in oil and gas industry).

(133.) See id. at 134 (acknowledging investments in oil and gas assets are predisposed to being Shari 'ah-compliant); see also New Horizons for Islamic Securities, supra note 31, at 410 (discussing unique relationship between American oil and gas law with Shari'ah concepts).

(134.) See New Horizons for Islamic Securities, supra note 31, at 422 (discussing first sukuk offering in United States); Islamic Finance Opportunities, supra note 3, at 149 (suggesting first sukuk offering arose from unique relationship between oil and gas and Shari'ah).

(135.) See New Horizons for Islamic Securities, supra note 31, at 422 (recognizing East Cameron Gas Company's sukuk offering in United States as a groundbreaking event).

(136.) See Blake Goud, East Cameron Sukuk Sinks, cpifinancial.net http://www.cpifinancial.net/v2/print.aspx?pg=magazine&aid=1942 (discussing East Cameron Gas Company's bankruptcy and ramifications on sukuk offerings in United States).

(137.) See supra Part III.A. (discussing changes made by United Kingdom to regulatory and tax schemes for Islamic finance).

(138.) Compare Part III.D. (discussing United States' failure to proactively aid in growth of Islamic finance, with supra Part III.A. (discussing United Kingdom's effort to cultivate Islamic finance). See supra note 5 (noting growth and size of Islamic finance).

(139.) See infra Part IV.A-B. (discussing steps United States must take to cultivate Islamic finance); see also supra note 5 (noting growth and size of Islamic finance).

(140.) See supra Part III.B.2. (discussing type of support U.S. regulators have shown for Islamic finance).

(141.) See supra note 104 and accompanying text (noting United States' passive approach to attract Islamic finance); see also supra notes 49-52 and accompanying text (discussing United Kingdom's proactive approach to attract Islamic finance).

(142.) See supra notes 49-51 and accompanying text (acknowledging creation of groups to determine barriers to Islamic finance within United Kingdom).

(143.) See supra note 107 and accompanying text (recognizing creation of Islamic Scholar-in-Residence program).

(144.) See Taylor, supra note 3, at 428 (discussing purpose of Islamic Scholarin-Residence program).

(145.) See supra notes 105-108 and accompanying text (listing instances of indirect support for Islamic finance by U.S. regulators); supra note 52 and accompanying text (recognizing Chancellor Brown's intention to turn London into gateway for Islamic finance); supra note 5 and accompanying text (recognizing size of Islamic finance industry and consequences of failing to cultivate it); see also supra notes 49-51 (listing instances of direct support for Islamic finance by U.K. regulators);

(146.) See supra Part III.B.2 (acknowledging instances where U.S. regulators expressed willingness to understand Islamic finance).

(147.) See supra notes 49-51 and accompanying text (noting recommendations by groups in United Kingdom have led to significant regulatory changes).

(148.) See supra notes 105-108 and accompanying text (discussing initiatives to understand Islamic finance, and lack of initiatives to propose new rules and regulations). The U.S. Department of Treasury has merely expressed an interest in understanding Islamic finance, not in changing regulations to encourage Islamic finance. Id.

(149.) See supra note 104 (recognizing Islamic bankers' need for direct support for Islamic finance from U.S. regulators).

(150.) See supra Part III.B.3 (discussing disparate tax treatment of Shari 'ah-based mortgages).

(151.) See supra Part III.B.3 (noting federal tax treatment of ijara-, murabaha-and musharaka-based mortgages).

(152.) See supra notes 119-121 (discussing issue of double taxation of property

by states).

(153.) See supra notes 122-126 and accompanying text (acknowledging use of "substance over form" doctrine and difficulties faced by taxpayers).

(154.) See infra Part IV.B.1-5 (discussing recommendations to eliminate barriers to Islamic finance in United States).

(155.) See supra note 111 (discussing types of Shari'ah structures utilized for mortgages in United States); see also supra Part III.B.3 (discussing unfavorable tax treatment of Shari'ah-compliant mortgages).

(156.) See supra Part III.A.3-4 (discussing types of Shari 'ah structures utilized in United Kingdom).

(157.) See supra note 113 and accompanying text (noting disparate tax treatment of murabaha- and musharaka-based mortgages).

(158.) See supra Part III.A.3 (discussing tax treatment of Shari 'ah-based mortgages in United Kingdom upon passage of multiple finance acts).

(159.) See supra note 112 (discussing tax treatment of ijara-based mortgages in United States).

(160.) See supra note 113 (noting tax disadvantage for murabaha- and musharaka-based mortgages).

(161.) See supra note 62 and accompanying text (discussing legislation of murabaha-based mortgages in Finance Act 2005); see also Development of Islamic Finance in the UK supra note 65 and accompanying text, at 16 (discussing legislation of musharaka-based mortgages in Finance Act 2006).

(162.) See supra note 113 (discussing current tax treatment of murabaha- and musharaka-based mortgages in United States). Currently, the United States severely handicaps murabaha- and musharaka-based mortgages by failing to amend the tax code to level the playing field between Shari'ah-based mortgages and traditional mortgages. Id.

(163.) See supra note 114 and accompanying text (recognizing inability to deduct interest in murabaha-based mortgage for tax purposes).

(164.) See supra note 63 (noting treatment of profit as interest in murabaha-based mortgage in United Kingdom).

(165.) Id. (noting buyer is taxed on profit as if it were interest).

(166.) Id.

(167.) See supra note 115 and accompanying text (discussing exclusion of imputed rental income and gain on sale of primary residence).

(168.) See supra note 114-115 and accompanying text (noting three tax treatment aspects of conventional mortgages).

(169.) See supra note 117-118 and accompanying text (discussing musharaka-based mortgages tax disparities in the United States).

(170.) See supra note 66 (defining musharaka financing in Finance Act of 2006).

(171.) See supra notes 117-118 and accompanying text (noting lack of deductions and exclusions when musharaka-based mortgage is utilized).

(172.) See supra notes 65-67 and accompanying text (discussing treatment of musharaka-based mortgages by United Kingdom).

(173.) See Tacy, supra note 91, at 335 (discussing state tax issues).

(174.) See supra note 61 (discussing elimination of double stamp duty tax by Finance Act 2003); see also Taylor, supra note 4, at 421-22, 426 (noting elimination of double stamp duty tax made IBB possible).

(175.) See Salah, supra note 88, at 59 (noting most states subject Shari 'ah-based mortgages to double property transfer tax).

(176.) See supra note 61 (providing limited exemption from Stamp Duty Land Tax for Shari 'ah-based mortgages in United Kingdom).

(177.) See supra note 121 (noting charging of tax at two instances in Shari'ah-based mortgages).

(178.) See Salah, supra note 88, at 59 (noting New York's recognition of inequitable tax treatment of Shari'ah-based mortgages).

(179.) See id. (acknowledging New York employs case-by-case basis to determine imposition of property transfer tax).

(180.) See id. (noting burden is on homeowner to prove alternative mortgage is equivalent to conventional mortgage).

(181.) See supra note 61 (acknowledging Finance Act 2003 removed any doubt about imposition of Stamp Duty Land Tax).

(182.) See supra notes 114-120 and accompanying text (listing barriers to Islamic finance).

(183.) See supra note 121 and accompanying text (noting U.S. taxpayers may invoke substance-over-form doctrine to eliminate tax disadvantage on Shari'ah-products).

(184.) See supra note 91 and accompanying text (acknowledging National Bank Act of 1864 prohibits banks from owning real estate); see also supra note 92 and accompanying text (interpreting National Bank Act of 1864 to allow ijara-and murabaha-based mortgages).

(185.) See supra note 94 (recognizing ijara-based mortgage is equivalent to conventional mortgage); see also supra note 101 (recognizing murabaha-based mortgage as equivalent to conventional mortgage).

(186.) See supra note 92 (discussing weight of interpretive letters)

(187.) See supra note 94 (acknowledging ijara-based mortgage is equivalent to conventional mortgage); see also supra note 96 (acknowledging murabaha-based mortgage is equivalent to conventional mortgage).

(188.) See supra note 123 and accompanying text (discussing application of substance-over-form doctrine).

(189.) See supra note 125-126 (noting difficulty faced by taxpayer in invoking "substance over form" doctrine).

(190.) See supra note 124-126 (discussing IRS's primary use of substance-overform doctrine).

(191.) See supra Part III.A.3 (discussing positive effect of legislation on Islamic finance in United Kingdom); see also supra note 125 (acknowledging taxpayers are frequently held to form chosen under "substance over form" doctrine).

(192.) See supra notes 99-102 (tracking increase in purchases of Shari'ah-compliant mortgages by Freddie Mac and Fannie Mae).

(193.) See supra Part III.A.4 (discussing positive effect of proactive legislation on Islamic finance in United Kingdom)

(194.) See supra note 71 (stating Finance Act 2003 allowed IBB to open for business).

(195.) See supra notes 6-81 and accompanying text (noting significant growth in sukuk listing on LSE).

(196.) See supra note 95-98 (recognizing market share of Freddie Mac and Fannie Mae in secondary market for mortgages).

(197.) See supra text accompanying note 127 (estimating Muslim population in United States).

(198.) See supra note 103 and accompanying text (noting Islamic financial institutions' access to leading purchasers of mortgages on secondary market).

(199.) See supra notes 99-102 and accompanying text (discussing growth of mortgages purchased by Fannie Mae and Freddie Mac).

(200.) See supra Part III.B.3 (comparing tax barriers to growth of Shari 'ah-compliant mortgages).

(201.) See supra note 128 and accompanying text (discussing applicability of FDIC insurance to deposit accounts).

(202.) See Islamic Finance in the U.K., supra note 43, at 14 (discussing dilemma faced by FSA in approving IBB's application); see also Bhatti, supra text accompanying note 73 (articulating reason for Shari'ah noncompliant deposit accounts); see also supra note 129, at 237 (discussing long period of "intensive

consultation" needed to deal with deposit account issue).

(203.) See Salah, supra note 88, at 61 (discussing barrier to Shari 'ah-compliant deposit).

(204.) See supra note 74 and accompanying text (discussing FSA's solution to deposit account protection dilemma); see also Bhatti, supra note 129, at 237 (discussing "deposit product that satisfied both secular and religious imperatives"). Bhatti, supra. The United Kingdom's solution to the deposit issue was:
   In case of a loss, the bank invites customers to sign a voluntary
   waiver of this offer, in order to comply with Shari'ah law.
   Depositors who sign this waiver would not be eligible to receive
   insurance of their deposit in accordance with Britain's insurance
   scheme. In this way, the bank formally operates within the deposit
   insurance framework but it has created an internal contract
   mechanism to allow the profit-and-loss-sharing arrangement. The
   British government made these legal changes despite having a total
   Muslim population of only 1.8 million individuals, which is less
   than third of that of the United States.


Id. at 237-38.

(205.) See supra note 74 (discussing size of Shari 'ah-compliant deposit accounts in United Kingdom).

(206.) See Salah, supra note 88, at 61 (discussing lack of opt-out provision in FDIC insurance); see also Bhatti, supra note 129, at 237 (recognizing U.S. depositary products do not allow for possibility of loss).

(207.) See Tacy, supra note 91, at 365 (discussing estimated Muslim population in United States); Ilias, supra note 92, at 4 (stating Muslim population estimated to be between five to seven million); Chiu, supra note 86, at 2 (stating Muslim population estimated to be 2.1 million).

(208.) See Islamic Finance in the UK, supra note 43, at 24 (acknowledging growth of sukuk offerings in United Kingdom secondary market).

(209.) See New Horizons for Islamic Securities, supra note 31, at 422 (discussing first sukuk offering in United States); Islamic Finance Opportunities, supra note 0, at 149 (suggesting first sukuk offering arose from unique relationship between oil and gas and Shari'ah).

(210.) See Islamic Finance Opportunities, supra note 2, at 132-33 (recognizing potential of sukuk offerings in oil and gas industry).

(211.) See UK Excellence in Islamic Finance, supra note 43 (recognizing success of LSE as listing venue for sukuk offerings).

(212.) See supra note 135 (discussing significance of East Cameron sukuk offering to Islamic finance industry in United States).

(213.) See supra notes 80-81 (recognizing growth potential of Islamic finance).

(214.) See supra note 133 (discussing potential for growth in sukuk offering because of nature of oil and gas assets); see also supra note 132 and accompanying text (recognizing Islamic finance products as promising yet untapped resources by oil and gas industry).

(215.) See supra note 136 (recognizing significance of East Cameron's Chapter 11 bankruptcy filing to future U.S. sukuk offerings).

(216.) See UK Excellence in Islamic Finance, supra note 43, at 14 (noting growth of sukuk offerings in United Kingdom after creation of sukuk secondary market); see also supra note 135 and accompanying text (noting significance of East Cameron's sukuk offering).

(217.) See supra notes 107-108 (recognizing programs launched to understand Islamic finance, not to train scholars)

(218.) See supra note 85 and accompanying text (acknowledging United Kingdom's launch of Shari 'ah scholar training program).

(219.) See supra note 82 and accompanying text (discussing importance of Shari 'ah scholars to growth of Islamic finance).

(220.) See supra note 85 and accompanying text (recognizing effect of Islamic Finance Council Scholar Professional Development Program on increase of Shari'ah scholars).

(221.) See supra notes 82-84 (noting limited number of Shari'ah scholars in world and need for training programs).

(222.) Cf. supra Part III.B (discussing barriers to growth of Islamic finance in United States).

(223.) Compare supra Part III.A (discussing public support of U.K. regulators for Islamic finance) with supra Part III.B.2 (discussing passive support of U.S. regulators for Islamic finance and goals of gulf-based investors).

(224.) See supra Part III.B.3 (discussing tax treatment of Shari 'ah-compliant mortgages).

(225.) See supra note 110 (describing deductibility of interest payments as cornerstone of homeownership in United States).

(226.) See supra Part III.A.4 (noting size of Islamic finance industry in United Kingdom).

(227.) See supra note 134 and accompanying texting (noting interest of Muslim and non-Muslim investors in Shari 'ah-compliant products).

(228.) See Wu, supra note 97, at 248 (discussing access to Freddie Mac and Fannie Mae funds for Shari 'ah-compliant mortgages).

(229.) Cf. supra Part V.B.5 (discussing importance of well-trained Shari 'ah scholars to growth of Islamic finance).

(230.) Cf. supra Part V (discussing steps United States must take to become viable Islamic finance hub like United Kingdom).
COPYRIGHT 2011 Suffolk University Law School
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2011 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Nizami, Shah M.
Publication:Suffolk Transnational Law Review
Date:Jan 1, 2011
Words:15837
Previous Article:International tax law as a Ponzi scheme.
Next Article:International contract law - choice-of-law analysis applies when signatory nations adopt opposing oral contract provisions under the CISG - Forestal...
Topics:

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters