Prospects and Challenges of Islamic Banking and Finance in United States

Abstract

This study examines the prospects and challenges facing Islamic banking and finance in U.S. and identifies lessons that IFIs can learn from recent global financial crisis. The paper employs a combination of qualitative and quantitative data analysis methods. A table comprising key retail Islamic banking and home finance providers and products was developed and analysed. In addition, comparison between Islamic and conventional housing mortgage transactions was conducted to determine if differences in transaction approaches allowed the reduction of impact of recent financial crisis on IFIs. Initial findings of the study indicates that, in general, Islamic banking accounts do not differ so much with conventional types except the way they are allowed to run in IFIs. However, their main difference lies in mudaraba account which promotes the concept of profit-and-loss sharing between bank and account holders. On the other hand, Islamic housing mortgage transactions in U.S. were found to differ with conventional types because IFIs in the first instance are required by Shariah law to purchase and own real estate properties before selling or leasing to interested home buyers. Other findings of the study shows that in U.S., IFIs were less affected by recent financial crisis due to adoption of Islamic transaction guidelines which prohibits excessive risk-taking, requires checking of credit history and income prospects to ensure cautious lending. Risks at the level of institutions, organisations and products were identified as important lessons for IFIs from recent financial crisis. The future of Islamic finance in U.S. appears to be promising due to strong performance manifested by Islamic housing mortgages during the recent financial crisis. Major challenges facing Islamic finance industry includes fragmented regulatory/supervisory framework, possible legal and regulatory changes in mortgage market during the post crisis period and restricted funding sources for Islamic home finance companies.