The Shari’ah and the Challenge and Opportunity of Embracing Finance “Without Interest”

Abstract

It is perhaps safe to assume that after the recent credit crisis, more Americans would prefer an interest-free Shari’ah-compliant mortgage over a conventional variable rate mortgage. But for over 300 years, a commercial alternative to interest-based banking has never been available in the United States.’ America’s population now includes nearly six million Muslims, all of whom are morally prohibited from entering into financing arrangements involving interest. The active participation of Muslims in the U.S. financial system depends, in part, on how current law responds to their need for a system of finance that does not require interest. U.S. regulators and legal professionals have taken notice of the growing salience of Islamic financial concepts, but their response has been ambivalent. Despite demonstrated interest from consumers within the United States, there are no statutes or administrative regulations allowing for the creation of banks that provide interest free financing for U.S. residents. Meanwhile, U.S. law firms have opted to make Shari’ah-sanctioned profit abroad, sending attorneys to serve wealthy commercial clients in the Middle East. Domestic financial institutions and legal professionals are generally unprepared to service the basic banking and financing needs of the six million Muslims living within the United States. For these Muslims, ensuring that their finances are managed in a way that is consonant with their belief structure is essential to the free exercise of their religion, a right that is arguably guaranteed under the First Amendment of the U.S. Constitution. This Note argues that the current U.S. regulatory framework should allow for an alternative retail financing option and bank deposit scheme for American Muslims who choose to observe Islam’s prohibition against interest. This requires de minimis banking regulation that would allow both conventional banks and new institutions to serve observant Muslims. These changes will integrate more Americans into the U.S. financial system without compromising the policies behind the laws and regulations of the United States. The Note suggests one regulatory proposal and one minor amendment to current U.S. banking law, particularly the FDICIA, which would allow for the development of Shari’ah-based alternatives in the United States while leaving traditional banking options unaffected. The Note also addresses the limitations of the proposed approach and responds to potential critiques.