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

Abstract

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