Islamic Finance in North America
Islamic Finance in North America
- M. Kabir Hassan, M. Kabir HassanDepartment of Economics and Finance, University of New Orleans
- Tahsin HuqTahsin HuqDepartment of Economics and Finance, University of New Orleans
- and Aishath MuneezaAishath MuneezaInternational Centre for Research in Islamic Finance
Islamic finance is an alternative source of financing to the conventional financing that emerged via institutionalization in the 1960s. It has gained popularity in the world irrespective of faith convictions due to the universal and ethical principles adhered in the practice of it. In this regard, North America is not an exception. In the United States and Canada, Islamic finance has been adopted, and there is an established regulatory environment for the operation of it with political support. There is also a wide range of innovative Islamic finance products structured and used in this part of the world that is conducive to the demand of the population and regulatory environment of Islamic finance found in the respective jurisdictions. These two countries are often described as competitors in the region, but the reality is despite the competitive relationship they are in by default, they are also collaborators in developing Islamic finance in the region. More than one million self-identified Muslims in Canada represents 3.2 percent of the total Canadian population. In comparison, the Muslim population in the United States represents 0.9 percent of the total population. Hence, Canada has been viewed as more suitable to become the hub of Islamic finance in the region simply because the number of Muslims in Canada is greater than that found in the United States in terms of religious representation in each nation’s total population. Furthermore, in terms of the regulatory environment, though the regulatory landscape applicable to financial institutions including Islamic financial institutions in the United States is much more sophisticated, the lack of a regulatory environment in Canada for Islamic finance is viewed as an opportunity for Canada as this provides flexibility required to develop and innovate unique Islamic finance products and increase the number of institutions dealing with Islamic finance. Sharia governance is the backbone of the Islamic finance industry in any jurisdiction. A common weakness found in both countries in the development of Islamic finance is on adopting a uniform Sharia governance framework applicable to all institutions offering Islamic finance products and services. In the early 21st century, the practice of Islamic financial institutions in the region indicates that there is no uniform yardstick to adopt in this regard, leading to confusion as well as lack of confidence—not only among “laypeople” but among Sharia scholars as well—in the Sharia-compliant products offered. In the absence of regulatory backing in this regard, an agreement among the industry stakeholders in the region would be sufficient to standardize this practice and implement procedural requirements that ought to be followed in offering Sharia-compliant products and services.
- Islamic Studies
Introduction of Islamic Finance in North America
Islamic finance primarily focuses on fairness, socioeconomic justice, and the well-being of future generations through proper allocation and distribution of valuable resources.1 The guiding principles of Islamic finance arise from a comprehensive interpretation of Sharia.2 The core principles of Islamic finance stem from the motivation of creating a financial system that is just, fair, and unbiased toward the wealthy minority at the expense of the poor majority. The fundamental aim of Islamic finance is to inform everyone about socioeconomic justice and establish an Islamic financial system that follows the core principles. The principles of Islamic finance advocate fairness in payoffs and reward structures while embracing socioeconomic justice among all.
Among all other markets in North America, American and Canadian financial markets are considered to be the oldest, largest, and most diverse. Affluence of wealth and varied infrastructure of small, big, and medium enterprises in these North American financial markets create increasing demand to find various sources of funding and investment opportunities. Development of such opportunities provides a platform for Islamic investment banks to display their funding as well as investment products and services in the North American financial markets.
The United States and Canada provide unique opportunities for growth and development of Islamic finance in North America. Hence, it is essential to comprehend the inception and history of Islamic finance in both regions. Investors interested in Sharia-compliant investing in North America will benefit from the understanding of Islamic financial institutions operating in the United States or Canada, and Islamic products offered by these institutions in either country. It is essential for these investors to compare the regulatory environment of each nation in order to anticipate any potential risk and return on investing in Islamic financial products in Canada or the United States. Ultimately, investors will be able to make better decisions by connecting all relevant information with their personal investment preference.
The Islamic financial industry began its journey in the United States during the mid-1980s, while Canada welcomed Islamic finance in the early 2000s. Islamic finance was introduced to North America in two ways: first, via the development of the retail finance sector such as home financing products and interest-free financial activities through institutionalization; and second, via investments made by the Gulf Cooperation Council (GCC), such as Arcapita’s investment in the Elysian Group; Gulf Finance House’s investment in the US automobile industry like Halcore; and numerous other initiatives taken by other financial institutions.
The historical context of the development of Islamic finance in the North American region proves that the push factor for it was led by the Muslim population residing in the region who were demanding halal products and services for their consumption as well as to meet their financing needs. Residing in countries where Muslims are the minority, the urge to create a community that is customized as per the religious convictions often happen. Eventually this becomes the driving force that motivates community practices to be institutionalized to cater to the demand.
“Islamic Finance in North America” includes an overview of historical developments of Islamic finance in North America with special reference to the regulatory frameworks applicable to it by discussing the Islamic finance products and services offered as well as discussing the challenges and outlook of Islamic finance in the North American region. It is also hoped that the discussions in this article might assist the stakeholders of Islamic finance on the continent.
History of Islamic Finance Industry in North America
This section discusses the history of Islamic finance industry in North America by dividing the discussion into two parts: United States and Canada.
The Islamic finance industry is rapidly growing in specific regions of the United States depending on the size and density of the Muslim population and the willingness of judicial bodies to cooperate with Islamic financial institutions to create products that are Sharia compliant.
It is difficult to determine the precise figure of Muslims residing in the United States as the government’s Census Bureau does not collect the religious background information of the residents.3 In 2017, the Pew study estimated the population of Muslim Americans to be at 3.45 million people of which 2.15 million were adults.4 The majority of the Muslim communities reside in New York City, Boston, Chicago, Dallas, Detroit, Houston, Minneapolis-St. Paul, Los Angeles, Detroit, San Francisco, Atlanta, and Washington, DC.5 The density of Muslim communities in these urban areas affects the exponential development of Islamic finance in the United States.
There is a common misunderstanding that after the 9/11 attacks the United States is less likely to welcome Islamic financial services in their markets. In fact, different regulatory bodies are working closely with Islamic banks and institutions to develop products that comply with both US laws and Sharia regulations. Both US regulators and Islamic financial practitioners recognize the increased demand for Sharia-compliant products in United States. Similarly, both sides share the view that growth of the Islamic financial industry will add significant value to domestic financial markets.
The Islamic financial industry began its journey in the United States during the 1980s via the establishment of two Islamic financial institutions. In 1984, an investment pool was formed by some Muslims with the objective of creating a Sharia-compliant investment product. However, this group did not anticipate an exponential growth in Sharia-compliant investment products. When the growth exceeded their investment pool, these US Muslim investors approached a local fund manager, and together they established Amana Income Fund. At that time, no standardized rules existed to screen Sharia-compliant Islamic mutual funds. As a result, Amana Income Fund remained smaller in size for several years.
The first Islamic institution, Amana Funds, commenced operations in 1987 as a mutual funds company in Washington. This company is operated by Saturna Capital Corporation. Initially, this fund started with $3.2 million in assets. By 1994, Amana Funds’ assets grew to $10 million. The second institution, American Finance House-LARIBA, was established in 1997. Both these financial institutions focus on financing small businesses and home financing by offering retail investment products that comply with Sharia rules. By the beginning of the 21st century, total assets under management by these two financial institutions reached almost $50 million.
Banking regulation in the United States is mostly market-driven; rather than promoting different kinds of financial products as when the banks and other financial institutions apply, the regulators respond.6 In the mid-1990s, the United Bank of Kuwait (UBK) requested letters from the Office of the Comptroller of the Currency (OCC) for two of its home financing products that are Sharia compliant. In 1997, OCC sent a favorable interpretative letter for its Ijārah wa iqtināʾ (lease-to-own) product. In 1999, OCC sent another favorable interpretative letter for UBK’s Murābaḥah (cost plus profit sale) mortgage products. According to OCC, both these products were economically similar to conventional financial products. OCC’s acceptance of these products as equivalent alternatives to conventional financial products marked a significant advancement for the Islamic finance industry in US financial markets.
In 1996, the launch of Failaka Advisors provided the Islamic finance industry some form of measure to compare different funds across the globe with its annual guide to Islamic funds. However, there were a lack of broader market indices to screen for Sharia compliance and standards to determine whether investments comply with Sharia rules and regulations. Finally, this gap in the industry was filled when the Dow Jones launched its Islamic Market Index in 1999.
The second half of the 1990s saw proliferation of wholesale Islamic finance in the United States. This growth focused on establishing investment opportunities for Middle Eastern investors in the domestic real estate market. These investments were solely designed for overseas clients, and not for US Muslim investors. On the financing side, a noteworthy development in the Islamic finance industry occurred in 2001 when Freddie Mac bought Islamic mortgages from LARIBA using its cash window. This created the first kind of Islamic mortgage securitization. As a result, providers benefited as they found a novel source of funding. Before the entry of Freddie Mac into the Islamic financing home market, lack of capital severely restrained the growth of this industry. The entry of Freddie Mac and Fannie Mae provided an immense source of liquidity into the Islamic financing home market. In 2003, both Fannie Mae and Freddie Mac started buying Ijārah products and became the sole investors in Islamic mortgage products in the United States. Both these government-backed institutions now buy mortgage contracts from Islamic home financing providers.
In 2002, the Sharia-compliant division of HSBC Bank called, Amanah, started offering Islamic home financing products in New York. Amanah used Murābaḥah to provide home financing opportunities that are Sharia compliant. During the initial years of its operations, Amanah started financing homes that were worth $20 million. However, they left the US home market in 2006 due to lack of sufficient demands for their products. In 2002, Guidance Financial implemented a Mushārakah (partnership) model to offer Islamic home financing products in suburbs of Maryland, Virginia, and Washington, DC. In Michigan, the Islamic finance industry grew rapidly when University Bank started offering home financing products in 2003. Islamic home financing products were also offered in the financial hub of Chicago after Devon Bank started offering Sharia-compliant home financing opportunities in 2008.
Development of the Islamic wholesale industry in the United States started in the 1980s and 1990s when some financial institutions focused on creating investment opportunities for Middle Eastern investors in the United States. Among these companies, the most notable one is Arcapita.7 It is a private equity firm headquartered in Bahrain. Previously, Arcapita was known as First Islamic Investment Bank, operating as private equity and venture capital in Atlanta since 1998; it was rebranded as Arcapita in 2005.8 Since 2011, Arcapita has been one of the largest Islamic wholesale companies in the United States. It has completed more than eighty transactions worth more than $30 billion in the United States, the Middle East, Asia, and Europe.9
Other Middle Eastern banks entered the Islamic wholesale industry in the United States during the 2000s. Gulf Investment House (GIH) bought Halcore Group, which is an automobile manufacturer focused on making ambulances. GIH also partnered with Gulf Finance House to establish Innovest Capital, based in Cleveland, and TransOcean Capital in Boston. These firms focus on private equity and real estate funds. In 2004, another Gulf-based investment bank called Unicorn Investment Bank (UIB) started their private equity operations in Chicago. UIB focuses on acquisition of control in middle market corporations that have significant growth potential. This investment bank invests between $10 and $75 million in companies that have $5 million or more in EBITDA (earnings before interest, taxes, depreciation, and amortization). In 2005, Anchor Finance Group began offering management financing, trade financing, and other financial services to businesses in New York. It partnered with Deutsche Bank Trust Company and Merrill Lynch International to conduct financing activities on its behalf.
In 2003, the University Bank of Ann Arbor, in Michigan, started to offer home financing that is Sharia compliant. A large population of Arab Americans reside in Dearborn, Michigan. For this Muslim community, University Bank became the first financial institution to offer Islamic home financing products. In 2007, University Bank began a banking subsidiary that complies with Sharia principles called University Islamic Financial Corporation.10 It is the first Islamic banking subsidiary in the United States that is entirely governed by Sharia principles. It provides home and commercial real estate financing based on Islamic banking and finance principles.
In Canada, a majority of the Muslim population resides in Ontario. More than 40 percent of Canadian Muslims are located in Toronto and another 20 percent in other parts of Ontario. As a result, Ontario is home for the majority of Islamic financial institutions in Canada. These institutions benefit from avoiding differences between provincial regulatory environments as they are concentrated in a particular region. Canada has a larger Muslim population in terms of the share of the total population compared to the United States. More than one million self-identified Muslims in Canada represents 3.2 percent of the total Canadian population. In comparison, the Muslim population in the United States represents 0.9 percent of the total. However, the Islamic finance industry is growing rather slowly compared to that in the United States.
In 2007, two financial institutions applied to open Islamic banks. Their applications were denied. By 2008, more than six applications were pending approval. Those applications were put on hold as the Canadian authorities started conducting studies to familiarize regulators in the financial sectors on Islamic finance. These studies were joint venture efforts conducted by the Canadian national housing agency, the Finance Ministry, the Canadian Mortgage and Housing Corporation (CMHC), the Office of the Supervisor of Financial Institutions, Bank of Canada, and Canadian Deposit Insurance Corporation.
Meanwhile, Sharia-compliant financing products were introduced in the Canadian residential market. In 2004, UM Financial Group financed $120 million of residential real estate using Muḍārabah (money management partnership) financing from the Credit Union Central of Ontario (CUCO). UM Financial has expanded its financing sources by partnering with other financial institutions in Canada. These partnerships led to development of real estate investment funds and deposit products. According to 2009 estimates, annually, these partnerships will provide $250 million in Islamic residential real estate financing. Currently, UM operates an investment fund along with a real estate brokerage. UM Financial group has partnered with two Canadian public companies and launched an Islamic exchange-traded fund (ETF) and interest-free credit card.11 UM Financial tried to open a multicultural bank to bypass the process of waiting for completion of the Islamic banking study mentioned before. As of 2009, that application was waiting for approval from Canadian regulators. There is no further mention of this application on UM Financial Group’s website. UM Financial Group remains the largest financial institution in Canada that provides Sharia-compliant home financing products.
In 2008, the first Takāful products were introduced in Canada by the Co-Operators Group. This group partnered with Ansar Co-Operative Housing Corporation Ltd., an Islamic housing cooperative, over two years and created home and auto Takāful.
Regulation of Islamic Finance in North America
Regulation plays a pivotal role in shaping the practice of Islamic finance. In this section, the regulation used to govern Islamic finance in the United States and Canada are discussed.
Regulation of Islamic Finance in the United States
In the United States, the regulatory oversight of the financial industry is fragmented between state and federal authorities, and between various other governing bodies at the federal level. Additionally, the regulators do not differentiate between conventional and Islamic banks in their governance process of financial services activities. Fragmentation of regulatory supervision across states and at the federal level creates a challenge for the Islamic finance industry to expand their operations in all the states because each state has a different authority in charge of monitoring the banks. Similarly, at the national level, many regulatory supervisors hold overlapping jurisdictions on governing banks as well as nonbank financial institutions.
The fragmentation of the regulatory supervision of the financial industry creates a barrier to entry for foreign banks with a centralized regulatory system. Islamic banks that are based overseas can misconstrue this fragmentation as a deliberate attempt by the US regulatory system to prevent entry of foreign-based Islamic financial institutions, especially after 9/11. This misunderstanding is likely to demotivate these overseas Islamic banks to enter the US financial industry.
Pioneering advancement toward the development of regulatory acceptance for Islamic finance and banking began in the late 1990s as UBK entered the financial industry of the United States. In 1997, UBK applied to OCC to get permission to offer Ijārah-based mortgages. In this type of mortgage contract, the customer, not UBK, is responsible for locating the property that the customer is willing to buy. Also, the customer is responsible for negotiating the terms of the residential real estate purchase with the seller. UBK will neither serve as a broker nor maintain any inventory of properties.
UBK introduced Net Lease, a monthly lease program in which the lessee is liable to pay in order to get access to the property. This monthly lease covers interest as well as principal payments. The Net Lease will require the lessee to maintain the residence, and the lessee will be liable to cover any costs attributable to the residential real estate. At the end of the lease term, the lessee will become the owner of the property. The purchase agreement has provision for the lessee to become the owner of the property before the expiration of the lease term by prepaying the entirety of the purchase price at an earlier date. In case of default, UBK will send notice to the lessee. The bank will give an opportunity to the lessee to cover all dues in an allocated time frame. If the lessee is unable to make a lease payment by that time, then UBK will acquire the property in foreclosure. Rather than reletting the foreclosed real estate, UBK will treat it as “Other Real Estate Owned” and later sell it following the National Bank Act.
UBK will treat its Net Lease as financing and not as a leasing program. Net Lease will be noted as Islamic Home Finance Lease Receivables and Residential Loans in UBK’s general ledger. The bank will use accrual methods to account for Net Lease residential financing as well as conventional mortgage products. UBK will follow similar methodology to calculate the monthly lease of both of its products. UBK will use London Interbank Offered Rate (LIBOR) to calculate its cost of funds. At the start of the lease, the bank will add its margins to its cost of funds and then allocate a monthly lease to cover both principal as well as interest payments.
The interpretative letter from OCC focuses on six major concerns regarding UBK’s lease transaction. The first concern is related to the ownership of the residential real estate by UBK. The second key point examines UBK’s role in maintaining the property. The third point evaluates UBK’s role in financing the transaction. The fourth concern mentioned by OCC is related to the transfer of title at the end of the lease. OCC’s fifth concern is related to the measures UBK is taking in case of a default, and finally, the sixth key point is the use of LIBOR to calculate the cost of funds.
According to OCC, banking activities conducted by federal branches of foreign banks are regulated using similar methodology as branches of domestic national banks. Therefore, UBK’s activities need to follow the rules and restrictions mentioned in the National Bank Act of 1863. OCC’s analysis reveals that the Net Lease has similar economic value as a secured loan. Hence, this lease program is permissible. The second through fifth key points that relate to the bank’s ability to foreclose and retake possession of the real estate as well as transfer of ownership clearly demonstrate that the lease agreement does not create additional risk for UBK than a secured mortgage. The use of LIBOR mentioned in the last key point clarifies that UBK is using an independent source to determine its cost of funds. Thus, it allows UBK to account for a borrower’s credit riskiness because the bank can show its price loans to a benchmark and a spread. Furthermore, when UBK asked for securitization of its Ijārah products, OCC accepted it stating that a portfolio of leases is exposed to similar risks as a portfolio of loans. Therefore, UBK’s activity of Ijārah financing is equivalent to secured lending or mortgage lending.
In 1999, UBK applied to OCC so that it could offer Murābaḥah inventory, construction, equipment, and home financing products in the United States. In a Murābaḥah contract, UBK will create a Master Murābaḥah Agreement or finance a particular good and provide the customer a predetermined maximum amount under the agreement. The customer is responsible for finding those goods, and insuring them while UBK would execute two agreements, the first one to buy and the second one to resell at a profit. These two agreements would be processed and signed at the same time. Also, UBK would only provide financing after the customer has made the down payment. The interpretative letter from OCC states that Murābaḥah financing practice by UBK is analogous to the banking practices of domestic banks acting as securities brokers to influence the sale of securities. According to the letter, the buyer and seller for the securities already exists, and UBK will not be subjected to the risk of holding securities with fluctuating values in its books.
Furthermore, in 2002, the US Department of the Treasury started hosting Islamic finance seminars after then-Secretary of the Treasury Paul O’Neill asked his deputy secretary for international affairs to connect with the domestic Islamic finance industry. In 2004, the Department of the Treasury created a “scholar-in-residence” program and appointed Dr. Mahmoud A. El-Gamal, Chair of Islamic Economics, Finance and Management, at Rice University. This lasted from June to December 2004. In 2005, the general counsel of bank supervision, Thomas C. Baxter, discussed how the secular, common law system like that in the United States can provide flexibility to accommodate products originating from different cultural and religious environments such as Islamic financial products. Mr. Baxter illustrated this flexibility with examples. University Islamic Financial Corporation uses a modified version of profit-sharing deposit accounts developed by Shape Financial. Federal Deposit Insurance Corporation (FDIC) collaborated with Shape Financial to create these modified versions of profit-sharing deposit accounts where these accounts retain their value regardless of the performance of residential finance assets. However, the profits given to depositors depend on performance of the assets.
The guidelines provided by US courts and regulatory agencies demonstrate that they focus on the economic outcome from a transaction. Hence, the regulators are quite flexible and are willing to accommodate the banking activities of foreign banks that employ different structures in their banking practice as long as these activities create similar economic outcomes as the activities used by traditional domestic banks. This demonstrates that the regulatory agencies of the United States are welcoming Islamic banks and Sharia-compliant financing products in US financial markets. This is good news for Islamic banks based overseas, and it also clears the misconception that the United States is not willing to welcome foreign banks, products, and investments in its domestic markets.
However, there exists some regulatory concerns. In the United States, mortgage brokers and leasing corporations are subjected to less regulatory oversight compared to depository institutions. As a result, Islamic institutions operating in US financial markets are mostly leasing companies and mortgage brokers. This provides fewer opportunities for Muslim Americans looking for Islamic banks to deposit their money. In addition, US agencies have no regulatory power on the institutions in the financial services industry. This lack of power also applies toward Islamic financial banks. This is concerning for banks offering Murābaḥah because these financial companies do not own the properties, except for the office buildings and foreclosed real estate.
There is no Sharia governance standard nor a framework for the uniform application across the Islamic finance industry in the country as such; the standard used in different financial institutions in this regard is different among the industry, and often this has created controversial views among Sharia scholars residing in the jurisdiction on the Sharia compliance of the products offered.12 For instance, a professor in economics working in a college in New York, Feisal Khan, has stated that the characteristics of conventional loan–based transactions and Islamic finance transactions look the same to the extent that it is difficult to figure out the difference between the two.13 If there was a proper Sharia governance framework put in place, a uniform practice among the financial institutions across the country will be followed resulting in proper procedures and controls to achieve Sharia governance.
Regulation of Islamic Finance in Canada
The regulatory supervision in Canada is less fragmented compared to that of the United States. Primary regulators of banks at the national level include, Finance Canada, Office of Superintendent of Financial Institutions (OSFI), Financial Consumer Agency of Canada (FCAC), the Bank of Canada, Canadian Deposit Insurance Corporation (CDIC), and Financial Institutions Supervisory Committee (FISC). However, insurance and securities face a challenge due to fragmentation as these are regulated by territorial-chartered financial institutions at the province level. There are nineteen regulatory bodies across thirteen provinces and territories. Despite this fragmentation, the regulatory agencies in Canada seem to maintain cooperative relations with Canadian Securities Administrators. Furthermore, mutual funds, investments, and stock exchange are overseen by three independent regulatory agencies.
At the national level, the key regulatory agencies coordinate through the Financial Institutions Supervisory Committee. Each group consists of representatives of the governor of Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI), the commissioner of FCAC, and the deputy minister of finance. The provincial securities regulatory bodies collaborate with one another as well as with Canadian Securities Administrators to develop more coherent rules and regulations. In September 2007, two institutions applied to the Ministry of Finance to open Islamic banks in Canada. After receiving the applications, the minister of finance commissioned a study on Islamic finance in Canada. A similar study was commissioned by Canadian Mortgage and Housing Corporation (CMHC). The purpose of the study is to comprehend Islamic finance and the extent to which it follows Canadian banking rules and regulations.
The CMHC study, which concluded in 2010, deliberated on the imperative issue as to whether the Bank Act allows Canadian financial institutions to offer Islamic banking products. It was found that there are some obstacles in this regard as the law does not allow personal property to be financed under an operating lease. Likewise, the law does not allow household goods and automobiles to be financed under the concept of finance lease. Furthermore, the law only allows banks to enter into limited partnerships, and, as such, when offering Mushārakah or Muḍārabah products, Islamic banks shall be mindful of stipulating them as limited partnership.14 In terms of applying Islamic law to the legal system of Canada, it was observed that “the Canadian legal system does not, in and of itself, create any particular issues.”15 However, it was observed that the Canadian substantive and procedural laws applied for commercial transactions would still be applied in Islamic financial transactions as well. This simply means that research ought to be conducted to find out whether there are any discrepancies in substantive and procedural laws applied to the commercial transactions with Islamic law. This is because, in case of conflict between the Canadian law and Islamic law, application of Canadian law will prevail over Islamic law.
In Canada, a centralized regulatory environment delays the release of studies commissioned by the minister of finance and CMHC on Islamic finance. As a result, there is a lack of clarity on the regulations that Islamic banks need to adhere to in order to carry out their operations in the Canadian finance market. However, the 2010 study published by CMHC provides some guidelines that are helpful for both domestic and international Islamic banks eager to enter North American markets.
Similar to the United States, Canada has no specific Sharia governance framework applicable to Islamic finance, and, as such, the issue of the bindingness and non-bindingness of Islamic banking fatawā, or Sharia opinion, is an issue that needs a solution.16
Islamic Financing Products in North America
In this section, discussion is made on the different Islamic financing products offered in North America by discussing them using the Shariah contracts used to structure them.
An Ijārah contract refers to lease and acquisition or lease to purchase of products that comply with Sharia rules and regulations. In this contract, the investor or Islamic bank buys an asset, such as a plant, machinery, or real estate, and leases it to the consumer for an agreed period of time and for a fixed rental payment.17 For example, the consumer finds real estate and applies to a bank to finance the asset. The Islamic bank purchases the real estate on behalf of the customer and holds the title in trust over the term of financing. During this period, the bank leases the real estate to the customer for a monthly payment. This payment is divided into two sections: a payment on principal and a “rent” payment. After the completion of both the payments, the customer gets exclusive rights to live in the real estate. The rent portion of the payment is indexed to a market interest rate. It was the first Sharia-compliant contract offered in the United States.
Ijārah is a product of UBK’s successive requests to OCC, which found that UBK’s net lease product satisfies accounting requirements that constitute an Ijārah contract as financing rather than leasing. UBK set requirements on the leasing activity to structure Ijārah as financing. The property purchase was not initiated by UBK but by the customer (lessee). The customer contracted with the seller to purchase the real estate. UBK did not provide the real estate brokerage service. Although UBK was legally entitled to the real estate, interest in the asset was recorded as a traditional mortgage. From a residential standpoint, UBK gave the customer occupancy rights to the real estate for a certain time period. As UBK satisfied all the necessary accounting requirements, OCC approved the Ijārah contract in December 1997.
Certain elements are required for Ijārah to comply with Sharia principles. If the customer is not responsible for the damage or destruction of the property in the Ijārah contract, then the customer is not liable to continue rent payment. The customer is not obligated to buy the real estate at the end of the lease period. If the customer experiences financial distress and is unable to purchase the property, the customer is not under any binding. Islamic banks are protected from the risks of principal and rent payment default and damage to property by insurance.
In Ijārah contracts, leased assets can be securitized. In the case of securitization, the note represents an interest in the property. This note can be secured by a mortgage or deed of trust. The strengths of Ijārah contracts are that Sharia scholars approve securitization of leased assets, and there is demand for these assets. Different types of investors, including one US government–sponsored institution, are willing to purchase these contracts. A weakness of Ijārah is that the extent of tax deductibility is not clearly defined in the structure of the contract. Furthermore, the contract does not explicitly define how issues like rent control or eviction rights apply to Ijārah.
A Murābaḥah contract is used by a financial institution (Islamic bank) to purchase a commodity or asset on behalf of the customer. It is very similar to fixed-rate, fixed-term, secured loans or mortgages. Under this approach, the customer shops for the commodity (car or home). Once identified, the customer negotiates the price with the seller. The bank then buys the commodity and resells it to the customer at a marked-up price. This marked-up price is divided into successive payments to be made in installments. In addition to the installments, the customer is responsible to make an initial investment similar to a down payment. The title is transferred to the customer at closing.
Under Islamic jurisprudence, the bank is responsible for finding and buying the home that meets the customer’s specifications at the best market price. The Murābaḥah contract can be voided if the customer is not satisfied by the quality of the real estate or the purchase price. The key difference between Murābaḥah and conventional lending is that the selling price of the contract remains unchanged if the customer is unable to make installment payments. OCC addressed regulation of Murābaḥah in 1999. According to OCC, Murābaḥah contracts can be used to finance construction, commercial inventory, and acquisition of commercial equipment.
A strength of the Murābaḥah contract is that the customer can exercise tax deduction over the base cost of the property as interest for tax purposes. For a financier, this contract is beneficial because the returns are reliable and short-term.
A weakness is that many Muslims are unable to distinguish Murābaḥah contracts from a conventional loan of money secured by a note and a mortgage. Muslims are also concerned whether this type of financing complies with Sharia principles. Islamic banks do not own the commodity (car or home). The bank transfers the title to the customer in a very short period. As a result, the banks are not sharing any risks. Murābaḥah contracts used to finance real estate include multiple title closings. As a result, this increases the transaction cost including transfer taxes, attorneys’ fees, and title charges. However, in the HSBC model, the New York State Department of Banking recognizes the Murābaḥah as one transaction, which reduces the transaction costs associated with real estate transfer taxes.
In an Istiṣnaʿ contract, the purchaser pays the bank a particular fee depending on the basis of the amount paid by the Islamic bank to the manufacturer for constructing the product. The financial value can be paid on a deferred basis, in advance, or in any way the parties have agreed.
Baiʿ Bithaman Ājil (BBA)
In Baiʿ Bithaman Ājil (BBA), an Islamic bank sells the item to the purchaser by buying the requested asset at a certain amount. Both banks and purchasers can make successive payments to their payable partners, but buyers can also pay the full amount as a single payment.
Muḍārabah financing is a money management partnership where one party provides capital and the other party manages a Sharia-compliant business activity where both parties agree to share profit. In case of loss, in this contract by default, it is the capital provider that will incur all financial loss with the exception of negligence. Current account, saving account and fixed deposit accounts of Islamic banks are structured using this contract. In this contract, the return cannot be guaranteed in any form as guaranteeing it would trigger ribā and the nature of the contract from an equity contract would change to a qarḍ or a loan contract.
Mushārakah is a Sharia-compliant equity contract where parties participating in the contract contribute capital or anything in kind to establish a partnership to engage in a Sharia-compliant activity with the view of making profit. A profit-sharing ratio is preagreed between the parties and loss is borne by the parties according to the capital contributed. To provide home financing, American Finance House-LARIBA uses “Declining Participation in Usufruct” (DPU) or “Declining Mushārakah in rent,” widely known in the world as “Mushārakah Mutanāqiṣah” and translated in English as “diminishing partnership.”18 This is a hybrid Islamic finance concept where the concept of lease is combined with Mushārakah in which the financial institution and the customer jointly buys the home and then leases it to generate profit. In this arrangement, the customer undertakes to purchase the financial institution’s share of the property—jointly owned periodically—until the financial institution’s share of the property becomes zero. At this point, the relationship between the parties comes to an end as the sole owner of the property will be the customer.
In LARIBA’s DPU model, the property is purchased by both the customer and the institution. However, the legal ownership of the property is under the name of the customer, while the share of usufruct for the property is retained by the financial institution. Subsequently, the customer, without any coercion, offers to buy the shares of the property belonging to the financial institution for the actual amount contributed by the financial institution, and the institution agrees to sell it at an agreed fixed amount (repayment of capital) that will be distributed over thirty years with no interest. To generate profit in the partnership, the property is rented on “actual market fair rental value of the property in its geographic location.”19
Islamic Financial Institutions in North America
In this section, to comprehensively cover Islamic financial institutions, institutions offering Islamic financial products and services are discussed in the United States and Canada respectively.
Institutions Offering Islamic Financial Products and Services in the United States
As of 2020, twenty-five Islamic financial institutions are operating in the United States.20 The two most prominent players in the banking sector are Devon Bank and University Bank. These two banks offer Murābaḥah and Ijārah Islamic home financing products.21 The three main financial institutions offering nonbank financial services are Guidance Residential, American Finance House-LARIBA, and Zayan Finance. Furthermore, the United States is home to the largest mutual fund institution, Amana Funds, which is the brokerage section of Saturna Capital Corporation. In the arena of venture capital and private equity, the two key institutions are UIB Capital and Arcapita. In addition to financial services, there are several Islamic financial advisory firms in the US financial market.
In 2003, Devon Bank started its operations in Chicago, Illinois. It started offering a residential Murābaḥah product both in as well as outside of Illinois in 2008. In addition to Murābaḥah, Devon Bank offers Ijārah home and business financing. One of its notable out-of-the-state deals was providing Ijārah wa iqtināʾ financing to California Muslim Community Center in San Diego. The bank also provides construction financing in some states. Devon Bank sells its financing of residential purchases to Freddie Mac. This agreement provides additional liquidity to the bank so that it can offer other financing options. Devon Bank is planning to expand its operations overseas to raise capital from outside the United States in order to provide Mushārakah home finance products in the United States.
University Bank of Ann Arbor started its operations in 2003. Similar to Devon Bank, University Bank also offers Murābaḥah as well as Ijārah Islamic financing products. However, unlike Devon Bank, University Bank has an Islamic finance subsidiary. University Bank is the first and only bank in the United States that offers Sharia-complaint deposit products. This product was developed by SHAPE Financial. The deposit product pays the depositors returns based on the underlying portfolio of Islamic residential financings offered by University Bank. Since its inception, University Bank has financed more than $20 million for residential purchases.
Lincoln State Bank, Broadway Bank, Cole Taylor Bank, and RomAsia Bank also offer financial services that are Sharia compliant although they do not advertise themselves as Sharia-compliant finance providers. In 2013, JP Morgan began offering Islamic banking services. Investment banks such as Standard Chartered Bank has followed its footsteps and started offering Islamic banking services in the US market.
The nonbanking financial institution is the most common company structure in the home financing sector. As these institutions do not accept deposits, they are less strictly regulated. Guidance Residential is the largest residential financing corporation operating in the United States. It is based in Virginia. Since its inception in 1999, Guidance Residential has provided more than $5 billion in home financing to more than twenty thousand families across seven regions in the United States.22 Guidance Residential offers diminishing Mushārakah because it is a nonbanking financial institution and faces no restriction to enter equity investments. It uses a co-ownership model, which is also known as Mushārakah, or “diminishing partnership.” In this partnership, both the client and Guidance Residential become co-owners of the property. According to the partnership agreement, the client pays Guidance regularly scheduled installments in order to purchase the remaining ownership stake of the real estate.
American Finance House-LARIBA is another nonbanking financial institution based in Pasadena, California. LARIBA started its operations in 1987 and is the oldest community-owned Sharia-compliant Islamic financial institution in the United States. It offers diminishing Mushārakah in rent for home financing, auto financing, and food franchises. It also finances dialysis centers and medical clinics. In 2001, Freddie Mac became an investor in LARIBA-financed homes. Following Freddie Mac’s footsteps, in 2002, Fannie Mae also became an investor.
Zayan Finance, established in New York City, is the largest provider of business financing in the United States that is Sharia compliant. Zayan offers financing of multifamily homes and commercial properties utilizing diminishing Mushārakah. It funds larger projects with up to $50 million in real estate financing. Anchor Finance Group is another nonbanking financial institution based in New York that provides management and financial consulting, financial guarantees, factor financing, and letters of credit.
The largest mutual fund institution, Amana Funds, is the brokerage section of Saturna Capital Corporation. It is established in Bellingham, Washington. Amana Funds has invested 98 percent of their assets in mutual funds that are Sharia compliant. There are two Amana funds. First, the Growth Fund (AMAGX) targets corporations with higher-than-average growth prospects and has $2.1 billion in total assets as reported by Morningstar.23 Second, the Income Fund (AMANX) focuses its investment strategies to maintain the primary objective of preserving capital and current income. Amana Funds has been one of the best performing mutual funds in the United States.
One of the competitors of Amana Funds is Azzad Funds. Azzad Ethical Fund (ADJEX) has $99.9 million in total assets according to Morningstar.24 This fund is focused on long-term capital appreciation. Other prominent mutual funds in the United States include Allied Asset Advisors. It is owned by North American Investment Trust (NAIT) that operated Iman Fund. As of April 2020, Iman K funds has $115.3 million in total assets according to Morningstar.25 The fund focuses on corporations with greater-than-average earnings growth.
In the area of venture capital and private equity, the two largest institutions operating in the United States are UIB Capital and Arcapita. Both UIB Capital and Arcapita are subsidiaries of GCC-based Islamic financial corporations. Investment in this sector led to the development of the wholesale portion of the Islamic financial industry in the United States. UIB Capital primarily focuses on the private equity sector with a special interest in midmarket corporations. It invests in oil and gas, health care, consumer products, technology, business, and consumer services industries. UIB Capital focuses on investing in smaller companies with high growth potential. Typically, the size of the equity investment ranges from $10 to $75 million.
Arcapita is known as First Islamic Investment Bank, operating as private equity and venture capital in Atlanta since 1998. It was rebranded as Arcapita in 2005 and currently is one of the largest Islamic wholesale companies in the United States.26 It has completed more than eighty transactions worth more than $30 billion in the United States, Middle East, Asia, and Europe.27 Unlike UIB Capital, which focuses on private equity, Arcapita invests in a wide variety of industries. Arcapita focuses on real estate investment, corporate investments, venture capital, and asset-based investments. The real estate business focuses on self-storage, warehouses, retail, health care, residential, and assisted living facilities. The corporate investments focus on energy, health care, manufacturing, and technology industries in the United States and abroad. The venture capital arena focuses on information technology, health care, and industrial technology industries in the United States. Finally, asset-based investments focus particularly on industries with the highest asset requirements. Hence, the investments include corporations from the oil and gas, transportation, and electricity industries.
Following the footsteps of Arcapita and UIB, two more firms were established by a joint venture between Gulf Finance House and Gulf Investment House. The primary purpose of their establishment was to create investment opportunities for Gulf-based investors in US markets. The first firm, Innovest Capital, Inc., is a fully owned subsidiary of Gulf Investment House. Since 2004, Innovest Capital has invested more than $130 million in the North American housing market.28 This Cleveland-based institution focuses on real estate development and acquisition. The second firm, Trans-Ocean Group Ltd., focuses on private equity.
Established in 2006, SHAPE Financial is a financial advisory company operating in Virginia. The customer-focused financial planning business of SHAPE Financial focuses on assisting clients to manage their finances and ensures that the clients have adequate financial protection in place to avoid any unnecessary risk.29
Besides companies that offer Islamic products, there are law firms with Islamic finance practices. Latham & Watkins LLP is a law firm that has Islamic finance practice experience as they have been involved in landmark Islamic finance transactions at the global level in sophisticated markets.30 Being highly rated and winning awards, Latham & Watkins LLP is the leading law firm for Islamic finance practices.
Institutions Offering Islamic Financial Products and Services in Canada
The majority of the Canadian Islamic finance market is served by United Muslim (UM) Financial Group. It includes a real estate brokerage firm, called UM Realty; a real estate investment corporation, called UM Investment; and a nonbank financial company, called UM Financial. Since 2004, UM Financial has financed more than $120 million in residential real estate using Muḍārabah financing from Credit Union Central of Ontario (CUCO). UM Financial has expanded its financing sources by partnering with other financial institutions in Canada. These partnerships led to development of real estate investment funds and deposit products. UM Financial Group has experienced significant growth with its UM Investment business, which has established UM Real Estate Investment Fund and also offers Registered Education Savings Plans (RESP) and Retirement Savings Plans (RRSP). UM Financial group has partnered with two Canadian public companies and launched an Islamic ETF and interest-free credit card.31 UM Financial tried to open a multicultural bank to bypass the process of waiting for completion of the Islamic banking study mentioned before. As of 2009, that application was waiting for approval from Canadian regulators. There is no further mention of this application on UM Financial Group’s website. UM Financial Group remains the largest financial institution that provides Sharia-compliant home financing products in Canada.
The demand for Sharia-compliant investment opportunities is growing gradually in Canada. As a result, the number of mutual funds and ETFs in the market is limited. The two mutual funds in Canada are Global Prosperata Iman Fund and FrontierAlt Oasis Canada Fund. Global Iman Fund is a socially responsible equity fund that is Sharia compliant. The fund invests in equity stocks of public firms listed on the Dow Jones Islamic Market Index series (DJIMI). It also invests “in instruments that mirror the performance of the DJIMI or instruments that mirror the performance of a selection of public companies listed on the DJIMI.”32 Global Iman Fund has more than $40 million in assets under management. This fund is managed by UBS Investment Management Canada Inc.33 FrontierAlt Oasis Canada Fund invests in securities of Canadian corporations that are publicly traded. As of 2009, it had $2.9 million in total assets under management.
Since 2004, Ittihad Capital Corporation has provided Islamic investment banking products in Canada.34 Based in Toronto, Ittihad Capital Corporation offers Ṣukuk investment products. Unlike other Islamic financial firms, Ittihad’s screening criteria includes socially responsible investing (SRI) along with Sharia restrictions. As a result, it is able to target Muslim as well as non-Muslim clients. It provides financial services to help expand ethical business ventures. Ittihad utilizes a joint venture profit or loss model that does not involve any credit or interest payments to investors. It earns returns from capital appreciation of the shares or dividend payout Takāful.
Other important institutions offering Islamic finance products and services include, Al Yusr, Manzil Bank, Habib Canadian Bank, Al-Ittihad Investment, Ijara Community Development Corp, Ansar Co-operative Housing Corp, Islamic Co-Operative Housing Corp, Qurtuba Housing Co-op, An-Nur Housing Cooperative, Amana Auto Finance Canada, and Assiniboine Credit Union.35 Iana Financial, Wealthsimple Halal, and ShariaPortfolio Canada have also entered the Canadian Islamic finance market.
In Canada, the law firms that practice Islamic finance are Canadian legal firms working with domestic Islamic financial companies. They offer legal guidance on the products offered by these domestic Islamic financial institutions. Stikeman Elliott; Ogilvy Renault; Gowlings Lafleur Henderson; Blake, Cassels & Graydon; and Cassels Brock & Blackwell are some of the prominent law firms that provide legal guidance to Islamic financial institutions in Canada.
Risk and Uncertainty in Islamic Finance
The concept of profit and loss sharing in Islamic finance differentiates the Islamic view of risk and uncertainty from the Western view. Sharia principles state that any profit must come from legitimate trade and asset-based investment. Additionally, the risk of a venture needs to be shared between both contracting parties.36 According to Western philosophy, the primary purpose of investment is to make profit that will maximize shareholders’ wealth. However, Islamic finance motivates investment in projects that are not solely aimed at earning profit. Islamic finance encourages investment in projects that are beneficial for society.
In Islamic finance, the concept of Gharar refers to both uncertainty and risk. Gharar is also referred to as excess uncertainty and is not permitted if it is impossible to determine risk and uncertainty associated with a particular transaction or exchange. It is not practically possible to eliminate all risk and uncertainty from exchange contracts.37 As every transaction has some elements of uncertainty and risk, Gharar is accepted in an exchange as long as all the contracting parties share identical levels of acceptable risk and uncertainty associated with that transaction.38 To this end, contracting parties explore risk-sharing solutions, for example, Takāful.
In a Takāful plan, a party allocates money to two distinct portions. The first portion (as premium) is directed to their risk fund, while the second portion goes to a Takāful company. The amount of money directed to the risk fund follows the idea of tabbaru’ (donation). Furthermore, the party comes to a mutual agreement with the Takāful company that receives the second portion of the money. According to the agreement, the Takāful company is obligated to provide financial protection against unanticipated loss to the parties.39 Insurance is the conventional counterpart of the Takāful plan.
Growth Prospects and Challenges
It is evident from the foregoing discussion that the future of the Islamic finance industry in North America is ever green. In September 2019, an article by the Financial Times states that the sharia-compliant Dow Jones Islamic Market Titans 100 Index has experienced a growth of 13.15 percent over the first quarter of 2019, while FTSE 100 only experienced an 8 percent rise.40 In October 2019, the Financial Times reports that Islamic banks have outperformed their counterparts in the conventional banking sector. According to the article, “Return on equity at 16.3 per cent in 2018 for the global Islamic banking system was higher than its non-sharia counterparts in the US.”41
However, there are some specific challenges facing the two countries in the region and some common challenges that need to be resolved via mutual cooperation and common understanding in the region. The developments of Islamic finance in North America proves that demand is the driving factor behind the creation of Islamic finance in the region and what is required now is the diversification of Sharia-compliant products and services available in the region considering the developments of Islamic finance in the world. Moving beyond the comfortable zone and breaking through with unique propositions is the bold move that is required now.
In terms of specific challenges facing the United States, it is observed that since 2010 Freddie Mac and Fannie Mae have provided significant liquidity in home financing that helped in the growth of Islamic finance in the United States, and the industry has experienced the highest growth rate in financial services as it focused on creating Sharia-compliant institutions to offer home financing and investments. Despite these developments in the United States, the challenge faced is offering Islamic finance products and services beyond the traditional products that were offered in the country and going beyond Islamic banking by offering Takāful products and introducing a full-fledged Islamic capital market beyond Islamic equities by introducing Ṣukuk and Islamic unit trusts. It is a known fact that the retail market would not demand Takāful and Islamic capital market products in the same way it demands Islamic house financing products since Takāful and Islamic capital market products are beyond the boundaries of ḍarūrāt, or basic necessities. The demand for these types of products can only be possible via introduction of them and creating awareness about the benefits they have. Therefore, the Islamic finance fraternity in the United States needs to play a proactive role in realizing this. In doing so, one of the strong factors the country has is its vibrant and resilient conventional financial market that is considered one of the most sophisticated, with an environment that is well regulated and governed by strict corporate governance rules that have been developed over many years and learning from experience. Therefore, the proposed Islamic finance products could leverage on the regulatory and corporate governance strength of the conventional market to start off, which definitely in time would need customization.
The specific challenges for Canada in this regard also include introducing a diversified range of products. But instead of highlighting this as a common challenge to both countries, this has been highlighted as a specific challenge as the types of products available in both countries are at different levels. The regulatory bodies in the United States have already shown willingness to cooperate and accommodate Sharia-compliant products in the domestic market. The Islamic finance industry should continue to work with federal as well as state authorities to introduce regulations needed to actively engage in global Islamic finance, Ṣukuk, and Takāful. Though this regulatory loophole situation facing the Islamic finance industry has been described as an opportunity for the growth of Islamic finance due to the flexibility it provides, this does not mean that there is no need to have in place the required legal and regulatory structure for Islamic finance. In this regard, comprehensive research is required to be conducted in the country to draft the required comprehensive framework for Islamic finance. This would be an important step toward realizing the dream of strategizing Canada as the center for Islamic finance in North America. In commercial transactions, certainty and confidence in the transactions can only be provided via codification of Islamic commercial rules applicable to Islamic finance as well. This way the probability of having disputes will be less, and even if there is a dispute, it could be resolved amicably.
In the development of Islamic finance, a common challenge facing both countries is the lack of having a sufficient and uniform Sharia governance framework applicable to all Islamic financial institutions. The backbone of the Islamic finance industry is Sharia governance as without a proper and adequate Sharia governance framework, it would be impossible to achieve Sharia compliance, resulting in losing confidence in the system where not only the customers but the religious scholars would keep making doubtful remarks about the Sharia-compliant products and services offered, eventually tarnishing the image of the whole industry. This damage could not be physically seen but is something that would be felt in how the industry is received by the stakeholders and the respect they have for it. For a sustainable Islamic finance industry, this is something compulsory to be adopted. In this regard, it is proposed that the whole region’s Islamic finance stakeholders should enter into a gentlemen’s agreement in this regard to standardize the practice across the region in the absence of regulatory backing. This way, each institution can adopt the agreed practice as part of their corporate governance principles and via this approach, Sharia governance becomes part of the corporate governance adopted by the institution. In this regard, Sharia harmonization and legal harmonization are two key areas that will need to be focused on in the future. However, the first step in this regard is adopting the general yardsticks that could be applied for Sharia governance across the region and adopting them at each individual institution’s level. For this, there is no need to reinvent the wheel as the Sharia governance framework that could be applied can be replicated from the practices of it in other parts of the world or can also refer to the recommendations given and standards issued by Sharia standard–setting bodies across the globe with required customization for the region.
There is hope for sustainable growth of Islamic finance in the North American region. With unified effort via collaboration between the two countries in the region, the Islamic finance industry could be developed with a strong Sharia governance framework, eliminating the fear of offering products and services that are Sharia compliant.
Review of the Literature
The development of Islamic finance in North America is a well-researched area. Numerous writings have focused on understanding the history as well as the developments of Islamic finance in the region. A comprehensive literature on this subject is written by Blake Goud where it is observed that doing research in this region becomes relevant despite having a small Muslim population, which is two to eight million Muslims in the United States and more than one million Muslims in Canada. Since 1990, the region has seen transformation from the offering of simple or pure vanilla Sharia-compliant alternative investment and home-buying solutions to other innovative, wide-ranging financial service offerings.42 It was also perceived that in the United States the environment for the development of Islamic finance would be hostile due to the 9/11 attack, but due to the favorable regulatory system established for it, the development of it did not curb.43 Though the government of the United States actively and openly does not advocate and market the country as a jurisdiction supporting Islamic finance, since 2010, the country has seen rapid developments with the offering of new products and opening of new institutions offering Islamic finance.44 In Canada, the situation looks different as it has yet to figure out the precise regulatory environment that is required to grow the Islamic finance industry, but Toronto has been described by CNN in August 2009 as the “North America’s hub for Islamic finance.”45 The reasons for this are based on future predictions such as the hope that in the near future the Toronto Stock Exchange is going to launch a Sharia index where soon an Islamic ETF will be introduced and that Toronto Financial Services Alliance has an Islamic finance working group that is trying to find a way to offer corporate and sovereign Ṣukuk (Islamic bond).46 In the Global Islamic Finance Report (GIFR), it was reported that S&P TSX 60 Shari’ah Index was launched in 2010.47 The work of Blake Goud is important to understand the historical and contemporary developments of Islamic finance, as well as its future prospects, in North America.
Stephen Lange Ranzini has expressed that it is imperative to know why Islamic banking did not take off until the early 21st century in North America. With the increase in the number of Sharia-compliant products and institutions in the region, the challenges that emerged were to provide halal products backed by Sharia opinions (with proper Sharia governance mechanisms) that are acceptable to Sharia scholars, offer quality Islamic finance products, and create halal products in a “halal manner after initial closing.”48 Ranzini also stated that there are several opportunities that have been highlighted that could be tapped into for the North American Islamic finance market such as investment opportunities to increase Ijārah (lease) Ṣukuk conduits for residential real estate, commercial real estate Ṣukuk, US Takāful (Islamic insurance), and listed real estate investment trusts (REITs).49 Brian Arthur Zinser has discussed various Sharia-compliant products offered in the North American market with special reference to the historical development of Islamic finance and the success story of University Bank, which is a community bank founded in 1980 as the Newberry State Bank and renamed University Bank in 1995.50
The “Canada Islamic Finance Outlook 2016” provides a general overview with specific developments and future prospects for Islamic finance in Canada where it is stated that the Canada’s competitor in Islamic finance is the United States, which is a country bigger than Canada, but in terms of the number of its Muslim population, Canada has a bigger population, making it more suitable to be positioned as an Islamic finance hub in the region.51 It is also stated that having a flexible regulatory environment for Islamic finance in Canada compared to that of the United States is also a pull factor for Canada.52 Though there is no comprehensive report produced on the Islamic finance market of the United States, there is comprehensive academic research conducted on the market. In this regard, the work of Victoria Lynn Zyp is commendable as an overview of Islamic finance in the United States from its inception to its future prospects, with details of the products, institutions, regulatory environment, Sharia issues, and challenges covered in this work.53
- Ahmad, Wahida and Robin H. Luo. “Comparison of Banking Efficiency in Europe: Islamic Versus Conventional Banks.” In International Banking in the New Era: Post-Crisis Challenges and Opportunities. Edited by Suk-Joong Kim and Michael D. Mckenzie, 361–391. UK: Emerald, 2010.
- Aldarabseh, Wesal M. “How Popular Is Islamic Finance in the USA? Findings from Google Trends.” International Journal of Finance and Banking Studies 8, no. 3 (2019): 2147–4486.
- Baharom, Abdul Hamid, Mohsin Ali Wajahat, and Azmi Zaheer Anwer. “Introducing Islamic Finance in Unchartered Economies: The Case of Canada.” In Developments in Islamic Finance. Edited by Syed Aun R. Rizvi and Irum Saba, 121–145. Cham, Switzerland: Palgrave Macmillan, 2017.
- Chaudhry, Imtiaz. “Islamic Finance and Its Relevance to Canadian Financial System.” Master’s thesis, University of Northern British Colombia, 2011.
- Chiu, Shirley, Robin Newberger, and Anna Paulson. “Islamic Finance in the United States.” Society Abroad 42 (2005): 64–68.
- Chiu, Shirley, and Robin Newberger. “Islamic Finance: Meeting Financial Needs with Faith Based Products.” Profitwise, Federal Reserve Bank of Chicago (2006): 8–14.
- Choudhury, Masudul Alam. Contributions to Islamic Economic Theory: A Study in Social Economics. London: Palgrave Macmillan UK, 1986.
- Goud, Blake, and M. Kabir Hassan. “Islamic Finance in the United States.” In Islamic Capital Markets: Products and Strategies. Edited by M. Kabir Hassan and Michael Mahlknecht, 279–306. West Sussex, UK: John Wiley, 2011.
- Graham, Jeffrey. “Canada: A Promising Emerging Market for Islamic Finance.” In The Islamic Finance Handbook. Edited by Sasikala Thiagaraja, Andrew Morgan, Andrew Tebbutt, and Geraldine Chan, 77–92. Singapore: John Wiley, 2014.
- Hassan, M. Kabir., Aishath Muneeza, and Adel M. Sarea. COVID-19 and Islamic Social Finance. Singapore: Routledge, 2021.
- Hassan, M. Kabir., Mehmet Saraç, and Ashraf Khan. Sustainable Development Goals and Islamic Finance. London: Palgrave Macmillan UK, 2021.
- Khan, M. Fahim. Essays in Islamic Economics. Leicester, UK: Islamic Foundation, 1995.
- Khan, M. Mansoor, and M. Ishaq Bhatti. “Islamic Banking and Finance: On Its Way to Globalization.” Managerial Finance 34, no. 10 (2008): 708–725.
- Malaysia International Islamic Financial Centre (MIFC). “US: Potential Market for Islamic Finance.” Kuala Lumpur, Malaysia: Bank Negara Malaysia, 2015.
- Mirakhor, A., and N. Krichene. The Recent Crisis: Lessons for Islamic Finance. IFSB 2nd Public Lecture on Financial Policy and Stability. Kuala Lumpur, Malaysia: Islamic Financial Services Board (IFSB), 2009.
- Sandwick, John, A., M. Kabir Hassan, and Pablo Collazzo. A Guide to Islamic Asset Management Portfolio Investing with Sharia. Cheltenham, UK: Edward Elgar, 2021.
- Saraç, Mehmet. and M. Kabir Hassan. Islamic Perspectives on Sustainable Financial System. Istanbul: Istanbul University Press, 2020.
- Sundararajam, V. and Luca Errico. “Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead.” IMF Working Paper No. WP/02/192, International Monetary Fund, 2002.
- Tacy, Kimberly J. “Islamic Finance: A Growing Industry in the United States.” North Carolina Banking Institute 10, no. 1 (2006): 355–378.
- Thomas, Abdulkader. “Methods of Islamic Home Finance in the United States.” American Journal of Islamic Finance (2001): 1–14.
1. Rasem N. Kayed and M. Kabir Hassan, “The Global Financial Crisis and Islamic Finance,” Thunderbird International Business Review 53, no. 5 (2011): 551–564.
2. Daniele D'Alvia, “Risk, Uncertainty and the Market: A Rethinking of Islamic and Western Finance,” International Journal of Law in Context 1 (2020): 14.
4. “Demographic Portrait of Muslim Americans.”
6. Victoria Lynn Zyp, “Islamic Finance in the United States: Product Development and Regulatory Adoption” (PhD diss., Georgetown University, 2009), 19.
12. Stephen Lange Ranzini, “Islamic Finance (Finally) Taking Root in North America,” Islamic Finance News, March 30, 2007.
15. Gowling Lafleur Henderson LLP, Research Report: Islamic House, 53.
16. Abd Hakim Abd Razak, “Centralisation of Corporate Governance Framework for Islamic Financial Institutions Is It a Worthy Cause?” ISRA International Journal of Islamic Finance 10, no. 1 (2018): 36–51, 41.
17. Zyp, “Islamic Finance in the United States,” 13–14.
19. “The LARIBA Model.”
21. Goud, Islamic Finance in North America, 45.
23. David Kathman, “This Fund Is Losing Its Longtime Lead Manager, but It Still Has Numerous Positive Features,” Morningstar’s Analysis, February 21, 2021.
24. Kathman, “This Fund Is Losing.”
25. Kathman, “This Fund Is Losing.”
26. “History,” Arcapita.
27. Arcapita, “Annual Report 2019,” 3.
31. “About,” United Muslim Financial.
35. Arno Maierbrugger, “Islamic Finance Making Strides in Canada,” Gulf Times, February 11, 2020.
36. D’Alvia, “Risk, Uncertainty and the Market.”
37. M. Kabir Hassan and Mervyn K. Lewis, eds., Handbook of Islamic Banking (Cheltenham, UK: Edward Elgar, 2007).
38. Ahmed, Adel, “Global financial crisis: an Islamic finance perspective,” International Journal of Islamic and Middle Eastern Finance and Management 3, no. 4: 306–320.
39. Akhter, Waheed, “Risk management in Takaful,” Enterprise Risk Management 1, no. 1 (2010): 128–144.
40. Alex Janiaud, “Islamic Fintech Pioneers Test Creative Ways to Engage Consumers,” Financial Times, September 23, 2019.
41. Chloe Cornish, “Islamic Finance Entrepreneurs Eye New Frontiers,” Financial Times, October 17, 2019; Kayed and Hassan, “Global Financial Crisis and Islamic Finance”; D’Alvia, “Risk, Uncertainty and the Market”; T. S. Zaher and M. Kabir Hassan, “A Comparative Literature Survey of Islamic Finance and Banking,” Financial Markets, Institutions & Instruments 10, no. 4 (2001): 155–199; Akhter, Risk Management in Takaful 1, no. 1 (2010): 128–144; Ahmed, “Global Financial Crisis”; and Hassan and Lewis, Islamic Finance.
42. Goud, Islamic Finance in North America, 9.
43. Goud, Islamic Finance in North America, 10.
44. Goud, Islamic Finance in North America, 10.
45. Goud, Islamic Finance in North America, 10–11.
46. Goud, Islamic Finance in North America, 11.
47. Global Islamic Finance Report 2010, “Toronto as a Hub for Islamic Finance in North America,” 243.
48. Ranzini, “Islamic Finance (Finally) Taking Root.”
49. Ranzini, “Islamic Finance (Finally) Taking Root.”
50. Brian A. Zinser, “Retail Islamic Financial Services in North America: The (Upper) Michigan Connection,” Journal of Developmental Entrepreneurship 19, no. 2 (2014): 1450010.
52. Toronto Financial Services Alliance, Thomson Reuters, and Islamic Finance Gateway, Canada Islamic Finance Outlook, 22.
53. Zyp, “Islamic Finance in the United States.”