Academic journal article Suffolk Transnational Law Review

Islamic Finance: The United Kingdom's Drive to Become the Global Islamic Finance Hub and the United States' Irrational Indifference to Islamic Finance

Academic journal article Suffolk Transnational Law Review

Islamic Finance: The United Kingdom's Drive to Become the Global Islamic Finance Hub and the United States' Irrational Indifference to Islamic Finance

Article excerpt

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. …

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