The Impossible, Highly Desired Islamic Bank

"5 William & Mary Business Law Review 105 (2014)The purpose of this Article is to explore, and explain the stubborn persistence of, a central paradox that is endemic to the retail Islamic bank as it operates in the United States. The paradox is that retail Islamic banking in the United States is impossible, and yet it remains highly desired. It is impossible because the principles that are supposed to underlie the practice of Islamic finance deal with the trading of assets and the equitable sharing of risks, profits and losses among bank, depositor and portfolio investment. It is true that much of this can be, and is, circumvented through artifice. However, federal rules that prohibit outright any possibility of loss, such as requirements that deposits be insured against loss, plainly constitute core violations of the shari'a. At the same time, these same federal rules for deposit insurance and similar prohibitions against banks holding extensive amounts of particularly risky assets such as real property are central features of modern banking regulation, which is designed to minimize risk sharing, not support it. It is unimaginable that regulators will create exceptions to, or somehow significantly amend, the modern financial regulatory system in the radical fashion necessary so as to accommodate Islamic finance. Yet notwithstanding such impossibility, Islamic banking is also highly desired in that there is a preoccupation with finding a way to enhance the very limited Islamic commercial banking opportunities that exist in the United States. Law review articles, government issued policy reports, trade publications and Islamic finance outlets themselves have discussed and in some cases advanced such initiatives at one time or another. If this is so, then why such interest in Islamic retail banking? Why the endless repetition of a charade, where one side pretends to care about accommodation, and the other to accommodate, when it is perfectly clear that on the clear plains of doctrine, the two sides cannot possibly, sensibly meet? The reason is that the bank, and the accommodation of it within the U.S. regulatory sphere, is a powerful symbol for the accommodation of the broader, pious Muslim public. The pious Muslim eager to see an Islamic bank open in her neighborhood is at best only partly interested in adherence to religious doctrine. The Islamic bank is more importantly a reflection of a broader recognition of her space in the broader American fabric. Her religion is not only recognized, but her financial practices respected and indeed legitimized by the relevant, American legal and regulatory regime. She is, in this sense, comfortable being both thoroughly American and thoroughly Muslim. As for American regulators and most policymakers, being part of the nation's elite, instinctually preferring messages of inclusion to those that appear xenophobic or intolerant, they are predisposed to help find a way to accommodate this broad Muslim desire. Hence they engage in dialogue to demonstrate that the government is determined to help to find space for the pious Muslim in the United States, respectful of the pious Muslim's religious commitments and aware of the Muslim's ability to function both as Muslim and as American simultaneously. There are broader lessons to be gleaned from this story that pertain to global Islamic finance that are touched upon in the Article's conclusion. In particular, it is no secret that Islamic finance has failed to live up to its ideals of realizing a financial system that is more attuned to fairness and social justice than its conventional counterpart. Instead, it functions as a form of mimicry of conventional vehicles using a series of artifices. Yet despite this, and despite prognostications of doom if the practice does not change its ways, it continues to enjoy explosive growth. As with the case in the United States, Islamic finance does not seem willing or able to function in the way intended, and yet it remains highly desired. As with the United States, the reasons involve considerations beyond the legal; specifically in the global case, the desire of Muslim states to demonstrate some sort of fealty to the shari'a at minimal cost. Finally, as with the United States, the only sensible way that Islamic finance could possibly move forward to satisfy these demands is by remaining the narrow, largely compliant practice that it is. Anything else would either be illegal (if attempted in the United States) or deemed too radical to support (if advanced as a genuine alternative to conventional finance in the Muslim world)."