USA Regulations and Islamic Banking
| Author | Abdi Shayesteh |
| Position | Associate in the New York office of King & Spalding |
Abdi Shayesteh is an associate in the New York office of King & Spalding and a member of the Middle East and Islamic finance practice group. Prior to joining King & Spalding, Shayesteh was a regulatory specialist at for the Federal Reserve Bank of New York and a member of the Federal Reserve's Islamic banking working group.
Although the US is not the first place one would put on a list of countries that are prominently promoting Islamic finance, much is happening behind the scenes. At an informal and educational level, activity in the US is impressive. This includes participation by high-level government officials at several public events and working group engagements.
More importantly, these informal activities have had a positive influence on the formal regulatory approval process, and this has opened the doors for various US institutions currently offering Islamic products and services. Despite public misperception, Islamic banks will continue to grow and prosper in the US and the country's regulators have expressed their eagerness to continue to accommodate such objectives. However, there are some outstanding regulatory and supervisory matters that still have to be explored. This article briefly examines these matters and provides an overview of US regulatory involvement with Islamic banking to date, including the market's reaction to such activities.
The informal US regulatory involvement has positively influenced the formal regulatory approval process for Islamic banking products and services. In 1997 and 1999, the Office of the Comptroller of the Currency (OCC) approved, on a case-by-case basis, the offering of Ijarah, Wadi'ah and Murabahah mortgage products. The New York State Banking Department also approved similar products in 1999 and 2001. In all of these approvals, the big issue at hand for US regulators was the fact that a retail commercial bank would acquire and hold title to real estate property in the proposed transactions.
In the US, banks are restricted from owning real estate property, unless it is related to foreclosure activities or the operations of the bank itself. These restrictions were designed to prevent banks from becoming involved in the risks associated with the speculative nature of real estate investment activities. Nevertheless, US regulators were accommodating in their review of these proposals and focused on the economic substance of the transaction, rather than the form. In its final approval, the OCC concluded that the risks associated with these products were not the type of risks that the statutes were originally designed to prevent, and, as a result, permitted the offering of such products.
Formal US regulatory approvals to date have positively influenced the market for Islamic banking products and...
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