UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 26, 2019

How Does Islamic Home Financing Work?

Diminishing musharakah is a financing program based on declining partnership used for the purchase of homes, assets, or businesses. In diminishing musharakah home finance, the customer makes a down-payment and the bank finances the remaining amount through the sale of equity units to the customer. The customer purchases each equity unit over a scheduled period of payments and becomes the owner of the equity unit. The customer purchases each equity unit until all equity units have been purchased and the customer becomes the owner of the house in full and title is transferred from the bank to the customer. In this manner, the bank and customer are co-owners until the customer becomes the full owner of the property. At the same time, the customer moves into the house and in addition to purchasing equity units on an instalment basis, the customer also pays rent. The rental payments, however, decline according to the purchase of units in the equity unit purchase plan by the customer and the bank’s declining share of ownership in the house. As the customer purchases more equity units from the bank and becomes a larger owner in the house while the bank’s share in the house decreases, the customer subsequently pays a decreasing rental payment.


I illustrate this concept in a chart produced below based on a chart by Dr. Muhammad Hanif. Dr. Muhammad Hanif gives the example that a house valued at 1 Million USD Dollars is the subject-matter of a diminishing musharakah contract. Dr. Hanif explains that if the customer makes a down-payment of 20% or USD$200,000 dollars, the bank finances the remainder of the house at USD$800,000 dollars. The bank’s share in the house is divided into eight equity units to be sold over eight years at USD$100,000 each to the customer. The customer purchases each equity unit on an annual basis for eight years increasing his/her ownership of the house by a further 10% each year. Therefore, the customer pays USD$800,000 dollars to the bank in equity units for the eight equity units over eight years. In addition, as the customer has moved into the house upon joint-purchase, the customer pays rent to the bank for renting the bank’s share in the house. In year one, the customer pays 80,000 USD in rent or 10% of USD$800,000. In year two, the customer pays the bank $70,000 USD in rent according to the same formula, In year three, the customer pays the bank $60,000 USD in rent according to the same, In year four, the customer pays the bank $50,000 USD in rent according to the same formula, In year five, the customer pays the bank $40,000 USD in rent according to the same formula, In year six, the customer pays the bank $30,000 USD in rent according to the same formula, In year seven, the customer pays the bank $20,000 USD in rent according to the same formula, and in year eight, the customer pays the bank $10,000 USD in rent according to the same formula. The total that the customer pays to the bank in rent is $360,000 USD over eight years. In addition to paying the bank $800,000 USD for the eight equity units over eight years, the customer pays the bank $360,000 USD in rent over eight years. The rental payments decrease on an annual basis as the share of ownership in the house increases for the customer and decreases for the bank.




According to Meezan Bank, this arrangement allows the bank to claim rent from the customer according to the bank’s proportionate share of ownership in the property and at the same time allows the bank periodical return of a part of the bank’s principal through purchase of the units of the bank’s share by the customer.

 An illustration of the main difference between diminishing musharakah in home finance and conventional mortgages is that if for some reason there is a default in Year 4 of the diminishing musharakah program, the bank will sell the house as co-owner with the customer, and if the house sells at the original estimated value, the customer shall get back $500,000 USD or the amount he/she paid in equity units and the bank shall take 500,000 USD or the value of the bank’s equity units in the house or in the same proportion. In a conventional mortgage, the bank would keep the entire sale price.


Steps in Detail (Meezan Bank) 

1.  Create a joint-ownership in the property (shirkat ul milk) between bank and customer;

2.  Bank leases bank’s share in the house to the customer and charges the customer rent.

3.  The client purchases units of the bank’s share in the house through an equity unit instalment purchase plan.

4.  There should be a one-sided promise from the client, firstly, to pay to the bank the agreed rent for the bank’s leased share in the house and secondly, to purchase the equity units of the bank according to the equity unit instalment purchase plan.

5.  The joint-purchase (sale and purchase) contract and the contract of lease may be joined in one document whereby the bank agrees to lease the bank’s share to the client after joint-purchase of the house. This is allowed because Ijarah can be affected for a future date. At the same time, the client may sign a one-sided promise to purchase the units of the share of the bank periodically and the bank may undertake that when the client purchases a unit of the bank’s share, the rent of the remaining units will be reduced accordingly.

6.  At the time of the purchase of each unit, sale must be affected by the exchange of offer and acceptance at that particular date.

7.  It will be preferable that the purchase of different units by the client is affected on the basis of the market value of the house as prevalent on the date of purchase of that unit, but it is also permissible that a particular price is agreed in the promise of purchase signed by the client. (In reality, the bank may have to book the purchase price at the outset of the contract)



Regulatory Landscape of Islamic Finance in the US

Regulatory landscape of Islamic finance in the US 

By Camille Paldi

There are currently 25 Islamic financial institutions (IFIs) operating in the US.  These institutions are state-chartered entities subject to the same state and federal regulatory guidelines, corporate governance, banking and insurance operations, and tax treatment as conventional financial institutions in the US.  The US has not adopted any federal legislation specifically addressing Islamic financing as of yet (Vogel: 2016).  Although IFIs may be qualified to do business in different states, the majority of an IFI’s assets are located in the institution’s home state and licensing and other conditions must be satisfied with respect to any state where the IFI seeks to be qualified as a bank or mortgage or loan finance provider (Vogel: 2016).  CAMILLE PALDI examines the US regulatory landscape and the possibilities for Islamic finance business in the US in the future. 

Illinois and other states have enacted a ‘wild card statute’, which allows IFIs chartered in these states to do anything that is permitted by the Office of the Comptroller of the Currency (OCC) to be done by national banks (Vogel 2016). The existing US Islamic banks, such as Devon Bank and University Bank, are state-chartered, state-licensed banks, which have FDIC insurance for depositors (Vogel 2016). Three main regulatory issues for Islamic finance include bank ownership of real estate; good programs for anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance; and whether deposits can be approved and insured (Lynn: 2009).


US bank offerings abroad

The Board of Governors of the Federal Reserve of the United States allows US financial institutions to offer Shari’ah compliant products in foreign countries where they are mandatory or where they are necessary for the financial institution to be competitive (Vogel:2016).


Foreign IFI offerings in the US

Foreign financial institutions may offer in the US Islamic banking structures approved by the OCC or the Office of the Comptroller of the currency, which includes the Ijarah and Murabahah structures for home mortgages and retail financing such as the United Bank of Kuwait (UBK).  Foreign institutions are required to comply with all applicable federal and state law, including obtaining all requisite state banking and retail lending licenses for the offering of approved products in those states where they operate (Vogel: 2016).  As a recent trend, Muslim investors from the GCC countries have sought to diversify their financial portfolios and to invest their wealth into US assets.  For example, Arcapita Bank and UBK have structured Shariah compliant transactions in private equity and real estate in the US to meet client demands (Ilias: 2010).


Two OCC rulings in favor of Islamic banking in the US

Only two rulings have been issued by the OCC in 1997, approving an Ijarah and Murabahah structure for home financing and other retail financial products. (Vogel 2016) In 1997, the United Bank of Kuwait (UBK) requested interpretive letters from its regulator, the Office of the Comptroller of the Currency (OCC) on Ijarah and Murabahah mortgage products.  The OCC approved both on the grounds that they were economically equivalent to traditional conventional products (Ilias 2010). In terms of Ijarah, the OCC determined that Ijarah is the functional equivalent of secured lending.  In 1999, the NYSBD or New York State Banking Department also approved the Ijarah and agreed with the OCC that the product was functionally equivalent to secured real estate lending.  In terms of Murabahah, the OCC determined that the bank would be functioning as a riskless principal (Cavanaugh: 2011).


According to John Vogel, these structures have now been approved by the Federal government, the New York State Banking Department, and the banking authorities of several other states.  Furthermore, the relevant authorities have removed the double tax jeopardy of these products where tax was incurred by initial purchase and at transfer of final payment.  The tax authorities in New York and other states have handled this issue by eliminating double tax burdens on a case-by-case basis where the Shariah compliant structure was equivalent to a conventional financing transaction.  In 2008, the NYS tax department determined that no real estate transfer tax is due when the deed is transferred by a bank to its customer at the end of the lease term in accordance with the terms of the Ijarah arrangement (Vogel 2012).

In terms of Musharakah (and diminishing Musharakah), this type of joint-ownership is not approved for use by banks in the US and is used only by nonbank mortgage lenders in the US.  The Musharakah transaction must be structured to be the functional equivalent of a debt transaction. (Hartom: 2014)

In the US, housing agencies Freddie Mac and Fannie Mae started buying Islamic mortgages in 2001 and 2003 to provide liquidity and they are now the primary investors in Islamic mortgages (Rutledge: 2005). Companies such as LARIBA, Bank of Whittier, and Guidance Residential are offering home financing through the Ijarah and Murabahah models.


Islamic deposit products

In terms of Islamic deposit products in the US, deposit products must be guaranteed by FDIC or the Federal Deposit Insurance Corporation (Vogel: 2016).  A Shari’ah compliant profit and loss deposit product is difficult where the deposit must be insured by FDIC as losses cannot be shared by the bank and customer in the US.  In 2001, SHAPE Financial Corporation sought FDIC Deposit insurance for an Islamic deposit-like product based on profit and loss sharing.  The FDIC refused because the bank would be sharing loss with the customer (Haltom: 2014).  SHAPE was forced to change the product structure to be based solely on profit and not loss sharing.  The SHAPE profit sharing deposit pays a yield upon the gross operating profit of University Islamic Financial Corporation’s Shari’ah compliant portfolio of assets, including mortgage-alternative assets.  The yield may drop to zero, but there is no possibility of loss of principal because the account is FDIC insured (Cavanaugh: 2011).




Central Shariah authority in the US

The US does not have a Shari’ah central authority like many Islamic countries, which is responsible for insuring that transactions or products are Shari’ah compliant or for regulating how Shari’ah professionals are appointed to and composition of Shari’ah boards.  IFIs in the US are not required to maintain their own Shari’ah supervisory boards, but may work with the Shari’ah board of another IFI, the Shari’ah Board of America, or other scholars such as AMJA or the American Muslim Jurists Association. (Vogel: 2016).



The ‘establishment clause’ of the First Amendment to the US Constitution presents an obstacle to the successful introduction of Takaful and re-Takaful to the US as this mandates separation of church and state and prohibits the favoring of one religion over another.  In addition, each state determines its own licensing requirements for insurance companies.  In order to obtain a license, an insurance company must demonstrate that it has the experience and management capability to run the company and that it is financially sound.  Insurance companies are also required to justify their premium rates.  In addition, insurance companies must meet or exceed the solvency requirements set by the state.


Furthermore, there may be limits on the types and concentration of investments made with collected premiums via each state’s insurance laws. For example, investment in non-Shari’ah compliant investment grade rated bonds may be the only option.  Therefore, it may not be possible to have 100% Shari’ah compliant Takaful in the US, however, if written into the contract, Takaful is still possible.


Since the members in a Takaful arrangement agree to insure one another and share in risks and profits, there may be some obstacles in establishing the company as a financially sound insurance provider and in justifying Tabarru or donation amounts. In case of potential insolvency, the shareholders’ fund must provide an emergency loan to the takaful company to meet existing claim obligations.  Capital requirements imposed on US insurance companies may not take into account the separation between policy holder and stakeholder funds in Takaful insurance.


Another obstacle includes the fact that setting up a state or federal Shariah Board for the Takaful fund may contravene the separation of church and state. However, it may be possible to outsource this function to foreign countries, other IFIs, or organizations such as AMJA.



The US has seen two major Sukuk issuances — the US$165.67 million East Cameron Gas Sukuk, which was the first Sukuk al Musharakah in America backed by oil and gas assets and the US$500 million General Electric Sukuk (Sukuk al Ijarah backed by aircraft leases).  Both New York and Illinois have enacted legislation enabling Sukuk transactions and Islamic finance.  Goldman Sachs issued a US$2 billion Sukuk in 2012.  There are currently no listings of Sukuk on the US security exchanges.


Dispute resolution

The US has no special courts, tribunals, arbitral or other bodies, which have jurisdiction to hear Islamic finance disputes in the US.  Islamic finance disputes are subject to US federal and state courts and depending on the contract, may be subject to arbitration.  (Vogel: 2016)  I recommend forming one global, centralized Islamic finance arbitral tribunal with a standardized dispute resolution contract for Islamic finance, Sukuk, Sukuk bankruptcy, and Takaful.



There are currently no applications for a fully fledged Islamic Bank in the United States.  Islamic banking in the US remains largely confined to home finance and further to the two approved models of Ijarah and Murabahah home financing. However, there also exists banking, asset management, sukuk, takaful, and funds.  There has been no new regulatory developments affecting the retail market since the late 1990’s. Institutions wishing to engage in Islamic finance will have to address various challenges, many of which are briefly stated in this article.


Camille Paldi, graduated from the Durham University Islamic Finance Program in the UK, an International Bar Association Scholar 2009/2010 and a qualified lawyer in the UK through the UK QLTT in 2013. Paldi is the founder of Ethical Finance Forum based in Palo Alto, CA, USA.  She can be contacted at or



Book Review for The Art of Riba-Free Islamic Banking and Finance (2014) by Dr. Yahia Abdul-Rahman

Book Review for The Art of Riba-Free Islamic Banking and Finance (2014) by Dr. Yahia Abdul-Rahman


By: *Camille Paldi

Founder of the Ethical Finance Forum


This book is a fascinating account of the journey of Dr. Yahia Abdul-Rahman and his family in their journey to America from Egypt in 1968 in his pursuit of several MA degrees and a PHD and a glimpse into his rich professional life, which includes the pioneering of no interest banking in the United States through his highly successful venture LARIBA and Whittier Bank in Southern California, USA. The LARIBA system and Bank of Whittier serves all 50 states in America and services a portfolio of no-interest financing that is worth approximately USD $400 million. In 2001 and 2002, Fannie Mae and Fannie Mac approved the LARIBA financing system.


Dr. Rahman asks the reader, ‘What is the first thing when one thinks of when one hears the term Islamic Banking?’ The most common answer was ‘vast amounts of oil money from the Gulf countries, which are waiting to find investment opportunities.’ However, Dr. Rahman goes on to explain the rich philosophical roots embedded in Christianity, Judaism, and Islam behind the no interest finance principle and shows with real-life examples how the majority of people and the economy become more financially sound and stable under a system where money is not rented, but where the bank acts as a finance house that invests in people, productive trade, and promotes economic growth and expansion. Americans are definitely curious about this new brand of banking as the author reveals that between 2000 and 2009, the LARIBA site attracted more than 1 million unique visitors whom were exploring the topic of interest-free banking. In fact, LARIBA has been showcased on ABC Nightly News, The Los Angeles Times, USA Today, the Dallas Morning News, the Wall Street Journal, the Washington Post, the Houston Chronicle, the Chicago Tribune, and the Detroit Free Press to name a few. When concerns about anything ‘Islamic’ arose in society after September 11, 2001, Dr. Rahman became involved in inter-faith activism and obtained a historic announcement from the Fuller Theological Seminary in Pasadena, CA that the Christian God and the Muslim God was in fact the same God and this pronouncement was published in the Los Angeles Times on December 3, 2006. In fact, the Bible is rich in language which condemns excessive interest and usury as this creates hardship for the normal person and turns people into slaves of the money-lenders. In fact, one can recall that in the Bible, Jesus went to the marketplace to crush the money-lenders stalls. Jesus Christ stated that one of his goals is to drive the money changers out of the Temple (John 2:15-15; Matthew 21:12-13; M ark 11:15-18). A story about community controversy in Nehemiah 5 concerns oppressive lending: It may refer to charging interest or to other tough actions, such as foreclosing on personal properties. It alludes to two reasons for debt: crop failure and imperial taxation. The story makes clear the results of default. One may forfeit fields, orchards, and houses, and/or one may end up in slavery. Rahman says that his brand of no-interest banking is in fact a manifestation of Christian, Jewish, and Islamic values particularly in concern to usury or renting money for profit, which is prohibited in all of the Holy Books. Basically, no interest finance helps one to live within one’s means, avoid exorbitant debt, enables one to have more cash to invest in his/her business, children, homes, cars, and education, promotes cash flow throughout the economy, promoting economic stimulation and growth as well as induces the optimal health of the individual, family, society, and world at large . S.C. Mooney, an author and Protestant opponent to interest finance states, “What is being argued here is not a new idea or a new interpretation of Scripture. It is the historic position. This is not a call to strike out in a new direction; it is a call to return to faithfulness to God.”


Throughout the book, the author explains the modes of no-interest finance compared to interest finance and the two foundations of the no-interest banking system, (1) Commodity Indexation and (2) Marking to Market. The no-interest discipline clearly states that fiat (paper) money can be used, and the U.S. dollar may continue to be the reserve currency of the world along with maybe the euro, but gold or a basket of commodities may be used to calibrate the real value of the currency. President John F. Kennedy and James Baker III (1987) have both approved and proposed these concepts previously in US history and monetary policy. John F. Kennedy attempted to introduce silver certificates with Executive Order 11110. In fact, at one time in history, the US dollar was backed by gold. Under the rule of the British Empire, the British pound sterling and the gold standard were adopted around the world. In 1913, the gold cover for Federal Reserve notes was set by 1913 law to be 40%. In 1945, the gold reserves against Federal Reserve notes were reduced to 25%, and to continue the inflation spiral, this figure (25%) had to be reduced to zero. Toward the end of WWII, the US dollar and gold became the principal international reserve assets under the Bretton Woods Agreement. The US dollar became the world reserve currency, and it was treated as if it were gold because the agreement defined its value to be $35 per ounce of gold. On August 15, 1971, President Richard Nixon ordered the gold window closed, ending the international currency’s link to gold. In fact, the US Constitution says that each state shall issue currency in gold and silver. Some speculate that the authors of the US Constitution may have extracted this principle from the Qu’ran. Thomas Jefferson indeed did have his own Qu’ran collection and often studied these books for various principles of social justice, commercial dealings, fiscal and monetary policy, and treatise’s on government.


This no-interest discipline is implemented in order to price things fairly in the market while detecting any overpricing ‘bubble.’ In fact, it is interesting to note that Dr. Rahman through his LARIBA system detected the 2008 bubble as early as 2005 using this Commodity Indexation Discipline. In fact, this system helps to fairly define prices and to standardize and stabilize markets, allowing the efficient working of the market forces of supply and demand. It lays the foundation of fair pricing for products and services, based on real market values within an open and free market operation. Thus, we can see that the no-interest banking brand is not based on renting money at a rental price (interest), but on the actual measured fair market rent of properties, businesses, and services. This system is also the main reason for the superior portfolio performance of LARIBA since 1988.


Dr. Rahman gives the following example of how the no-interest discipline may be used to buy a house. The buyer who wants to obtain no-interest finance and the no-interest bank should mark the house to market. The best way of doing this is to find out how much a similar house in the same neighborhood and with similar specifications would rent/lease for in terms of U.S. dollars per square foot (or euros/square meter). This mutually agreed-upon live market lease rate is used to calculate the rate of return on investment of the proposed purchase and no interest transaction, looking at it as a no-interest investment. If the rate of return on investment makes economic sense, the no interest bank proceeds to finance (invest in) the property. In addition, the no-interest bank does its best to make the monthly payments in the no-interest mode of finance competitive with those offered by conventional banks. Basically, the author summarizes that the no-interest banking and finance discipline , in an effort to neutralize the effects of the prevailing fiat currency in the local markets, requires that the financier first apply the Commodity Indexation Discipline to check, in a macroeconomic way, on the existence of a bubble in the business/asset that is being considered for finance. This process is followed by the Mark-to-Market Discipline and approach, evaluating the economic prudence by calculating the real return on investing in this item, using its actual real market rental value. In this way, it is affirmed that money is not rented with interest and that the rent is that of the market rent of the facility in the marketplace.


Through using the no-interest discipline, Dr. Rahman states that we may enter into a new era where:

  1. We normalize prices expressed in fiat money in order to be expressed in the real no-interest value of that currency in terms of staple food and other commodities that are in the economy. (2) Apply the Commodity Indexation Discipline for the early detection of local or international economic bubbles by using the no-interest currency to measure prices and disengage price fluctuations due to normal supply-and-demand factors from major change due to speculation using regular banknote fiat paper currencies. (3) and Devise a fair and intelligent tax policy that will enhance the vibrancy of the economy and create new job opportunities and prosperity leading to peace, happiness, and more production, leading to world peace among all nations.


In addition, in the subsequent chapters of the book, the author explains the concept of money, the money creation process, the fractional reserve banking system, the financial crisis, spells out US banking regulations and the supervision process, details the US banking system (state, national, federal reserve), discusses conventional and no-interest banking products, and shows how the no-interest model fits into the US banking and legal system without having to change the laws of the USA. Dr. Rahman consistently backs up theory with real-life examples and case-studies, giving a firm impression and understanding of how the no-interest finance models work in the real banking world and the real results. In addition, Dr. Rahman has placed a series of review questions at the end of each chapter to solidify the reader’s understanding of the core banking concepts, which he presents to the reader in a clear, logical, and efficient fashion.


Dr. Rahman articulates how the most historic moment for the LARIBA no-interest finance model came in 2001, when Freddie Mae approved LARIBA. In, 2002, Fannie Mae followed suit. The support of Freddie and Fannie helped the growth of no-interest home mortgage financing in America. With the support of Freddie and Fannie, LARIBA went from financing 2-3 to 50 homes per month for US citizens. Dr. Rahman describes another first in the history of the United States financial event when LARIBA and FANNIE MAE joined forces to issue no-interest mortgage backed securities. This book is definitely worth reading for anyone curious about no-interest finance and its benefits and success rates as compared to the conventional banking system.


Camille Paldi, graduated from the Durham University Islamic Finance Program in the UK, an International Bar Association Scholar 2009/2010 and a qualified lawyer in the UK through the UK QLTT in 2013. Paldi is the founder of Ethical Finance Forum based in Palo Alto, CA, USA.  She can be contacted at or

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance