The Rise of Sharia Banking in America

Sharia banking in America is on the rise, with many institutions now offering Islamic finance products that comply with Islamic law. Sharia-compliant banking has been growing steadily since the 1990s.

In 2003, the first Islamic bank was established in the United States, marking a significant milestone in the development of sharia banking in America. This bank offered a range of financial products and services that adhered to Islamic principles.

The growth of sharia banking in America is driven by the increasing demand for Islamic finance products from Muslim communities. According to a 2019 survey, over 60% of Muslim Americans prefer to bank with institutions that offer sharia-compliant products.

The Islamic finance industry in the United States is expected to continue growing, with estimates suggesting that it could reach $1.7 trillion by 2025.

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Sharia banking in the US is a growing niche segment in the American financial sector. It has been driven primarily by domestic demand.

The US market has seen a significant increase in interest-free financial products and services, with about 15 financial institutions operating on a "interest-free" basis. These institutions offer a range of Shari'ah-compliant products, including home financing, personal financing, and investment services.

To date, around 10,000 Shari'ah-compliant home purchases have been concluded over the past decade, with home financing products accounting for most of the demand.

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The rise of Islamic finance in the USA is a significant development in the American financial sector.

Over the past 30 years, US-based entities have shown a continuous interest in Islamic finance, launching seven Islamic funds with total assets under management of USD 3.6 billion.

This represents 7.9% of all Islamic funds managed around the globe, a remarkable figure that highlights the growing demand for Shariah-compliant financial products in the US.

There are about 15 financial institutions operating on an interest-free basis in the US, offering a wide range of Shari'ah-compliant products and services, including home financing and investment services.

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Home financing products account for most of the demand in the US, with around 10,000 Shari'ah-compliant home purchases having been concluded over the past decade.

Islamic financial institutions in the US have avoided deposit-taking operations due to regulatory hurdles, opting instead to work as leasing companies or mortgage brokers, which are subject to fewer restrictions.

The US Islamic finance industry remains a niche segment in the wider American financial sector, with Sukuk issuances worth USD 1.1 billion, including USD 500 million by GE Capital, demonstrating its growing presence.

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Muslims in the US make up about 1% of the population, which translates to around 3.45 million people.

The majority of Muslims in the US are Sunni, with a smaller percentage identifying as Shia or other Islamic denominations.

The first mosque in the US was built in 1915 in Cedar Rapids, Iowa, and was primarily used by Somali and Yemeni immigrants.

Many Muslims in the US are immigrants or the children of immigrants, with some coming from countries with a strong Islamic presence, such as Pakistan and Indonesia.

The US has a long history of Muslim immigration, with the first Muslim immigrants arriving in the 18th century.

Transparency is a significant issue in Islamic banking, with some research suggesting that the lack of transparency in the Islamic finance marketplace in the West can make it difficult to track the money trail.

Islamic banks have a unique relationship with their customers, which can distort the institution/client relationship and make it harder to fulfill obligations like reporting suspicious transactions.

This potential conflict of interest can compromise preventive procedures, such as reporting suspicious transactions, and even make the institution jointly liable for money laundering or financing terrorism.

Islamic banks are also exposed to risks in managing Zakat and Sadaqat money, which are Islamic taxes on the rich and the money given to the poor, respectively.

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Transparency is a major issue in the Islamic finance marketplace. The International Monetary Fund conducted a paper on the subject and found that there are challenges in providing transparency, making it difficult to track the money trail.

One of the main reasons for this lack of transparency is the unique relationship between Islamic banks and their clients. The partnership dimension of this relationship can distort the traditional institution-client relationship, making it harder to fulfill obligations like ongoing customer due diligence.

This can lead to a conflict of interest, potentially compromising preventive procedures like reporting suspicious transactions. If a client is involved in money laundering or financing terrorism, the institution could be considered jointly liable.

Managing Zakat and Sadaqat money, which are Islamic taxes on the rich and assets given to the poor, is another area of risk for Islamic banks. Many accusations of funding terrorism come from indirect relationships connecting Islamic banks to charities using Zakat money.

As the Islamic finance market continues to grow, it's essential to address these transparency issues. By doing so, we can ensure that this niche sector evolves in a way that promotes integrity and accountability.

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Insurance can be tricky to navigate, especially in the US. Insurance standards make it problematic to work with takaful, as licensing requirements for insurance companies differ in each state.

Takaful, a form of Islamic insurance, is limited in the US. Commercial and residential property insurance is the only insurance currently offered as takaful.

Life insurance is not an option for those following Sharia law, as it involves an unacceptable level of uncertainty. This is due to the prohibition of "gharar", or an unacceptable level of risk or uncertainty.

Insurance contracts that involve the sale of a non-existing object are generally unenforceable in Islamic financial operations.

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In the United States, foreign financial institutions can offer US-approved Islamic banking products.

Islamic banks can offer mortgages and retail finance through products like ijara and murabaha.

Some US banks have set up Islamic finance departments to cater to the growing demand for sharia-compliant banking.

In the US, Islamic financial institutions offer a wide range of Shari'ah-compliant products and services, including home financing, personal financing, and investment services.

Home financing products account for most of the demand in the US, with around 10,000 Shari'ah-compliant home purchases having been concluded over the past decade.

Islamic financial institutions have tapped the Sukuk market in the US, issuing Sukuk worth USD 1.1 billion, of which USD 500 million by GE Capital.

These institutions have avoided deposit-taking operations due to regulatory hurdles, opting to work as leasing companies or mortgage brokers instead.

The relevant regulation on banking is currently similar for all banks wanting to operate in the US, making it easier for Islamic institutions to operate in these capacities.

In the US, investors can structure their investments through various entities, each with its own tax implications.

The most common structures are sole proprietorships, partnerships, and corporations.

A sole proprietorship is the simplest and most common structure, but it doesn't offer personal liability protection.

Partnerships can be general or limited, but they also lack personal liability protection.

Corporations, on the other hand, offer personal liability protection and can be taxed as pass-through entities or as C-corporations.

C-corporations are taxed on their profits, while S-corporations are pass-through entities that only pay taxes on the profits distributed to shareholders.

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