The letter that made halal home finance possible in the United States

This corpus now carries a primary text saying what a halal home-purchase product is in United Kingdom law. It carried nothing equivalent for the United States edition. This entry is that document, and it turns out to be a very different kind of thing from the British one - not a definition in a statute book but a letter from a bank regulator to a bank, answering the only question that regulator is empowered to answer.

THE DOCUMENT. Office of the Comptroller of the Currency, Interpretive Letter #806, signed 17 October 1997 and published in December 1997, from the OCC's Northeastern District Office of the District Counsel. Unlike most of the letters in this series the applicant is not redacted: it was written to the General Manager of The United Bank of Kuwait PLC's Federal branch in New York. The question it answers is "whether the National Bank Act permits The United Bank of Kuwait PLC ("UBK" or "Branch"), a Federal branch located in New York, New York, to offer a residential Net Lease home finance product as part of the business of banking". This corpus names the institution because the primary document does, and grades neither it nor any product sold today; the letter is a record of what was proposed and permitted in 1997, and nothing here is a statement about what any provider currently offers.

WHY IT MATTERS AT ALL. Article 63F of the United Kingdom's Regulated Activities Order, which this corpus carries, is a definition: it fixes what a home purchase plan is and therefore which products the state supervises. The American document does no such thing, and the difference is worth stating carefully rather than dramatically. No United States statutory definition of an Islamic home-finance product was found in the research behind this entry, and none is asserted to exist or not to exist; what is certain is that this letter is not one. What it answers is a threshold problem specific to banks: a national bank may only do what the National Bank Act lets it do, and buying houses is not obviously on that list. Interpretive Letter #806 is the earliest published OCC clearance of a residential halal home-finance product that this research located, and it removed that obstacle for the institutions the National Bank Act governs. It should not be read as the origin of the whole American market: several of the best-known United States providers are finance companies rather than national banks, and the National Bank Act is not what constrains them.

THE FIRST THING A MUSLIM READER WILL NOTICE IS THAT THE REGULATOR SAYS SO OUTRIGHT. The British instrument defines its product without ever using the words Islam, Islamic, Shariah or Muslim. This letter opens by naming the reason for the product in its second paragraph: the branch "wishes to have the flexibility to offer Net Leases to meet the special needs of its customers who adhere to the principles of Islam", because "The religious prescriptions of Islam or other faiths prohibit home purchasers from borrowing money where the lender charges interest and, therefore, effectively prohibit such individuals from purchasing homes by executing standard mortgages." Later it states the benefit in terms a reader will recognise: the proposal responds "to the special issues regarding Islamic customers by providing an alternative method for a discrete group to get access to credit without forcing them to choose between their religion and home ownership." Two Western regulators, two opposite drafting techniques, and the difference is not cosmetic - it decides whether a product is caught by what it does or by what it is for.

THE STRUCTURE, AS THE LETTER DESCRIBES IT. The customer finds the house and negotiates the price; the bank does not, and "will not purchase or maintain an inventory of properties to sell to customers" and "will not serve as a real estate broker or agent". The customer pays a deposit, the bank supplies the rest of the purchase price and takes legal title, and the two sign a Net Lease and a Purchase Agreement at the same moment. The lease is a net lease in the full sense: it "will require that the Lessee maintain the property, and pay charges, costs and expenses attributable to the property that an owner or purchaser would ordinarily otherwise pay". At the end, ownership passes without a further step - "The Lessee will automatically become the legal owner of the property upon fulfilling the terms of the lease" - and the customer may buy out early by "prepaying the remainder of the purchase price". On default the bank does not become a landlord: it "will not relet the property" but treats the house as Other Real Estate Owned and sells it, as it would after a foreclosure.

AND HERE IS THE PART THAT SHOULD BE READ SLOWLY, BECAUSE IT IS THE MOST UNCOMFORTABLE MATERIAL IN THIS ENTRY. The permission was granted precisely BY ESTABLISHING THAT THE ARRANGEMENT IS THE SAME THING AS AN INTEREST-BEARING MORTGAGE. That is not a hostile reading; it is the legal test. An activity is within the business of banking if it is "functionally equivalent to or a logical outgrowth of a recognized banking activity", so sameness is what the applicant had to prove and what the regulator had to find. The letter therefore records, as the bank's own representations, that "Monthly lease payments will be sufficient to cover principal and interest, and pay insurance and property taxes"; that "UBK will add its margin to its cost of funds at the beginning of the lease. The London Interbank Offering Rate will be used to determine UBK's cost of funds. UBK will then allocate lease payments to mirror the principal and interest breakdown of a conventional mortgage."; that the branch's own ledger "would have accounts called Residential Loans and Islamic Home Finance Lease Receivables"; and that the bank "anticipates that the IRS will treat the Net Lease as financing and allow the customer to deduct the interest portion of the lease payment in the same manner as interest is deducted on traditional mortgages." The OCC's own conclusion is that "UBK's Net Lease proposal, in substance, has the characteristics of a financing transaction."

THE SHARPEST DETAIL OF ALL IS THE TEST THE LETTER REACHES FOR. To show that a lease can properly be treated as a financing, the OCC sets out the Internal Revenue Service's factors for deciding "when a purported purchase and lease transaction may be recharacterized as a financing" - among them that "Portions of the periodic payment are made specifically applicable to an equity interest that the lessee will acquire", that "The lessee will acquire title upon payment of a stated amount of "rentals" which the lessee is required to make under the contract", and that "Some portion of the periodic payment is specifically designated as interest or is otherwise readily recognizable as the equivalent of interest." This is, in structure, the same question a jurist asks when testing an arrangement for hila: does the form describe what is actually happening, or has a forbidden substance been dressed in a permitted form? The American regulator ran that test and answered yes, it is a financing - and treated the answer as the reason to permit it.

WHAT THIS ENTRY DOES NOT CLAIM, AND WHY THE RESTRAINT IS THE POINT. It does not claim that the letter shows the product to be riba. It cannot, and the reasons are not evasions. The document records a bank's submissions to a banking supervisor, written in the only vocabulary that supervisor's statute recognises, by an applicant whose legal interest was in maximising the appearance of sameness - the more like a mortgage it looked, the more clearly it was permitted. A finding of economic equivalence for the purposes of 12 U.S.C. 24(Seventh) is not a finding about the contract's validity in Shariah - the two questions are asked by different people, under different authority, for different purposes. Whether a financier's ownership in a lease-to-own structure is real or nominal, and whether pricing a rental against a published rate corrupts an otherwise lawful contract, are live questions on which this corpus carries positions rather than a verdict; this entry deliberately states none of its own, and the entries on ijara, on the binding promise, on ina and on benchmarking are where a reader should take it next. What the letter does supply is something the reader could not otherwise get: the contemporaneous record, in the provider's own words to its regulator, of how the payments were actually to be computed.

AN OCC INTERPRETIVE LETTER IS NOT A SHARIAH CLEARANCE, AND IT IS NOT A GENERAL RULE. It is the supervisor's answer to one applicant on one set of facts: the OCC states that it concludes "UBK may conduct the activity based upon the facts and circumstances described herein", and its analysis rests throughout on what the branch represented to it. No scholar, board or standard-setter appears anywhere in the document, and it makes no religious determination of any kind. A reader who takes regulatory permission as evidence that a product is halal has read this letter backwards - it is evidence only that an American bank may lawfully offer it.

THE SEQUEL, AND THE PLAINEST EVIDENCE THAT STRUCTURE HAS CONSEQUENCES. Two years later the same district counsel's office issued Interpretive Letter #867 (letter dated 1 June 1999, published November 1999), permitting Murabaha financing - the branch will "acquire the property on behalf of the customer and then resell the property to the customer at a mark up on an installment basis" - for real estate as well as commercial inventory and equipment. The reason given for needing a second structure is worth more than the ruling. The net lease had failed a particular kind of customer: "the net lease proved unworkable for certain not-for-profit customers of the Branch because the underlying real estate was subjected to various forms of taxation since it was held in the Branch's name and leased back to the not-for-profit organization." Leaving title with the financier cost mosques, Islamic schools and community centres their property-tax exemption. The same letter records the same benchmarking arrangement in a footnote - "In most cases, LIBOR will be used to determine [ ]'s cost of funds. In all cases, the amount of the Murabaha profit will be calculated to comply with applicable usury laws." - and the same accounting treatment, that "the Murabaha products will be financing products and they will be considered loans for both tax and accounting purposes." A reader comparing the two letters is watching the same trade-off the fiqh literature argues about: real ownership by the financier carries real consequences, and removing those consequences is exactly what makes the arrangement look like a loan.

SCALE, HONESTLY STATED. This was a small beginning, not an industry. The letter records that the branch "currently has approximately $68 million in assets"; every projection of how large the programme might become, and every figure for the existing mortgage book, is redacted in the published version, so no number for the size or growth of United States Islamic home finance can be taken from this document, and none is offered here.

HOW TO USE THIS ENTRY. Read it beside the United Kingdom's article 63F. Britain drew a perimeter around a shape of transaction and never mentioned the faith it was drawn for; America was asked by a named bank for permission to serve Muslim customers and granted it by finding the transaction economically identical to the mortgage those customers were avoiding. Neither document tells a Muslim whether the product is lawful for him. Both tell him something he genuinely needs to know before he asks that question: what the state thinks it is looking at, and what the provider told the state it was selling.