LONDON — On April 26, Harvard University at the request of the US Treasury Department organized a briefing on Islamic finance for US policymakers. The briefing, held at the Treasury building, attracted senior officials from the Treasury, members of the US Congress and Senate, and other government departments.

A few days later on April 30 in London the Bank of England Governor Sir Eddie George met with the Advisory Group on Islamic Finance, chaired by Andrew Buxton, former chairman and current adviser to Barclays Bank, to discuss progress made toward the introduction of Islamic mortgages and house financing to Muslims in Britain. Some banks such as United Bank of Kuwait have already been doing this, but at a disadvantage to conventional banks because of existing tax and stamp duty regulations. This means that Islamic mortgages, because of their structures, are more costly and therefore less competitive than their conventional counterparts.

The irony is that US regulators such as the Comptroller of the Currency Administration of National Banks (OCC) has for some years now ruled that the risk attached to Islamic mortgages (especially for the Ijara — leasing contract) are similar to the risks for traditional conventional mortgages. As such the risk weighting — the money set aside by banks to cover such lending — should be the same at 50 percent. The OCC has also exempted the Ijara-based mortgage from double stamp duty, the tax paid to the Inland or Internal Revenue of the sale or purchase of a property.

In fact, HSBC bank in New York last week launched its first Islamic mortgage product to US customers, which is perhaps the single most important breakthrough of Islamic retail finance in the West to date.

Before anyone gets carried away with these developments, let me put them in some perspective. The US involvement in Islamic finance initially has been client and market-led. In 1983, Citibank International Bank arranged the first Islamic finance deal for Shell Malaysia, which effectively heralded the involvement of the conventional banking majors in the sector.

Since then, Citibank, Merrill Lynch, Goldman Sachs, Morgan Stanley, JP Morgan, Bankers Trust, Chase Manhattan, and other US banks, have been the receptacle of billions of dollars of deposits from Muslims, who insisted that their funds be invested along non-interest lines.

Some of these funds were simply parked in conventional accounts and the interest simply not paid on them. In this respect the banks capitalized on these interest payments, instead of the depositors insisting that such payments be distributed to charity. Most of the funds, however, were placed in low-risk short-term metals and commodity trade finance instruments, called Murabaha (cost-plus financing), which sadly is still the case today in global Islamic finance.

Muslim depositors and investors, contrary to the ethos of Islamic finance, still tend to be shortrmist and risk-averse, and therefore prefer to invest over 70 percent of the funds under management in these Murabaha-type instruments.

In recent years, Islamic portfolios have sprung up in equities, real estate, leasing, capital protected, and trade funds. And almost every major international financial institution is involved in the sector, apart from the regional and Islamic banks themselves.

In the US, in the meantime, the growing number of Muslims settling there has necessitated the launching of a number of "home-bred" Islamic funds — mainly in US equities. But, because the average Muslim in the US is an above average income earner, the demand and potential for Islamic ethical financial products is much higher.

The World Bank and the International Monetary Fund (IMF) also started to develop an interest in Islamic finance, helping Muslim countries such as Sudan, Iran and others to launch Musharaka certificates and other commercial paper to raise liquidity and to manage certain aspects of monetary policy.

Even top universities such as Harvard got into the act. The IDB, the Dar Al-Maal al-Islami Group, headed by Prince Muhammed Al-Faisal, and National Commercial Bank and others contributed millions of dollars to finance a study on Islamic investment and to establish the Harvard Islamic Finance Information Program (HIFIP), which organized the US Treasury briefing.

It is debatable whether the US involvement in Islamic finance was based on a social inclusion motive. It was more a market and client-led initiative, and there was and still is in general a huge gap in the understanding of and familiarity with Islamic finance between the financial community and the US administration and its agencies.

But come Sept. 11, the US interest in Islamic finance took a new but nasty turn. The sector under the guise of ‘international terrorism funds’ came under intense scrutiny. Malicious disinformation, partly fueled by sheer ignorance of the sector, by prejudice, by wilful misreporting, and partly by the enemies of Islam and Islamic finance, gave rise to what was perceived as a ‘witch-hunt’ against Islamic banks.

This detracted from the genuine international effort in curbing money laundering whether it be from proceeds of drug money, the funds stashed away by corrupt politicians, or terrorist groups trying to move funds around the world for their nefarious activities. Muslim countries such as Malaysia have been at the forefront of anti-money laundering measures well before 9/11. Many banks — both conventional and Islamic — from the Muslim countries do have strict anti-money laundering measures in place. In fact, most of the money laundering in the last two decades have been through the Western banks, including the banking majors.

So what is the motive behind this new-found interest of US policymakers in Islamic finance? Is it a genuine move as part of a social inclusion policy to understand the sector and then try to help facilitate access to it under US regulations to American Muslim and ethical investors? Or is it a cynical ploy to try to get more information about Islamic financial institutions, their depositors, clients, investors and so on, in their ‘war against international terrorism’?

Some Middle East bankers are wary of this US courtship with Islamic finance. They want more credible evidence that the US administration is genuinely interested in Islamic finance as a facilitator of financial social inclusion in the US and of helping to steer the sector to greater international recognition, and yes better regulation and supervision, and development.

At least in the UK, the Bank of England has had a dialogue with Islamic finance, including the Islamic Development Bank, for the last two decades. In February 2000, the UK chancellor of exchequer, Gordon Brown, launched ‘The Social Investment Taskforce’, which consolidated the work of the All Parliamentary Group on Socially Responsible Investment (SRI) on financial exclusion and community development finance.

In fact, Brown, according to senior banking sources in London, is highly likely to announce in his autumn budget statement in September, an amendment that would abolish the double stamp duty for the Ijara mortgage finance.

It is indeed a great pity that post 9/11 some of the UK’s European partners seem to have adopted the American view of Islamic finance, than going down the road of social inclusion, given the fact that Europe has a large Muslim community and that Islamic finance can contribute to community development, which may help in stemming the rise of the far-right and in giving succor to the likes of Jean-marie Le Pen.