Shariah’s Black Box

At the very least, full disclosure requires these banks to indicate that the loans are not interest-free and to fully disclose in all of their advertising the true annual percentage rate (“APR”). This would require an explanation that while a loan might be considered “riba-free” for Shariah purposes, it is considered a standard loan with interest for all secular legal purposes because that is what it is. Unfortunately, even this might not be true. For example, it is not clear at all how a bankruptcy court would treat the transaction. Much would depend on whether the debtor was in bankruptcy or the lender. How the lender’s attorney navigates these issues in print advertisements and on the Internet will likely come to a regulator’s or court’s attention.[315]

An additional concern for Shariah-compliant consumer loans is that they are typically more costly than conventional loans. This is true because of the machinations inherent in the transactional documents and because much of the documentation must be duplicated – one set to track Shariah compliance and one set to track government regulations. In addition, Shariah supervision adds a cost in most cases as do some extra taxes attributed to the transfer of title as required by Shariah.[316] Because these consumer loans are marketed to a specific minority community with a unique cultural affinity to Shariah, and because the added costs of these loans have no economic value per se, it is quite possible that the marketing of these products will fall within the scope of the anti-predatory loan laws, such as the Home Ownership and Equity Protection Act (“HOEPA”)[317] or the state versions of HOEPA which are typically more aggressive and have lower thresholds for offending predatory high-cost loans.[318]