The Conventional Riba-Based Banking System


The United States has developed the most sophisticated and highly dispersed banking network and system in the world. The American banking system, when it was developed, benefited from the accumulated body of human experience over history, including many religious values, human experiences, and documented and sophisticated solutions to problems faced while developing the system in the United States and other systems in Europe. The system was and continues to be built using the most capable minds, accounting methods and standards, mathematical tools, regulatory disciplines, and analyses available in the world. It is a project in progress. We are reminded that it would be embarrassing to write about the American banking and financial system after what happened in 2008, when the system failed miserably. It is believed that when the lessons learned from the worst crisis since the Great Depression are applied and the system is modified, it will be better: well designed, well positioned, and ready for a better future, not only for the United States, but for the rest of the world. This was proven in the aftermath of the 2008 debacle, as witnessed later on in 2011. History has shown that a country can have the most sophisticated system in the world, but if some people, who are part and parcel of the system, do not respect it and instead indirectly try to sabotage it by trying to get around the laws by taking advantage of loopholes in the regulations, that system is doomed. The United States functioned well with its banking system when Americans at all levels believed in it, respected it, and implemented it, and when we Americans lived within our means.

This chapter covers the U.S. banking regulations, which are considered the most sophisticated banking regulations ever developed in the history of the world. These regulations are included in this book to underline two important facts:

1. These regulations are intended to make sure that every citizen in the United States is treated fairly without the slightest form of discrimination, and that the money deposited in the depository institutions is protected and safe. This is important, because those who are involved in RF banking and its development need not reinvent the wheel; we can use these regulations as a foundation for future efforts, improving upon or adding to this system of regulations in our effort to develop the RF banking and finance system. The United States' banking regulations are built on a huge body of human experience that was meticulously designed and documented.

2. Many of these regulations have Judeo-Christian-Islamic roots. These roots were tied in with the banking regulations.

In addition to the banking regulations, this section attempts to familiarize the reader with the process of regulating and supervising banks in the United States. This chapter will focus on the process used by the U.S. Treasury Department's arm responsible for regulating national banks — the Office of the Comptroller of the Currency (OCC) — and how its “Examination of Safety and Soundness” of the national banks is conducted, including my personal perspectives from firsthand experience running the Bank of Whittier, NA, starting in July 2003. The role of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System will also be discussed. Additionally, the role of the Securities and Exchange Commission (SEC) in regulating the investment banking industry will be explained. The goal is to help the reader understand the processes used by the SEC to ensure that the financially uneducated and unsophisticated citizen is not conned out of his/her precious savings and that the process of selling securities (shares of companies, mutual funds, and bonds) is closely scrutinized by the government through the SEC.

To give a historic foundation to our discussion of how banks work and how Judeo-Christian-Islamic values can be applied to them, we need to know how financial institutions in the United States were built, their contributions to encourage community savings and investments, and their contributions to the lifestyle and the economy in the United States. With nearly 99,160 branches[1] and 415,321 automated teller machines (ATMs), the U.S. banking system is the largest in the world. As of the second quarter of 2013, U.S. banks had $14.41 trillion in assets and $7.35 trillion in total loans. U.S. banking is more diverse than in most Western countries. Despite ongoing consolidation, vigorous competition exists within the vast banking community, which includes financial holding companies that operate nationwide, dominant regional banks, and smaller independent community banks.

In my many personal communications and meetings with finance and banking officials and bankers in the world, especially in the United States, Europe, the former Soviet bloc countries,[2] and the developing countries of Africa and Asia, I was amazed to learn that officials outside the United States are not aware of the real engine of the United States economy: the highly dispersed community-owned (shareholders and board members are from the local community) and operated network of community-based state and national banks, which make it easier for local communities to keep their savings safe and to reinvest these savings in the community. Most of the rest of the world is more familiar with branches of a larger bank that serve local communities.

The American banking system is based on a “bottoms-up” approach as compared to that of the rest of the world, which is designed and built based on a “top-down” approach. This basis, in itself, signifies the ideal of the U.S. banking system, which espouses, to the best efforts possible, the democracy of capital distribution. These, along with the many regulations in the system, aspire to make capital available for those who need it without discrimination of any sort. This in itself is a basic Judeo- Christian-Islamic value and ultimate goal. Compare this to many of the countries in Europe and the developed world, which have huge capital resources but have not yet been able to make it trickle down to the masses despite claims sometimes made by their governments that they are applying the values of the faith and that they are pursuing responsible governance.

It is interesting to report here the results of a survey made by a popular television channel in the Arab world, in which they asked if “Islamic” banks catered to the rich or served the poor and the needy. More than 70 percent of the respondents said that Islamic banks only cater to and serve the needs of the rich. In fact, most banks in the developing world, including Islamic banks, not only cater to the needs of the rich but also invest large sums of their capital and deposits in projects that are outside their countries. It is sincerely hoped that the United States' banking regulations are studied by the regulators, the religious scholars, and the politicians in these countries in order to make a real difference in the fortunes of the future generations at all levels of the social ladder. This can be done through real economic development, prosperity, social justice, and equal opportunity in obtaining credit and in making sure that the huge fortunes accumulated from the sale of the natural resources are invested back in the local communities through a healthy (and hopefully in an RF [riba-free] format) banking industry that believes in making credit available to all people as a basic human right.

  • [1] American Bankers Association (ABA), Private Communication: As of the end of 2007, there are 42,386 national (commercial) bank branches, 42,895 state commercial bank branches, 9,801 national savings banks, 4,067 state saving banks (savings banks used to be called savings and loan associations and financed homes and apartments), and 11 foreign banks.
  • [2] LARIBA started LARIBA Bank of Kazakhstan in 1994, which offered RF community banking and RF mortgage financing in Kazakhstan for the first time in the history of Kazakhstan. The bank was sold in 2006 due to the increase in capital requirements by the national bank there.
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