THE PUZZLE AND THE CHALLENGE OF DEVELOPING RF RANKING AND FINANCING
It is useful to document the many challenges we at LARIBA faced while trying to meet the challenges of developing an RF finance and banking operation and of solving the many puzzles that appeared before us with the humble tools and the limited resources we had available to us at the time. The intention of this review is to document what our team did for the record and for the benefit of future generations.
When we started LARIBA, our goal was to come up with a solution to the problem of living a full American life without violating the laws of our faith as ordained by the Judeo-Christian-Islamic Shari'aa law and to uphold the laws of the land without participating in the culture and practices of riba/ribit. It may have been easy to articulate that goal; in practice, though, it was a big and daunting challenge and a hard dream to realize!
The following sections comprise a review of the many currents we at LARIBA faced while developing an RF financing and banking operation and discipline.
Legal and Financial Categories
First, let us review what we learned so far in this book by touching on each category of the subject that had an impact on the development of the RF financing and banking brand.
The Law (Judeo-Christian-Islamic Shari'aa Law)
■ Shari'aa has as its main goal the protection of the self, the family, the assets and wealth, and the faith in the community.
■ Shari'aa focuses on the intent and not the form. The real test is the outcome.
■ The main objective of Shari'aa is to maximize the benefits to the family and the community at large while pushing away what is harmful.
■ Shari'aa requires those who make edicts (fatwas) to be knowledgeable of the faith, the community, and the local conditions and systems where the edict is solicited and applied.
Shari'aa states that if it (the law) cannot be applied in full, that does not give believers an excuse to abandon it completely without attempting to the best of one's abilities to apply whatever is possible.
■ Shari'aa does not allow the use of ruses (deceptive tricks, heelah) or circumventive structures that may look as Shari'aa compliant but in fact ignore the intent and spirit of Shari'aa.
■ Money is a thing and is fungible, like an apple or a loaf of bread. Fungi- bles cannot be rented because the minute they are given to another person, they will be used. When these fungibles are used, they change their nature and cannot be returned in the same exact original shape, form, and condition as stipulated in a rental relationship. When a fungible is handed over to another, it becomes an “investment” that is entrusted with those who accept it. Money is a fungible thing.
■ Money cannot be rented by paying a price for using it. In the past, the payment of a price (rent) for the use of the money was called usury by the Catholic Church; now it is called an interest rate.
■ Money is a measuring device and is useful only if invested. It can only be invested in a useful activity, such as the purchase of an asset, a service, or a business. Money does not grow on its own if not used. It must be invested in a productive activity that produces a useful outcome.
■ Money cannot be loaned, except in the form of a good benevolent loan (qard hassan) to those who need it. A loan is conceptually looked at as a bite (qard) given to those who lend the money out of the assets of those who borrow it because they do not have money; it is to be given to the poor and needy without expecting any increase.
■ Money is a measuring tool that is used to measure the value of the product or service produced by this economic activity. The success or failure of that activity is measured by how much value — measured in money — is produced by that asset. The concept of return on investment is a measurement of the success or failure of that investment.
■ Money must be real money that can be used as a calibrating measure of value, and real money must be a base commodity. It can be gold, silver, a basic energy or mineral source or a basic food staple. Paper (fiat) money can be used as a convenient tool of exchange and trade, but it must be related and indexed to these basic real money reference commodities. That is, one can use U.S. dollars, British pounds, the yen, and/or the euro, but such currencies must be referred and indexed to a calibrating standard and reference commodity to be fair to all by keeping fair pricing and free and balanced markets without deception (gbarar).
■ When basic commodities — that is, gold, silver, and food staples like wheat, rice, corn, salt, or dates — change hands, they must be exchanged for the same amount if they are of the same element. That is, gold is exchanged for the same amount of gold, and corn for the same amount of corn. The exchange must be done on the spot, hand-to-hand, and the trade cannot be delayed or settled at a future date. That implies that these calibrating reference commodities (pricing metals and food staple commodities) cannot be included in futures and options market speculative activities. If the exchange involves two commodities that are different but used for the same purpose — for example, gold and silver, which are used as a pricing reference (real money), or corn and wheat, which are used as a food staple — the exchange can be made with an increase, but it must be done on the spot and should settle hand-to-hand without delay. This makes trading these calibrating reference pricing commodities in the futures market prohibited by the Judeo- Christian-Islamic Shari'aa law. For example, it is allowed to exchange one ounce of gold for seven ounces of silver because both are used as pricing commodities or one bushel of wheat for three bushels of barley because both are used as a food staple. The exchange must be done on the spot. No delayed delivery is allowed. If the two commodities are different in element and in use, they can be exchanged for an excess amount, and the exchange can be done on the spot or for delivery at a later date for a different price. However, if delivery is not completed at the agreed-upon date for a legitimate reason (such as a change in the economic environment or climate conditions), no increase over the agreed future exchange ratio is allowed to compensate for the delay in payoff, because it is considered riba (time-dependent nassee'ah riba). For example, an ounce of gold can be exchanged for 7 bushels of wheat hand-to-hand; subject to agreement between the two parties it can be exchanged for 15 bushels of wheat after one year. If the wheat is not available after one year for reasons that are considered force majenre, no further increase is allowed. This concept was introduced in Chapters 5 and 6 as the Commodity Indexation Discipline.
In case one wants to exchange an item for another item of higher quality — for example, exchanging small oranges for larger, higher-quality oranges — the exchange must be done in equal quantities. However, to perfect the exchange as a legitimate exchange according to the Judeo-Christian-Islamic Shari'aa law, the small oranges should be first exchanged in the market for a different element, such as gold or corn; then the gold or corn can be used to buy the larger oranges. This way, markets are kept fair. Transacting business this way ascertains that fair pricing is achieved without deception (gharar). This concept, called the Marking-to-Market Discipline, was introduced in Chapter 3.
■ Interest can be defined as an excess or an increase — riba (in the Qur'aan) or ribit (in the Jewish Bible and the Old Testament) — over the original amount of the capital given as a loan (qard). The increase is divinely prohibited (haram) in case of a qard to the poor and needy. Any increase in whatever form — be it in the form of excess money, compensation through free and unpaid labor, the free use of the borrower's facilities, or publicizing the borrower's indebtedness — is considered riba and is not allowed.
■ In a fiat (paper) money regime, the interest rate used by central bankers to decide on the policy of how much money to print or to withdraw out of the market — called the Fed Fund rate in the United States — is different from the riba prohibited by the Judeo-Christian-Islamic Shari'aa law.
■ Interest charged as a price for renting money to those who do not have it (because they are poor or because of lack of capital available to business owners) is what the prohibition of riba (interest and usury) is all about. Interest charged for a transaction that implies the renting of money to a user of money for credit (dayn) without marking it to market is considered riba or ribit, and is not allowed by the Judeo-Christian-Islamic Shari'aa law.
Money and Commercial Transactions
The original teachings of the Judeo-Christian value system focused on the abuse exercised by the rich against the poor in agrarian societies in order to expropriate their land, crops, and properties and render them slaves in their own originally owned land. The Judeo-Christian-Islamic value system reinforced that ruling and made it into law, which prohibited usury (or interest) — the act of charging a rent for the use of money, which is considered an act of riba or ribit. The system encouraged helping those who need money through the application of a benevolent lending system of qard hassan, meaning a good and benevolent loan that does not charge any increase over the original amount in any shape or form.
With the development and growth of trading and commercial businesses, owners of these businesses needed money not because they were poor but because they wanted to expand their business and their capacity to transact more business. A historic revolutionary development in business financing was brought about by Islam under the leadership of Prophet Muhammad (pp) by developing RF disciplines and pricing valuation disciplines using reference commodities (the Commodity Indexation Discipline). This system brought about a currency calibration mechanism that brought a standardized calibrating reference pricing commodities that can be used for defining the real value of different currencies used in various countries.
As commerce developed and grew, the Judeo-Christian-Islamic system expanded upon the Judeo-Christian system to allow buying and selling at different prices as dictated by fair and open markets, but not renting the use of money (usury, now called interest). Buying and selling transactions that involved an increase due to profit making, in an open and fair market, are not like charging riba by charging a rent for the use of money, as revealed in the Qur'aan. For buying and selling to be perfected, the title of the item to be acquired must change hands from the seller to the buyer in a documented buy-sell agreement. Different models developed to put this rule in effect were used during the Muslim reign and adapted in the 1700s by the rabbis in the eastern European areas in their hetor iska models (also known as musharaka or joint venture in Islamic RF banking applications).
■ To perfect the buy-sell transaction, the two parties must participate in all risks (including profit and loss) as defined by the buy-sell contract.
■ The buy-sell contract must be fully documented, free from any deceptions or undefined parameters and risks, and should be transparent. The concept is called gharar free (which means deception free). Gharar-free rules also require that trading in risk, as in cases of sale with a guaranteed buyback at a future date at a predefined price (called eena in Shari'aa law), uncovered short sales, naked options, and futures, as well as financial derivatives, involve major aspects of gharar, and they are prohibited.
■ Future sale prices cannot be set ahead of time because such practices interfere with the free and fair market system as defined by the Judeo- Christian-Islamic value system. Only God knows the future. That is why a contract that includes two sales (i.e., buying a property from someone at a price and promising to sell it back to him/her at a future date in the same contract at another prefixed price — an eena sale), is prohibited. Contracts of this type are considered divinely prohibited (,haram) contracts and a means of gharar.
If the person who was entrusted with the money cannot make the payments for legitimate reasons, such as unexpected changes in the economy or a sudden war — force majeure — foreclosure is not allowed unless one of the parties committed fraud or deception. In this case, the asset is sold and the proceeds are distributed between the contracting parties as per the partnership agreement.
■ In a joint venture, a predefined profit is not allowed. However, the percentage participation in profit and loss, or the rent for the use of the property, or the service between the parties can be agreed upon between them.
One cannot sell what one does not own.
Ruses and circumvention (beelab) of the rules of the Judeo-Christian- Islamic Shari'aa law are not allowed.
Banking and Securities Laws and Regulations
In the United States, these regulations are rooted in the Judeo-Christian- Islamic value system of fairness, nondiscrimination of any type, transparency, full disclosure, truthfulness, trust, and preservation of people's assets and properties. These regulations encourage the people to reinvest their savings in the community, thus generating job opportunities and economic prosperity and allowing equal opportunity for all, regardless of faith, skin color, gender, marital status, language, national origin, social status, and/or relationships.
■ The laws and regulations are designed to supervise, identify, and discover abusers of the system and to examine the safety and soundness of the financial institutions entrusted with people's hard-earned deposits, investments, and assets.
■ The laws and regulations are based on the vast body of recorded human experience throughout history.
■ The laws are designed to prevent fraud by those who attempt to defraud people in the marketplace and those who want to take advantage of people who do not have knowledge, are not educated in finance and risk, or are not well informed, by insisting on full disclosure, transparency, and fair representation.
■ The regulations are in continual development because they are adapted to correct previous and newly uncovered faults and loopholes in the design of the system, with an objective to reach perfection as closely as is humanly possible.
■ The laws and regulations require that any hnancial transaction must be translated into an implied interest rate (as required by Regulation Z in the United States, called Truth in Tending Act [TITA]) that includes the effect of all fees and expenses so that the consumer can make a fair comparison between different offers and an educated decision in his or her financial dealings.
■ The regulations do not allow depository institutions (i.e., banks) to own properties except in cases where these properties are owned by default, such as foreclosure (this concept is known in U.S. banking as Other Real Estate Owned, or OREO). Banks are encouraged to dispose of these properties as soon as practically possible.
■ The laws and regulations include a safety valve that gives borrowers who cannot meet their obligations ways and means to restructure and reorganize in an orderly fashion without destroying their facilities or their investments, which might cause the loss of jobs and create more problems (U.S. bankruptcy laws).
■ The laws prohibit the payment of interest on bank demand deposits (Regulation Q in the United States, which was suspended, as stated earlier). Interest-paying accounts are allowed only with strict conditions and limited withdrawals (see Regulation D in the United States).
■ The U.S. banking regulations offer standardized, frequently used, and fundamentally needed consumer finance contracts, such as those used to finance home mortgages or automobiles. This cohesiveness helps maintain quick settlements of disputes and avoids lengthy and expensive legal proceedings.