The Approach Used to Develop the Art of Islamic RF Banking

The challenge we faced, at LARIBA, was how to develop an RF bank (with the limited knowledge we all had then; please note that in 1987 we called it interest-free Islamic banking) that would abide by the law (Shari'aa) and at the same time would comply with the laws of the land. In trying to do so, a prior experience I went through in 1972 in Dallas, Texas, was useful. At that time, I was the chairman and one of the imams (religious leaders) of the first organized Islamic Center in Dallas (and maybe one of the first in the state of Texas), the Islamic Association of North Texas, or IANT. I also was nominated to be the southwestern regional representative and board member of the Muslim Students Association of the United States and Canada (now called ISNA — Islamic Society of North America). One of my responsibilities was to perform weddings according to Islamic law (Shari'aa). The board of the association asked me to start working on getting Texas state officials to recognize an Islamic wedding contract, instead of the state-sanctioned civil marriage license. Our group talked to lawyers, state officials, and the clergy in the Christian (Catholic and Baptist) and Jewish faiths. Soon, we learned that other faith leaders had tried earlier, but it was not possible. A wise religious leader shared with us the fact that the civil marriage certificate carries with it the weight of the law of the land in order to protect the two parties in the marriage contract. In addition, the civil marriage contract can be signed by a civil official (e.g., a justice of the peace), which makes it civil, or by a religious leader, which makes it religious. Without the power of the state's legal system, law enforcement systems, and legal codes, this leader pointed out, no institution would be able to prevail in case of a dispute.

It was a personal experience that made us see the light. One day I performed the wedding of a wonderful young lady who had come to the United States from a Muslim country to study. She met a young man, and they decided to get married. I officiated the wedding using a “homemade” Islamic wedding contract. Six months later, the young lady contacted me with tears in her eyes and told me that her husband had left her and disappeared. We tried to help by calling the police. I showed the police the “Islamic” marriage certificate. We were told that it might be a useful document, but it did not carry the weight of an official civil marriage certificate issued by the municipality involved. After searching my heart, I concluded that we should use the civil marriage contract. We concluded that what makes a marriage Jewish, Catholic, Methodist, Protestant, or Islamic is not only the religious vows and the signature of the religious leader on the civil marriage contract. What makes it any of these things is what the parties do at the time of a dispute. The couple can go to the religious leader (e.g., the rabbi, priest, or imam) to preside over an arbitration process that is conducted according to the tenets of the faith involved, and that will make it religious. Or they can go to a civil court and that will make it civil. After this experience, which deeply touched us all, we recommended to all Islamic Centers in the United States and Canada that no imam or certified community leader be allowed to perform a wedding without a civil marriage certificate, in order to protect each party. This ruling stands today.

Our team at TARIBA reflected on this experience when we started looking for ways to bring RF banking to America, in order to solve the puzzle and optimize the process of merging the many currents and players in the field as detailed earlier.

We were concerned and troubled by the standard approach used by many “Islamic” RF bankers who were interested in establishing an Islamic RF banking operation in the West. It is sincerely hoped that this frank discussion will not offend any of the wonderful, well-intentioned, and believing RF (Islamic) bankers in the world — Muslims and non-Muslims — who want to use this approach.

The standard approach used starts by requiring local authorities in other non-Muslim countries to change their laws, regulations, and procedures to fit the requirements of the Shari'aa Board of those RF banks. I was privileged to have been exposed to many of the detailed discussions that led the U.K. Financial Services Authority (FSA) to license an Islamic bank (the Islamic Bank of Britain [IBB]). The legal costs involved, the compromises arrived at, and the monetary guarantees offered could be done only by a very rich entity that could afford it and would be capable of providing the guarantee from the central bank of the country involved. We respectfully ask those who use this approach to reverse roles. Imagine that a bank in the United Kingdom comes to a Muslim country, presents itself as a Christian bank, and calls itself the “Christian Bank of Country X” — and demands that the laws of the Muslim land be changed in order to transfer large sums of money and open that bank. It does not require much imagination to project the reaction of the country. It is hoped that this attitude will be changed because it may be temporarily accepted by some non-Muslim countries' officials to achieve a short-term goal, like securing “Islamic” funds for an “Islamic” bond (sukuk) in a European city. Alternately, it will be accepted from those who happen to have the funds to spend today, but after the funds dry up, then there will be no more guarantees and the license is withdrawn or the special conditions are removed. It is also important to note here that complying with the U.S. banking regulations and satisfying the regular periodic examinations conducted by the bank regulators is a very important and essential aspect of running a viable bank — both RF and conventional — in the United States and most other Western nations, as well as other nations in the world.

In our efforts to establish a viable RF banking operation in the United States, we started by realistically listing the facts. Here is a list of what we came up with:

■ The OCC[1] ruled that the Islamic banking models of cost-plus (murababa) and lease-to-own (ijara wa iqtinaa) proposed by the United Bank of

■ Kuwait — which follows the Shari'aa-compliant model — are in fact regular interest-based finance transactions with different names.

■ Almost all Shari'aa-compliant contracts we reviewed and analyzed were in fact similar to the regular finance contracts, but with different names and procedures that make them look “Islamic” on paper. In fact, the contracts stated implicitly that they are indeed regular finance contracts in case they are brought to the courts of law.

■ There is sensitivity associated with the mixing of religion with business and also the stereotyping of Muslims in many Western societies. These sensitivities intensified after the heinous attacks of September 11,2001.

While developing an RF finance model in the United States, we decided that our goal was to find a workable solution that would abide by the Judeo-Christian-Islamic Shari'aa law and would not violate or attempt to change the laws of the land. We drew on our experience in developing the Islamic marriage procedures and contracts in the United States. There were many reasons for us to adopt this strategy. The first is that we do not have the money, the human resources, or even a standardized and universal working RF legal code that we could present as a foundation.

The basis of our strategy was to achieve small successes in our endeavor to prove the viability of this new RF banking and finance system, and not to limit our growth and success potential by trying to achieve impractical and unrealistic goals. We started from the fact that the United States has, as described earlier in the book, the most sophisticated and fair banking system representing the fruits of many years of improvisation; it is rooted in the fairness of the Judeo-Christian-Islamic set of values. In our efforts to develop RF banking and finance, we decided that we should not start from ground zero and reinvent the wheel, but should draw on the huge body of human experience in banking and finance, which cannot simply be ignored or thrown away, as that approach would not be fair and wise and indeed would have been counterproductive. Our priority was to prove to ourselves first that we had a working concept with proven success and to chart a track record for applying this new RF brand of banking and finance. We knew that this approach would require a lot of hard work to raise capital; to put systems in place; to locate, identify, recruit, and train human resources; to clearly understand how conventional riba-based banking works; and to develop RF models and products that are easy to understand by the RF bankers and customers and that comply with the law (Shari'aa) while at the same time upholding the laws of the land. Most importantly, we wanted to develop an investment (loan) portfolio that proved that we have a small but viable and proven RF banking and finance alternative. We firmly believed that American Muslims as a minority — and, for that matter, the minority of all minorities in America — must be humble, respectful, and understanding in this effort to develop RF banking and finance without violating the law (Shari'aa) but while also upholding the laws of the land.

An important aspect of the RF banking business is its faith-based credentials. History has shown us time and again that religious fervor, when instigated, can be very strong; it can be the source of great emotional energy, which can be used for marketing products and services. It has happened in the United States, when religious groups (including some Muslims) raised capital from innocent and trusting members of their faith- based communities, promising them great returns in this life and God's acceptance in the hereafter, only to see the trusting customers lose everything when the promoters disappear. One recent episode was the Madoff hedge fund, which attracted money from many Jewish nonprofit organizations as well as many wealthy investors and banks all over the world. It turned out, apparently, to be a type of Ponzi scheme that lost its investors billions of dollars.[2] Another episode was that of Sunrise Equities, a Chicago, Illinois, company that not only offered “Islamic” investments but also had its own “Shari'aa Board,” which the company had imported from India to add legitimacy to its operations. In one of the financing applications we received from a customer, we noticed an investment certificate from Sunrise Equities that promised the investor 15 and 20 percent annual returns on investment. We met the founder and the representatives of the company during a New York conference in October 2007, took them to the side, and told them that what they were doing was wrong, illegal, and damaging — not only to themselves and their victims but to all of us in the new and emerging RF banking and finance industry in America and the world. They shrugged their shoulders and walked away smiling. Earlier that year, a delegation from LARIBA had flown to Chicago to discuss the matter with their imported and company-financed “scholar” and his team and to alert them to what was being done in the name of religion. We were discounted. It was saddening to learn that in September 2008 the Indian- and Pakistani- American Muslim community — mostly from Hyderabad — lost all of its investments, and the “bearded” and “turban-dressed” religious business “leader” who founded the company disappeared with his staff. Episodes like these have also been experienced in Egypt, Turkey, and many other places. We at LARIBA have disciplined our operations from the time we began in 1987 to go slowly; to exercise prudence; never to use faith in our advertising; to learn systems, techniques, and operations from the pros in conventional banks; to attract professionals to join our team; never to promise what the return will be, because only God knows the future; and to always try our best to underpromise and overdeliver. These are, in fact, some of the aspects and character foundations of the Judeo-Christian- Islamic value system that make RF banking a uniquely positioned brand name in banking.

In conclusion, we decided to first understand the laws of the land and to try to apply these laws in the same way that the Islamic/civil marriage process was developed in the United States.

  • [1] Ibid.
  • [2] Bernard Lawrence “Bernie” Madoff (b. April 29, 1938) is an American businessman, and former chairman of the Nasdaq stock exchange. He founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008, when he was charged with perpetrating what may be the largest investor fraud ever committed by a single person. Prosecutors accused financier Madoff — the alleged mastermind of a $65 billion Ponzi scheme — of intending to transfer up to $100 million worth of assets to protect them from seizure, and they wanted him locked up immediately. Madoff was sentenced in June to 150 years in prison after admitting the fraud — the largest in history.
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