MAJOR OBJECTIONS OF RF SHARI'AA SCHOLARS TO THE CONVENTIONAL RIBA-BASED FINANCE CONTRACT
Most modern RF (Islamic) finance scholars who reside in some of the Muslim countries made the following recommendations to change the riba-based conventional banking system:
1. The contract must be changed to fix some of the noncompliant features it suffers from. The Shari'aa-compliant contract (as ruled by these scholars) must:
■ Not show the word interest. As discussed in Chapter 8, this stands against Regulation Z (TILA). As discussed in Chapter 10, there is a clear edict (fatwa) from the most senior and respected scholars that states that if the laws of the land require using the word interest, then it can be used. This fatwa (edict) is conditional on not using interest — money renting — in the actual process of financing.
■ Show a buy-sell transaction in which the bank buys the item from the seller, and then sells that item to the buyer. As discussed in Chapter 10 and in many parts of this book, U.S. banking regulations stipulate that banks cannot act as buyers of properties. In addition, in most Western systems, any buy-sell transaction triggers a tax event, and the profits are taxable. In addition, as was concluded in Chapter 10, all the buy/sell schemes are synthetic in nature and are in fact ruses and deceptive tricks (heyal) used to get around and circumvent the law (Shari'aa).
■ Late payment fees cannot be applied unless the payments were intentionally made late without an acceptable excuse. These late payment fees should be paid out to a charity, and should not be added to the bank's profit. This was an easy requirement to implement.
■ Any income realized by the bank due to an unavoidable interest source must be paid to charity and not added to bank profit. This condition is also achievable.
■ In a lease-to-purchase model, insurance premiums must be shared by the two participants in the transaction in proportion to their ownership. Most scholars suggested that the monthly payment of the buyer be increased to reflect that cost, and add the portion of the insurance premium to the monthly payment. Per U.S. bank regulations and for the sake of transparency and straightforwardness, the bank must disclose in full the payments made and what they were used for. In response, it was decided that if an RF bank uses the LARIBA Shari'aa- based RF finance model, the bank must tell the customer openly that he or she is responsible for the insurance; because he/she owned the shares from the beginning (as will be discussed later in the LARIBA RF Finance Model) and that he/she is the one benefiting from the use of the facility in an operating lease.
Maintenance must be shared. Again, because the buyer uses the facility, regular maintenance is not only required but must be paid by the user to keep the property in the best of all shapes.
■ Customers' deposits must be exposed to bank profit and loss. Investment products cannot guarantee a certain interest rate or return. It is believed that it is unfair, in a banking scheme that offers FDIC insurance on deposited funds, that peoples' hard-earned savings and deposits are exposed to the risk of loss. We are aware of the scheme used in the United Kingdom (at the IBB), in which the customer must be offered the guarantee and offered the option of refusing it in order for that condition to be applicable.
■ The bank should have a supervisory board that specializes in Shari'aa to ensure that the bank's products, services, and operations are compliant with Shari'aa. The Shari'aa Board is given the power to render bank operations not compliant. That condition can be implemented as a part of, and a complement to, the annual on-site regulatory examination conducted by the concerned regulatory authorities. As discussed earlier in the book, many of the aspects of the regulatory onsite examination ensure compliance to regulations. It must be frankly admitted that the bulk of the regulations, which are in fact Judeo- Christian-Islamic in nature, are not even considered by the Shari'aa Boards of some of the RF (Islamic) banks in many of the Muslim countries. As an example, the fairness of treating expatriate workers needs to be closely examined and evaluated by the Shari'aa Board of the RF bank or finance company before dealing with such companies. Another example is applying the basic human right, pertaining to nondiscrimination, when a guest worker applies for obtaining credit in a host country. The Shari'aa Board in the setting we propose should complement the onsite regulatory bank supervision to make sure that the RF models used are in fact the same as advertised and that these models comply with the Judeo-Christian-Islamic Shari'aa law and that the RF bankers and their representatives apply that law (Shari'aa) when they promote and “sell” these products and services. Unfortunately, the extent of the Shari'aa Board's involvement in the operations of many RF (Islamic) banks has been minimal, and their job mostly ends at sanctioning a particular RF model or an RF product. Unfortunately, it is observed that many of the “Islamic” bankers use the names of these respected scholars to advertise and seek acceptance in the market. The question we have is: Does every light bulb we buy have to have the signature of Mr. Thomas Edison to make it an acceptable light bulb?
2. It is interesting to note that the focus of the scholars was concentrated on the legal aspects of the contract but did not include some of the basic requirements that define the substance and spirit of the true RF banking and finance system. For example:
■ Very little is mentioned about the aspect of social responsibility of “Islamic” RF finance. It is true that the rules put forward by many Shari'aa Boards and scholars prohibit participation in financing religiously prohibited (haram) businesses like the manufacturing or selling of intoxicants, gambling, illegal activities, or promiscuous activities, as well as businesses that involve socially irresponsible activities such as environmentally damaging industries, businesses that do not treat their employees and customers fairly, and institutions that use false advertising to con their customers. Flowever, one would notice little or no mention of the responsibility of the RF banker to local communities by investing the deposits gathered from a community back into that community — as in the U.S. Community Reinvestment Act (CRA) — before allowing bank deposits to be invested outside the communities (and in some cases, outside the country), depriving the local communities of the opportunity to reinvest these accumulated deposits in order to help the economic growth of local communities and create prosperity for the citizens by creating new job opportunities. Also, it is noticed that there is no mention of treating people equally, without discrimination based on national origin, wealth, tribal ties, skin color, gender, or language.
■ There was no significant sign that the scholars of the RF Shari'aa and the “Islamic” bankers tried to benefit from the vast body of bank regulations, especially in the United States, that deal primarily with fairness and respect of human rights in the communities, as well as to protect those who experience unexpected and unfortunate circumstances beyond their control, as we see in the bankruptcy laws and codes in, for example, the United States.
■ It is peculiar to note the posture of most of the Shari'aa RF finance scholars, who ignore what is believed to be the basic revolutionary aspect of the RF finance system: the Commodity Indexation Discipline, which neutralizes the effects of fiat money fluctuations (leading eventually to a new, fair, accurate, and revolutionary RF Monetary Regime), and the Marking-to-Market Discipline, by which each of the items to be financed is marked (compared) to the market to identify any market pricing bubbles and help investors make prudent investment decisions. We believe in prudently evaluating the potential investment in terms of return on capital invested, by pricing, for example, cars, homes, businesses, or equipment based on the actual market-measured lease rate they would command in the open market system. It is believed that these rules are the most important, and add fundamental unique aspects to and provide real added value of the RF financing approach. There is no mention, for example, of paper (fiat) money and how it may lead to unfair and deceptive pricing aspects and unfair valuation of a transaction.
In conclusion, it is believed that in a fair and viable RF banking regime, all the banking regulations that were discussed in Chapter 8 should in fact be part of Shari'aa Boards' requirements. It is the real intent and not merely the words in a convoluted contract that in fact makes the RF banking and finance system unique and beneficial. Many of the Shari'aa-compliant contracts are in fact designed by force-fitting the conventional riba-based contract into language that “complies” with Shari'aa in form, but that in most cases does not satisfy the real spirit and substance of why Shari'aa prohibited riba.
I want to share with you, the reader, a personal experience that we hope will shed more light on the unfortunate practice of some of the “RF scholars” who have in fact risen to positions of fame despite very little being known about their education, training, research, scholastics, and/or any proven track record of documented, debated, and critically reviewed research.
At LARIBA, we once decided to engage a well-American-educated economist who had completed a PhD in economics in one of the respected universities in the United States, had authored a number of books on “Islamic” economics, presented himself as a scholar in the law (Shari'aa), and acted as an adviser to some of the most prominent law firms active in “Islamic” finance legal services. We wanted this economist to evaluate the LARIBA Shari'aa-based RF finance model as a foundation for true RF banking and finance and develop a set of documents that he would feel satisfied with what he believed to be the law (Shari'aa). We gave him the fruits of our many years of research since 1987, supported with references and research papers to read. He came back with a big smile on his face, saying, and I quote, “This is really unique and is different. I think you have something that will be very useful in the Islamic banking industry.” We agreed on the scope of work he was assigned to perform, which consisted of making sure that the research we documented was included and articulated in his efforts and ensuring that we had followed the laws of the land and the norms required by the U.S. banking regulations — something we later discovered that he knew very little, if anything, about. He asked us to supply him with copies of the standard deed of trust and promissory note used in standard banking transactions. After a few weeks, he e-mailed us his products. Upon investigation, and after matching the Microsoft Word documents using the edit-tracking facility, we can summarize what he did as follows:
1. Replaced the word interest with rent or profit. We had told him that we take care of that in the process of RF finance preparation, and that doing it his way creates a completely different set of documents that will require us to obtain an exception from the regulators in order to receive complementary approvals, which would expose us to a lengthy and expensive process that is not permanent. We also stated that this approach might compromise the interests of the customer, especially in a court of law, where it would result in utter confusion among the judge, the prosecutors, the defense attorneys, and the jury. We also stated that it does not matter — based on many references in the law (Shari'aa) — what you call that percentage sign (denoting interest) as long as it does not imply the “renting” of money, indicating a riba-based transaction.
2. Made the process look like a buy/sell agreement. We told him that in a buy/sell transaction — based on the laws of the land and Shari'aa — we should include a documented and properly recorded transfer of tide from the seller to the bank (the buyer), which violates U.S. bank regulations and credit policy. This step must be followed subsequently by a sale from the bank to the ultimate buyer. In addition, this claimed buy/sell step is, in reality, synthetic, because we know that the bank never intended to buy the property and that the process is done this way to make it look “Islamic.” We told him that metaphorically, it reminded us of a man who wanted to enjoy a few nights with a lady. He proceeded to marry her with the intention of divorcing her after he got his pleasure — definitely a deceptive trick designed to make the process look religiously and socially acceptable on paper, though the intention was anything but! We also told him, based on our long-time banking experience, that this approach might open the bank (as a buyer of the property) to punitive actions by the regulators and a potential capital gains tax that could be significant. He said, to our amazement, that changing title (of ownership) was not necessary, because at the time of Prophet Muhammad (pp), there was no change of title, let alone the concept of title altogether! We told him that we obviously were no longer living in that age. We also told him that it would be counter to our claims to be trying to uphold the law (Shari'aa) if we did not tell the truth, which is one of the most important foundations of any faith, let alone the Judeo-Christian-Islamic value system.
3. Included in the documents was a very interesting disclosure, in which he stated, and I quote: “This is a finance contract . . .” Our response was,
“If this is the real intent, what is the point? Why go through all these changes and maneuvers?” He said that we needed this to be done in order to be compliant with Shari'aa.
We canceled his consulting contract. He reacted by saying that he was not surprised because he felt that we had no respect for scholarship! He is still being invited to teach scores of European and Western bankers in training seminars, short courses, and conferences on how to structure “Islamic” contracts that would “comply” with Shari'aa. These are the same seminars organized by the same groups that have controlled the “Islamic” banking promotion domain with one goal in mind: presenting scholar participants who will help promote the “Shari'aa-compliant” banking that conforms to the methodology promoted and signed on by the very Shari'aa scholar “superstars” created by such promoters.
In another experience, one of our staff members was sharing the challenges we face as a minority in the United States with another “scholar.” The staff member shared with the scholar that we all should be wise, honest, and creative in order to offer true RF banking that would be based on the law (Shari'aa) without violating the laws of the land and the U.S. banking regulations, while at the same time offering real economic substance and an advantage to the user of RF financing techniques. This scholar's advice was that we get ourselves a good lawyer who is well connected with the regulators and/or a retired regulator — as they had done earlier, in another European capital — and all would be taken care of. We shared with this scholar that in the United States, it is not the usual practice to buy your way in; even if you were successful in the beginning, it would cost you a lot of money and result in many restrictions — as happened in the aforementioned European country — that would render RF financing a “joke,” something that satisfied the form but not the spirit and the substance of the Judeo-Christian-Islamic value system based on Shari'aa.
While developing this LARIBA Shari'aa-based RF model, we had to come up with solutions to the many challenges discussed previously in this book and we had to merge many of the opposing undercurrents. The following is a list of the major guidelines used to develop the model:
■ It should reflect and embody the real spirit and substance of the Judeo- Christian-Islamic Shari'aa law.
■ It should be based on Shari'aa (notice here the phrase based on, not compliant with) and not force-fitted, as is done in the Shari'aa-compliant approach.
■ It must reflect the added value and benefit to the user when compared to the models used by the riba-based system and the Shari'aa-compliant system.
■ It must enforce and abide by the laws, regulations, and standards of the banking and financing system in the United States. The most important task here is to design the RF alternative product and service such that it can easily be compared with the riba-based product and service to enable the consumer to make a well-educated decision.
■ It must be appealing to all users, regardless of their faith, skin color, national origin, ethnicity, gender, marital status, or language.
■ It must be convincing to the educated and sophisticated users, offering a real economic advantage and benefit and not relying solely on the reputation of a famous religious scholar's endorsement.
-  I had the good fortune of moderating a session on Shari'aa that was attended by some of the superstar scholars. As customary, I asked them to give me their bios or CVs. I am sorry to state that some of them did not have enough formal education in Shari'aa to qualify them to assume that role. I am sorry but I cannot name them out of respect for their privacy.