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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance


After a thorough analysis of the Islamic finance models available on the market and used mostly in the oil-rich Gulf countries and in Malaysia, it was concluded that these “Shari'aa-compliant” models were in fact not much different from those used by the riba-based conventional banking system. What reinforced our conclusion was the ruling passed by the Office of the Comptroller of the Currency (OCC) in response to the application of the New York branch of United Bank of Kuwait to allow the bank to offer “Islamic” banking using the cost-plus (murabaha) and lease-to-own models. The OCC concluded that these products were the same as interest-based financing. This fact made us conclude that we do not need to obtain special government approvals and exceptions that require a huge investment of time, money, and effort. We felt that what was needed was a system that would truly implement the Judeo-Christian-Islamic values of Shari'aa to benefit all.

Many attempts were made to devise a model that would satisfy our requirements at LARIBA. After a long search and extensive analysis, the effort focused on an analogy to our community's experience with the development of marriage procedures and contracts in the United States. A marriage contract is considered in the Judeo-Christian-Islamic system as the most solemn, most binding, and “thickest” of all contracts (Qur'aan 4:21). Based on our community's earlier experience with the development of an Islamic Shari'aa-based marriage system and procedures that utilize the civil marriage contract, we can draw a wonderful parallel with our efforts to develop a Shari'aa-based RF finance system. As is normally the case in marriage, a standard process is used. In this process, a number of preparatory steps must be followed before signing the standard civil marriage contract. For example, the two families would meet and agree on the details of the marriage agreement (e.g., the dowry), and the wedding details (e.g., the religious leader [the rabbi, priest, preacher, or imam] who will officiate the wedding). Then, the couple to be wedded would apply for a standard civil marriage license that has a space in it for a religious leader's signature. The religious leader would meet with the two families and the couple to be wedded to explain in full detail the meaning and obligations of the marriage contract according to the rituals and processes of the faith and to consult with and agree upon the details of the process. It was also reasoned that what makes a contract Islamic, Catholic, or Jewish is not only the religious ceremony and the religious wedding vows and rites pronounced, but also where the couple goes if they have a dispute. If they seek religious arbitration, that makes it a real faith-based marriage; if they seek the civil courts, that makes it a civil marriage.

There are two important considerations that need to be included in the development of the Shari'aa-based RF finance system:

1. That money is not rented. This stipulation is met by ensuring that the property is marked to market.

2. That, in the case of a dispute, the contracting parties use a board of arbitration that abides by the law (Shari'aa). This makes the contract “faith based,” depending on the faith involved.

Another important parallel experience of the American Muslim community and its development was our 1969 attempt to make available to the American Muslim community halal (divinely permissible) meat products from chicken, cattle, and animals in general that are slaughtered according to the rules of the law (Shari'aa). In 1969, as the community prepared for the second nationwide Annual Meeting of the Muslim Students Association of the United States and Canada (MSA) in Green Lake, Wisconsin, I, acting as the chair of the conference, tried to arrange for the famous Oscar Mayer meat company in Madison, Wisconsin, to give us beef that was slaughtered according to Islamic rites, as it is conceptually done for kosher meat.[1] I went to Oscar Mayer's general slaughterhouse and participated in making the slaughtering according to the law (Shari'aa) and witnessed firsthand a rabbi doing the same for kosher meat. In an effort to systemize this process, one can state that the meat production involved a number of subsequent steps. These are:

1. The Preparation of the animal. It had to be clean, clear of any illness, and able to pass the standard regulatory tests of the veterinarian.

2. The Faith-Based Action to slaughter the animal, which differs by faith.

3. The Processing, which includes proper slaughtering and cutting and complete drainage of the blood; the details of this process also differ by faith.

4. The Packaging can include the label kosher (for Jews) or halal (for Muslims) in addition to the U.S. Department of Agriculture (USDA) label and emblem, which are required to sell the product according to the laws of the land as described in the universal standards set by the USDA.

Our strategic group reasoned that this process, too, could be copied and used in the development of RF financing without the need to incur huge expenses in trying to reinvent the wheel.

Applying this vision based on the analogies and the stepwise approach described above, we reached the following process as it pertains to RF financing:

1. The Preparation. This step includes taking an application from the customer and processing it by evaluating the customer's resume and personal data to get to know his achievements and his family, credit scores to check on his/her credit character profile, to learn where the property is in order to be ready for an appraisal, and to learn the customer's financial details.

2. The Faith-Based Qualification. This step includes the application of the TARIBA Shari'aa-based RF finance model to decide whether investing in and buying the property makes economic and prudent sense.

3. The Processing/Underwriting. This step includes the analysis of all the information gathered, the assembly of all the documents needed, and the decision as to whether we should join in investing in the property with the customer.

4. The Documentation. This step includes documenting the agreements according to the standard and universally used documents that follow the banking laws and regulations of the United States. To record the process we used, we developed what we call the LARIBA Agreement. It is a rider that is added to the agreements and contracts. It describes in detail the prohibition of riba, the process that was used, and the U.S. banking regulatory reasons why the phrase implied interest was used.

We are aware that others in the field of Shari'aa-compliant “Islamic finance” in the United States and other parts of the world — in their sincere attempts to comply with Shari'aa — have used expensive lawyers and costly and sophisticated structured corporate vehicles for the purpose of “financial engineering.” We are also aware that others use ruses (heyal, or deceptive tricks and practices) to make the financing agreement look Shari'aa-compliant on the surface, but when the intent, the fine print, and the methods used are investigated, one can clearly and readily conclude that the contract is intended to circumvent the law (Shari'aa).

Based on thorough research in the original sources, on our consultations with many scholars in Shari'aa since 1987, and our soul searching, we decided to be fully transparent about the LARIBA RF finance model methods and not to mislead or misrepresent facts by using “financial engineering” techniques such as the use of an SPV, as discussed in Chapter 10.

It was also decided never to use the names of the eminent scholars in Shari'aa for advertising purposes to make it easy to “sell” our RF products and services. We feel that doing so takes away respect and eminence from those respected scholars and, in fact, is counterproductive because it is important that educated and sophisticated users understand the concepts used in order to be responsible for their actions and decisions in this life and the life after.

  • [1] This occurred when I was in charge of the Muslim Students Association (MSA of the United States and Canada, now called Islamic Society of North America, ISNA) near Madison, Wisconsin, in 1969.
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