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

The LARIBA Agreement

The RF Shari'aa-based financing process (as is done at LARIBA) uniquely supplements the above standard documents, which use the word interest, with a specially devised rider called the LARIBA Agreement. This agreement documents the process used in the LARIBA Shari'aa-based RF finance model to calculate the monthly payment using the market measured rental value agreed upon between the customer and the RF bank or RF financial institution. The LARIBA Agreement clearly declares that riba/interest charging and/or receiving is divinely prohibited (haram). It also summarizes the proprietary process and the LARIBA RF finance model used. In addition, it states that the calculated and agreed upon rate of return, using the actual market rental rate of the property, is called an implied interest rate in order to comply with the U.S. Regulation Z (TILA, detailed in Chapter 8). The RF bank issues U.S. IRS tax form 1098 to allow for the deduction of the rental portion of the payments (as an implied interest) in the case of home mortgages, which is calculated at the beginning of the transaction and converted to an implied interest rate on the promissory note, as previously explained.

Monthly Billing

LARIBA has created a new billing format (for both American Finance House [LARIBA] and Bank of Whittier) that, we believe, is a historic development in the RF movement. LARIBA's monthly billing breaks down the monthly payment in terms of RofC (called principal payment in the riba-based finance industry) and RonC (called interest in the riba-based industry). A copy of the monthly billing is shown in Exhibit 11.1.

LARIBA Monthly Billing

EXHIBIT 11.1 LARIBA Monthly Billing

Servicing the Hnancing Facility — The Loan

Servicing of the credit facility (called loan in riba-based banking) is the process of maintaining the finance facility after it has been funded. It includes recording title with the concerned local government authorities, billing the customer on a monthly basis, responding to customer inquiries, resolving any issues faced by the customer, escrowing (depositing monthly payments to accumulate enough savings to pay taxes and insurance) taxes and insurance for the property, and maintaining records according to consumer compliance government regulations. Many finance companies and banks “sell” the servicing to outside banks and servicing companies, some of which are located outside the United States, for a handsome sum of money. This practice may expose the customers in general and the RF customers in particular to customer service personnel and managers who are not from the community members who financed their properties, are not familiar with RF finance, and are not trained in the moral authority required by the Judeo-Christian-Islamic value system. It is believed that this may not be permitted by the law (Shari'aa). The Shari'aa-based LARIBA RF finance model requires that the RF institution services the RF facilities it originated and that it cannot sell the servicing of those facilities to another company. Metaphorically, one cannot sell the children he has produced! When the RF institution services its facilities, community members who are well trained and who understand the RF finance and banking concepts, community values, culture, and languages are not only ready to serve and respond to inquiries, but they are also trained in the important Judeo-Christian-Islamic value of mercifulness and kindness (tarahum) to those in need.

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