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


Steps for Implementing the Model

1. The bank (finance institution) and the customer share in purchasing the home according to the agreed-upon proportions: The finance institution conceptually purchases the property jointly with the client by authorizing the client to act as its agent (wakeel) to select, negotiate the price of, and execute the intent to purchase the property.

2. Out of his/her own free will, and because of the customer's ultimate intent, the client offers to buy, and finance institution accepts to sell its shares that it owns (milk ul raqabah) immediately to the customer at the same price (without increase). Based on this understanding, the finance institution authorizes the client to record the title (register it with the local authorities) directly into his or her name. The client becomes the owner of title of the house or the owner (milkul raqabah). The finance institution and client agree to perfect a lien (implied co-ownership of usufruct) on the property in favor of the finance institution. This lien evidences finance institution's co-ownership share of the usage right (in the case of a house, it is the rent due to pay for living in and using the house, and in the case of a car, it is the rent of that car in order to use it) and is to be “reconveyed” back to the client once the entire RofC is fully completed. Please note that some mistranslate the word lien as rahn (the word rahn in Arabic literally means pawn). In a rahn situation, the ownership is suspended until the loan is paid back and the right of use of the property is arrested completely like in case of pawning a watch for money. In a lien, the right of use is not arrested and the ability to share the right of use is allowed. The value of the sale of the institution's ownership share becomes like a riba (interest)-free debt called an RF “dayn,” meaning an RF debt, to be paid by the client to the financial institution in monthly installments over a period of time up to 30 years without adding any riba/interest. The monthly repayment, as detailed earlier in the book, is called RofC.

3. As the client gradually pays back his/her RF loan (dayn), the finance institution's shares less in the usufruct (haqul manfa'aa). That way, by the end of the repayment period, the client's share of the usufruct will reach 100 percent.

4. The agreement and the lien imply that the client and LARIBA agree to share the income from the usage of the property proportionately (the agreed-upon rental value of the property, as discussed earlier) based on their shares. This income is called RonC.

5. As the client pays back his riba-free loan, LARIBA releases a proportional share in the usufruct. That way, by the end of the repayment period, the client's share will reach 100 percent.

6. The monthly payment due, to be paid by the client over the financing period, consists of a portion of the unpaid RF obligation/loan (RofC) and an amount equal to finance institution's proportional share of the agreed upon rental value (RonC). The proprietary LARIBA RF computer model does the arithmetic calculations using the proprietary RF algorithm.

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