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

Business Financing

Business financing in an RF setting does not only require the use of the LARIBA RF finance model but also the implementation of the Judeo-Christian-Islamic Shari'aa law that includes restrictions on dealing in prohibited businesses like alcohol, unfair commercial activities that take advantage of those who are in need, like payday lenders, pawn shops, professionals who take advantage of their customers, and businesses that are not fair to their customers and their employees.

Business financing in an RF setting requires that the business has accumulated documented operating hands-on experience complete with its documented financial results for at least two to three years. RF financing of start-up businesses is discouraged in an RF community bank because of the risks involved. Such start-up businesses are classified as potential subjects for RF venture capital financing using an RF investment bank setting where the risks are higher and the rewards as well as losses can be much higher.

Business financing to professionals like medical doctors, pharmacists, and entrepreneurs can be conducted in two ways. The first is the financing of the building that houses the business if applicable. That can be easily done using the LARIBA RF finance model. As to the business itself, thorough analysis based on at least two to three years of business operations, results and future potential should be conducted. The RF financing is done using the LARIBA RF finance model by conceptually sharing in the ownership of the business and sharing in the profits realized by the business as detailed in the LARIBA RF finance model.

Another important category of businesses is restaurants. Experience has shown us that private-label family restaurants can be a wonderful investment but require three important conditions to be realized:

1. A unique service environment, service style, product, recipe, and/or taste.

2. Enough private capital to keep the restaurant going for at least five to seven years because it takes that much time to develop repeat customers who get used to the service style and taste.

3. Experienced hands-on operator who runs the business personally with the family.

Financing such facilities can be classified as a venture capital type of investment and cannot be financed in an RF community bank setting. These can be financed only by an RF investment bank or RF finance company.

Franchise fast food restaurants can be a great foundation for building a community of entrepreneurs. These restaurants, which are operated by a national organization, have established a proven operating and financial track record and can be financed in an RF community bank. However, there are many guidelines that we have learned at the FARIBA System in our practice since 1987. These are:

■ Many restaurants can be involved in selling or serving items that are prohibited by the Judeo-Christian-Islamic Shari'aa law like pork, bacon, and wine. Proper edicts (fatwas) must be obtained regarding each of these cases. Also, practical solutions can be offered. Examples are the use of halal (properly slaughtered) turkey bacon and sausages instead of regular pork-derived products and the suppression of advertising for pork and wine-related products in the menu with the consent and approval of the area manager of the franchise, which will eventually lead to no sales of these prohibited products.

■ The operator of these franchises must have had at least three years of proven hands on operating experience in all aspects of the restaurant operation.

■ The term of financing of such franchises should not exceed seven years for two important reasons:

■ The first is that the popularity of a certain franchise may decline over the years.

■ The second is that the character of the operator and business ethics may change over the years. That is why an RF community bank using the FARIBA RF finance model uses a maximum term of seven years to finance such facilities.

■ The loan to business value for these facilities should be at least 40 to 50 percent in order to ascertain that the franchisee will give the business his or utmost best to make it a success.

It is also preferred that the franchise operate in a real estate building owned by the franchisee.

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