By Christopher Harress, International Business Times
Islamic banking is a growing option in America as various Islamic banks pop up across the country to service those who wish to preserve Shari’aa law or those who just want to use an Islamic bank. They welcome all customers, and there are some very interesting features that could make you consider turning to an Islamic institution before you take out that next loan.
The underlying principles of Islamic banking are fairness and shared responsibility. Traditional banks will lend you money if you’re creditworthy, with little concern about the actual thing in which you intend to invest. A house, for example, can either be a successful or unsuccessful investment, but when it loses value, you still owe the bank the same amount of money you borrowed in the first place, plus interest. Islamic banks, on the other hand, have more stringent rules and won’t help you invest in something they don’t consider affordable or a good investment for them. And that’s the key to these banks: the risk is shared.
This culture of shared responsibility and willingness to change the banking world for good has been a goal of Dr. Yahia Abdul-Rahman’s for 45 years.
Abdul-Rahman is currently the CEO of LARIBA, an Islamic-centric financial institution that offers interest-free banking, or as he calls it, RF banking, meaning Riba Finance or responsible finance.
For Lariba, every transaction is an investment that uses the lease-to-purchase model.
“We get the address of the house and ask for three live-market document estimates of how much would this house rent for if you were buying it as an investment, and the customer’s finance officer does the same,” Abdul-Rahman said. “Then we use a proprietary model to calculate the rate of return on the investment using the rent estimates. If the rate of return on investment is higher than what the shareholders and investors of the house are expecting, then this makes it a very good investment, and we tell our customer that they’ve found a home that makes economic sense and we are going to invest with them and we’re going finance it.”
However, if the financial models show that the borrower is making a bad investment, the bank will tell them that it’s a bad economic decision and it will not invest with them.
The beauty of the model, says Abdul-Rahman, is that the bank will share the responsibility in the event of losses, so the borrower is not burdened with all of the bad debt if the house should lose value. (Read the full article)