SERVICES OF THE RF (RIBA FREE) ISLAMIC BANKING AND FINANCE MOVEMENT HAVE BEEN AVAILABLE TO THE PUBLIC FOR OVER 50 YEARS. WHEN THE MOVEMENT STARTED IT WAS THOUGHT THAT IT WILL PENETRATE A SIGNIFICANT SEGMENT OF THE BANKING AND FINANCE MARKET AND THAT BOTH PUBLIC AND BUSINESS SECTORS WILL RUSH TO ADOPT THEIR BANKING SERVICES FROM RIBA BASED CONVENTIONAL BANKS TO RF BANKS. UNFORTUNATELY, THIS DID NOT HAPPEN.
PENETRATION of interest-free banking and finance has been in the range of 12% to 18% in countries that have built some of the most sophisticated and credible Islamic finance systems. The question is asked, why? And how we can improve that performance? Milestones achieved by RF Islamic banking and finance movement:
The RF banking and finance movement was started in the mid-20th century to revive the fundamental teachings of Moses, Jesus and Muhammad (peace be upon them all). This bridged the gap of 600 years and made following achievements in less than 50 years:
1. Created a new and internationally recognised alternative banking brand, discipline and system,
2. Built a wide-ranging banking and finance infrastructure,
3. Created a new, credible and market-tested RF financial products and services,
4. Attracted vast capital resources that prefer RF finance and banking over the riba-based system,
5. Created world class universities that teach and train RF banking and finance to students from all over the world, who are both Muslims and non-Muslims,
6. Created a critical mass of RF bankers who speak most world languages, and
7. Revived riba/ribit-free movement among followers of Judaism, Christianity and some other faiths.
THE 20TH CENTURY DEVELOPMENTS in the RF banking and finance domain focused on the legal and contractual aspects of RF finance, the creation of products and services that mimic those offered by conventional riba based banks but structured to fulfil the rules and tenets of the Law (LARIBA uses the word “The Law” to mean Shari’a and prefer to call it the Judeo-Christian-Islamic Law). The focus then was on developing finance models and structured products involving group of scholars from different regions of the Muslim world. The differences between the positions of the Shari’a scholars and the models that existed in the beginning of the movement between the scholars in South East Asia, – and those in the Arabic speaking Gulf countries, seem to share common understanding and are slowly converging. Scholars from both areas are now collaborating to lay the foundation for a true and global RF movement that has greater potential to change the financial and banking industry in the 21st century.
Challenges for developing RF Islamic banking and finance as an alternative to riba-based banking In order to identify the challenges we need to first agree on the goals of the RF banking and finance industry. Here is a list of goals as we see them at LARIBA.
A. Agree on a simple and easy-to-understand definition of Riba
We need to agree on a simple layman’s definition of riba that can be easily understood and related to by a simple citizen, Muslim and non-Muslim. Based on our studies, at LARIBA, on the history of prohibition of Riba in Judaism, Christianity and Islam, we came up with the following simple definition: “Riba is the act of RENTING money at a price called interest rate.” That is why the Catholic Church used the word “usury” to describe Ribit as the act of paying rent for the use of money. RF Movement must develop behaviour change and introduce methods to educate people that money is a fungible thing. This means that it changes its nature upon using it, exactly like when an apple or a loaf of bread is used (eaten) and that is why money cannot be rented. It can only be a medium of exchange. However, cars, homes and businesses can be rented at a fair market price and not at a price called an interest rate. The real spirit of RF finance is PRUDENCE in investing and not renting money to buy and consume more as the mass media propagates and popular culture follows.
B. Mark-to-market discipline
At LARIBA we use the discipline pronounced by Prophet Muhammad (pbuh) regarding marking goods and services to market as we learn from the well-known story of the Bilal (r) and the date palms of Khyber. The prophet prohibited Bilal from exchanging large number of inferior quality dates with small number of superior quality dates as the transaction tantamount to riba. Instead, the prophet (pbuh) advised Bilal to sell the inferior quality dates and use the proceeds to buy the superior quality dates. At LARIBA, we call this Marking-to-Market discipline. This discipline, when applied, can remove the concept of indexation to LIBOR or current mortgage interest rates in the market and other reference interest rates from our operations at RF banks. Cars, homes, businesses and equipment can be easily marked to local markets: for a car, it is its market rental rate, and for a house, it is its market rental/ lease rate. The goal then becomes gauging the prudence of the investment based on the rate of return of the venture calculated by using the actual prevailing market rent or lease rate and not just using an arbitrary index, which implies the renting of money, i.e. riba. This rule has been another reason why the finance portfolio at LARIBA has demonstrated superior results. Our non-performance rate has been 1/10th the USA national average. The simply rule is investing prudently without renting the money, and applying the Markto-Market rule.
C. Develop and popularise model for RF lifestyle for all people (Al Naas)
We encourage all participants in the RF banking domain to develop a model and living example of an RF Lifestyle that can be popularised to become a model lifestyle for people of all faiths (Al-Naas used in the Qur’an to mean the masses) using the intelligent and educated means of mass media. The main goal is to promote living within one’s means, not to indulge in borrowing, to conserve and not to over consume, to value people based on who they are and on their abilities and contributions and not what they wear, the car they drive etc. Here are some ideas:
1. Popularise riba to be more than just the removal of interest or the documentation of a Shari’a compliant contract–which are important, but as a lifestyle which includes moderation in consumption, living with the least debt possible and the subscription to a value system that respects content and not appearance. The average consumer should see an example in RF banker– as an example of thrift and humbleness.
2. Focus on retail financing of community and small business needs. Acceptance of RF banking by the public is needed for its sustained growth and continuation:
2.1. Clearly define the real added value of dealing with RF institutions and using the RF disciplines. Consumers want better service, better treatment, bankers that understand their needs, bankers that care for them and bankers who offer a lower cost service. RF banks can do all of this by training their RF bankers as investors and not as renters of money, and as providers of services with the objective of minimising one’s debt or removing it as practical as possible and not selling loans as is done by conventional banks.
2.2. Prepare an intelligent and well-designed mass media campaign to educate women of all ages – from childhood to motherhood, about the harm of dealing with riba. In a research conducted by LARIBA, it was concluded that over 75% of the users of RF banking services in the USA come from South Asia (from India, Pakistan, Bangladesh and surrounding countries). When asked about the reason for opting this proposition, many of them confessed it is because of their upbringing and teachings from their mothers.
2.3. Educate the public about the harm of using credit cards. In fact the original name for these cards when they were mass-introduced in the USA in the 1960’s was
“Charge Cards” meaning a card that can be used to facilitate transactions for the consumer. When the card was innovated, the user was expected to pay back within a month without interest. Now that the industry has changed its name to “Credit Card”, one can use it as a tool for “instant” borrowing. This credit card became the ultimate tool for renting money at very high rental rates (interest) to those with consumptive instincts, peaked by well-designed and massive advertising campaigns. Many banks realise huge income from these credit cards. RF banks should resist participating in this commotion as it may go against the true spirit of RF disciplines and teachings.
2.4. We need to gauge the RF banks’ “Community reinvestment efforts and record” to ascertain that the RF banks’ deposits are reinvested locally and not sent to other more affluent regions or to overseas investments to benefit others while depriving local communities. This can be done by the central banks publishing on an annual or semi-annual basis, the following data for each bank:
A. The ratio of the amount of financing (credit extended) to the total deposits in the RF bank. This ratio must be over 50%,
B. The ratio of the amount of financing extended locally as a percent of total financing (credits) and investments done in
that year must be higher than 50%,
C. The distribution of loans as to who these loans were given to. The question is: Was it given to the rich and affluent only? The profile of those who banks lend to should be distributed the same way as the demography of the communities RF banks operate in and gather deposits from.
THE REGULATOR should examine these figures to ascertain that the RF bank complies with this and that deposits are reinvested back into the community. This regulation and practice is an important part of the United States bank regulators’ annual examination of its banks Adopt RF monetary discipline together with RF monetary theory The objective here is to develop a monetary discipline that will offer an alternative to the current monetary system which is based on fiat money. The main goal of this discipline is to define the real value of goods and services based on a basket of precious metals, natural resources and staple food products of the country involved as was originally used by Prophet Muhammad (pbuh) to define a fair value of local fiat currencies’ exchange rates. LARIBA started a research program to make modern monetary sense of a well-known Hadith by the Prophet (pbuh) regarding equal and hand-to-hand exchange of commodities such as gold, silver, barley etc. This research was initiated as a result of our original in-depth research about the prohibition of Riba/Ribit in the Torah, the Bible and the Qur’an.
THE CONCLUSION OF THIS RESEARCH was that Islam came to reinforce the prohibition, pronounced in the Torah and the Bible, of taking advantage of the poor and the needy through the use of loans given by the rich. In fact Islam discourages all kinds of loans (Qard meaning a bite) except one loan which the Qard Hassan (benevolent – interest/riba-free loan.) Further research indicated that the real historic and revolutionary contribution of Islam was the development of a fair and well rooted system for financing commerce and business that is interest-free.
AS IT IS KNOWN HISTORICALLY, Moses (pbuh) and Jesus (pbuh) were commissioned in the ages of slavery and agrarian societies; and when the prophet Muhammad (pbuh) was commissioned international commerce was flourishing with trade caravans and business markets _ with Mecca being the major trade centre. The challenges during this time were:
1. To devise a system that would allow caravan managers to grow their business without borrowing with interest using the joint venture concept pioneered in Islam and later used in Jewish communities (called Hetor Iska in the Talmud).
2. The other challenge was to fair calculation of profit and loss of trade using different local currencies such as of Ethiopia, China, India, Persia and countries in the Roman and Byzantine empires.
OUR RESEARCH concluded that this might have been the real motivation of what we call the hadith of the prophet Muhammad (pbuh) for commodities in order to set fast and firm standards and reference of pricing discipline in order to normalise the value of the trades using these commodiy-based standardised currencies. LARIBA’s RF Commodity Indexation Discipline normalises prices away from paper/fiat currencies like the dollar and the euro. To examine this, let us assume that a Qard Hassan (benevolent loan) of US$100,000 was given in 1971. The agreement to repay can be expressed in one of the following options:
A. Pay it back in US$ the amount of US$100,000 in 2012, or
B. In case the country is a rice producer ONLY and relies on rice as a reference currency, pay it back in the same amount of rice (or a basket, of the basic pricing commodities based on the Hadith of the prophet on commodities). If we do it in rice then US$100,000 would buy, in 1971, a total of 18,868 hundred weights of rice (rice in 1971 was selling for US$5.30 for hundred weights of rice.) That is; based on this agreement the Qard Hassan when paid back in 2012 will be the exact amount in rice or 18,868 hundred weights of rice (rice price reached approx. US$15 a hundred weights in 2012.) This is equivalent to US$283,000.
C. In case the country uses gold as a reference standard for currency, pay it back in the same amount of gold. If we do it in gold then US$100,000 would buy in 1971a total of 2857 ounces of gold (gold then was priced at US$35 per ounce.) That is; based on this agreement the Qard Hassan when paid back in 2012 it will be paid back in the exact amount in gold or 2857 ounces of gold (gold price reached US$1,700 an ounce in 2012.) This is equivalent to US$4.85 million.
IN TODAY’S ECONOMY, countries produce a basket of basic commodities that varies from country to country. A research program by LARIBA introduced an algorithm that defines the real value of local currencies based on local production of food staples and natural resources instead of tying these currencies to a major fiat currency like the dollar, value of which is defined by a completely different matrix of commodities that relate to the local US economy. We proceeded to apply this Commodity Indexation Discipline to study prices in the USA for homes, crude oil, food commodities, natural gas and even the stock market in terms of the reference commodities based on the said Hadith of the prophet (pbuh), and here is a summary of the results: When paper/fiat money is normalised in terms of pricing
commodities economic bubbles can be readily identified ahead of time and remedial actions can be taken to avoid participating in or help in taking advantage of these bubbles. We could identify the housing bubble in America starting from the 4th quarter of 2005 to 2006 when the overpricing started to give way, before it burst. This rule, helped many of our customers NOT to purchase homes at the peak prices in the US housing market in Arizona, Nevada, Massachusetts, Washington DC, and northern California. In fact, based on this RF Commodity Indexation Discipline, back in 2008, we projected that the housing bubble would last for 5 to seven years and issued our recommendation to buy homes then. It is interesting to note that the housing market in the US has recovered in mid-2013 as the RF discipline has projected. In fact because of the bubble, the level of housing finance in the bubble period declined at LARIBA and started to rise sharply in response to our call to start buying. Using the same approach described above, we could also identify the fair value of crude oil in the market and identify if current prices of gold or crude oil are fair prices based on the market forces of supply and demand or are hyped through speculation in the commodities’ futures and options markets. We believed since 2012 that the next bubble to burst will be gold and have made it public that we think that the fair market value of gold is between US$850 and US$1000 per ounce and that the oil price may range between US$65 and US$80 a barrel in the next two to three years (that is; 2014 to 2016). This projection has been fulfilled in the sudden decline of oil
prices in the fall of 2014.
We also discovered that after taking the effect of fiat currencies away from pricing food commodities, the agricultural food commodities prices declined precipitously after the closing of the gold window in August 1971. Despite higher agricultural food commodities prices in US dollar, their value in terms of other commodities like gold, silver, wheat and rice have declined precipitously and stayed low and fluctuating to reflect the forces of supply and demand. This explains the reason why farmers have deserted their farms to live in the cities. These farmers also helped train and educate their children to enable them to leave the farm and become city dwellers. It is also interesting to note that the price of one food commodity (say rice in terms of wheat) reflected the real exchange value of two staples as prices fluctuated around a mean channel that defined the forces of supply and demand.
The way forward:
It is believed that the most pressing challenge to RF Shari’a scholars and bankers in the 21st century is to develop a comprehensive RF monetary system that will be the foundation of fair pricing in the market place and a central bankers’ tool in the stabilisation of local currencies and their exchange rates on the international foreign exchange markets. Isn’t it time we use this beginning as a foundation to start comprehensive research in the areas of Shari’a and implement the RF monetary system?