management has to match the maturities of the TCD portfolio with the RF
bank investment portfolio’s (loan portfolio in riba-based banks) maturities.
It is also important to know that the RF bank management, represented by
the chief operating officer COO, the chief financial officer CFO, the bank
treasurer, the chief credit officer, and the credit department, evaluates the
expected return on a TCD investment that is matched to the credit (loan)
portfolio in light of the bank’s operating expenses, allowance for loan losses
(ALLL), the average return on investment of the portfolio, the duration
of the portfolio, and maturities, in addition to the rates offered by the
competition.
This particular investment product is also very challenging because of
two important limits and compliance requirements, which need to be met
by any bank in the United States. These are the full disclosure of the (im-
plied) interest paid to the TCD investor with different maturities and the
penalty charged for early withdrawals.
The solution to this challenge depends on both sides of the financial
ledger. On the assets side, the RF credit portfolio is constructed such
that the implied interest rate (based on the actual market rental rate of
the property or service, using the LARIBA RF Shari’aa-based model de-
scribed earlier) is indexed to the rate by which the government declares
the Fed Funds rate. That way, every time the Federal Reserve changes
the rate, it reflects—in most cases, every quarter—the implied interest
rate on the TCD is changed. On the RF TCD side, we offer our custom-
ers maturities that range from three to twelve months, and we discour-
age longer maturities so that we may comply with Shari’aa, which
prohibits fixing returns in advance for a long time. In this case, the rates
of return (the implied interest rate on the financing facilities) and the
profit paid to the RF TCD holder (interest on CD in riba-based banks)
are adjusted in sequence to avoid any violation of Shari’aa or of the
strict U.S. banking regulations. As the RF banking industry matures and
is accepted by both the regulators and the customers, a variable income
TCD can be offered.
The rate of return on investment for RF TCD is calculated using two
important guidelines:
1.Competing rates offered in the market by all competing riba-based con-
ventional banks:The objective here is to make sure that the returns on
investment/profit sharing given to the RF investor for investing in an RF
TCD are at least the same return as (and hopefully more than) the riba-
based returns paid by conventional banks.
2.The profit distribution from the portfolio:We ensure that the distribu-
tion is fair as disclosed to the customers.350 THE ART OF ISLAMIC BANKING AND FINANCE