facts; nor put down or criticize the competition in order to ‘‘sell.’’
This practice is enhanced by the Shari’aa supervisor and his staff
scanning all incoming and outgoing e-mails and communications to
ascertain compliance with the Law (Shari’aa).Risk Management by Applying the Proper RF Financing Model As indicated
earlier in the book, cost-plus (murabaha) represents the least risky RF
financing model. It is true that the profitability may be limited, and that the
model itself is not accepted by many of the customers looking for RF financ-
ing because it is very close to and resembles conventional riba-based financ-
ing, but it offers a lowest-risk type of investment. The risk grows as we
move from cost-plus (murabaha) to money management (mudaraba), joint
ventures (musharaka), leasing (ijara), and RF financing of future production
(ba’i ul salam).
It is recommended that for the first one to three years of operation, the
RF bank should use the cost-plus (murabaha) approach, as we did in LAR-
IBA for two years. Then you can slowly move into leasing and lease-to-own
joint ventures using the RF LARIBA Shari’aa-based model as discussed in
Chapter 10. To minimize risk during these first two to five years, the RF
bank management should set aside sufficient reserves (ALLL) to allow it to
meet any unexpected nonperformance of the financing activities in which it
is participating.
Risk Management through Diversification of Clients The RF bank manage-
ment should do its best to spread its financing activity throughout the com-
munity without concentrating the financing into a small number of already
successful businesspersons. This strategy will also result in more clients on
the investment side and a bigger pool of referrals. Additionally, the proba-
bility of failure is distributed over a larger number of clients.
Risk Management through Diversification of Sectors of the Economy It is ad-
visable to recruit a viable board of directors for the RF bank. the members
of which represent expertise in the business sectors to be financed by the
bank. In addition, these directors must pledge not to finance their businesses
with the bank to avoid the slightest concern of self-serving or violation of
the U.S. banking Regulation O. It is also important that the RF bank,
through its thorough analysis of economic activity as well as political, finan-
cial, and monetary developments, formulates an investment position on a
quarterly basis, as discussed in assessing the level of ALLL. In this analysis,
attractive sectors of the economy should be identified as well as unattractive
sectors. In this way, the RF bank’s credit policies committee devises an in-
vestment ‘‘pie’’ that allocates the investment of its funds in each sector. The
354 THE ART OF ISLAMIC BANKING AND FINANCE