world. Prior to its enactment, banks lent money at a purportedly low inter-
est rate, but they would charge a number of additional fees that, if added
up, would result in a much higher implied interest rate. It was imperative to
legal experts and regulators to create a standardized ‘‘yardstick’’ by which
the consumer could compare various banks’ offers to finance his/her needs.
That was the motivation behind Regulation Z, which requires that when-
ever money changes hands between two persons or entities, the return real-
ized should be expressed in terms of an ‘‘implied’’ interest rate, and that in
calculating it, all pertinent fees and costs should be included.
Regulation BB: Community Reinvestment Act (CRA)
The Community Reinvestment Act (CRA) requires banks to define an as-
sessment area that they will be serving. Based on this, the regulators moni-
tor the bank’s lending activities to make sure that:
&The bank’s loan to deposit ratio is at least 50 percent.
&The bank’s loan portfolio has at least 50 percent of its loans extended
to entities in the declared assessment area.
&The bank lends to all segments of the community that reside in the as-
sessment area without discrimination and in a way that reflects the de-
mographic nature of the communities residing in these areas.This is an important regulation that is needed for most, if not all, of the
developing countries of the world, including those which have a thriving RF
banking industry. One of the most important revelations of God to all of us
in all His messages and through all of His messengers, as taught by the
Judeo-Christian-Islamic value system, is to reinvest in the communities to
which one belongs and from which banks gather their deposits. This regula-
tion is very important, because in my travels throughout the world, both in
the developing non-Muslim and Muslim countries, I was sorry to see the
public underserved. The banks collected peoples’ savings and reinvested
them in financing projects that were only short term in nature; most of the
financing was done to facilitate imports-related businesses, rather than
long-term development and strategic projects. I also discovered that in most
of these countries, most banks’ loan-to-deposit ratio is 50 percent or less. If
this happened in a bank in the United States, the bank would be cited by the
regulators for not implementing the CRA and would be required to increase
its financing activity in the community. If the bank did not comply within a
limited time, its license to operate would be revoked.
Another disappointing fact is that banks in many of these countries in-
vest the liquid money left over in their coffers outside the country, which
The Conventional Riba-Based Banking System 179