CHAPTER
10RF Banking Model for the
21st Century
Developing the Shari’aa-Based
Finance ModelT
his chapter will detail the unique financing model that we pioneered at
American Finance House LARIBA, which we based on the Law
(Shari’aa) in contrast to the ‘‘Shari’aa-compliant’’ approaches discussed in
Chapter 9. This unique and pioneering model embodies the true spirit and
substance of the RF (riba-free) system.
In 1987, we started a humble effort by establishing LARIBA (American
Finance House). We started our finance operations by using the Cost-Plus
(murabaha) model, because we did not know better. We simply started
with the interest rate of the day, calling it a ‘‘profit’’ index based on opin-
ions and edicts (fatwa) by some of the Islamic finance Shari’aa scholars at
that time. We would calculate the value of the dollar amount to be bor-
rowed and compound it at the ‘‘index’’ (interest rate) to create an equiva-
lent sale price at the end of 15 or 30 years, depending on the term of
financing. The company would agree to sell the house back to the ultimate
buyer at the original price plus a profit element, so that the total cash paid
would be equal to the compounded value arrived at—just as if it were a
regular interest-based transaction.
Many of us were not very comfortable with this approach, despite
the fact that it was sanctioned by most of the well-known Islamic finance
Shari’aa scholars at the time. At this juncture, the value of the educated
and sophisticated believers in the Judeo-Christian-Islamic value system
became useful. The educated and analytical members of the community
objected to the system, because it did not make sense to change names,
use the same exact approach used by riba-based conventional banks, and
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