4.Draws up an agreement with the family that complies with the RF fi-
nance legal requirements.In this agreement, the family acts as the agent of the RF bank to buy the
car. The transaction is structured such that the family would own 6,000/
30,000, or 20 percent, of the car, and the RF bank would (temporarily)
own 80 percent of the car. The family agrees to buy the bank’s share of the
car for the same value, or $(30,0006,000=) $24,000. This way, the bank
does not own the asset (as based on Shari’aa) and is in compliance with the
U.S. banking rules and regulations. The family, based on their cash flow,
agrees to pay back the bank’s share, interest-free over a period of (for exam-
ple) three years, or $8,000 per year. This is called theReturn on Capital
(RonC). In lieu of the promise to pay backRonC, the family gives the RF
bank a lien on the car. In lieu of the joint ownership of the right (perfected
by the lien) to use the property, the family and the RF bank divide the
income from the lease among themselves in the (changing) proportion of
unpaid capital.
The family and the RF banker independently survey the market to find a
fair leasing rate for a similar car in the same market. They negotiate a fair
lease and agree to it. Here, the lease is divided between the family (20 per-
cent in the beginning, rising to 100 percent over three years) and the bank
(80 percent in the beginning and declining to 0 percent over a three-year
term). This is called theReturn on Capital (RonC)for the RF bank. The
proprietary computer program developed by LARIBA is mechanically not
much different from a regular amortization schedule. The difference is that
the variable in the LARIBA program is the car lease rate defined by the mar-
ket, while the riba-based amortization schedule uses interest rate—the
rental rate of money—as an input parameter. In other words: In the riba-
based conventional banking model, the unknown is the monthly payment.
In the RF banking service, the monthly payment is calculated based on the
lease rate using the declining equity model, and the unknown is the rate of
return on investment.
The family and the RF banker, in order to satisfy the laws of the land,
sign a promissory note that documents the repayment of the debt (dayn—no
time value of money) and the declining lease rate in a total monthly pay-
ment. To comply with the laws of the land, the RF banker plugs in the
monthly market measured and agreed-upon rent of the facility representing
the lease rate, the purchase price, the down payment, and the number of
years to pay back into the LARIBA proprietary computer program. The
program calculates the rate of return on investment, which is called in the
RF system ‘‘implied’’ interest rate. This rate is disclosed to the client to com-
ply with the ‘‘truth-in-lending’’ Regulation Z.
284 THE ART OF ISLAMIC BANKING AND FINANCE