By
Christopher Harress
If
second quarter results are anything to go by, America’s banks are recovering
nicely. Most made respectable gains and have improved investor and public
confidence in America. However, many people who advocate for changes in the
banking system feel that just recovering from the financial crisis is simply
not enough, and that serious changes must be made to avoid future banking
meltdowns.
Put
simply, the Great Recession was caused in part by banks that advanced credit to
people who could not actually afford the repayments on their homes, which led
to a housing bubble that eventually burst. Beneath the surface, the problems
were toxic mortgages; financial firms acting recklessly and taking on too much
risk; and a mix of excessive borrowing and risk by households and Wall Street
that put the financial system on a collision course with concurrent systemic
breaches in accountability and ethics at all levels, according to a report by
the Federal Reserve.
However,
nearly five years later, banks are still paying huge fines, and they are still
subject to criminal and civil investigations from government agencies, so it’s
hard to see what has actually changed in America’s banking system.
But
don’t worry, there is an alternative.
Islamic
banking is a growing option in America as various Islamic banks pop up across
the country to service those who wish to preserve Shari’aa law or those who
just want to use an Islamic bank. They welcome all customers, and there are
some very interesting features that could make you consider turning to an
Islamic institution before you take out that next loan.
The
underlying principles of Islamic banking are fairness and shared
responsibility. Traditional banks will lend you money if you’re creditworthy,
with little concern about the actual thing in which you intend to invest. A
house, for example, can either be a successful or unsuccessful investment, but
when it loses value, you still owe the bank the same amount of money you
borrowed in the first place, plus interest. Islamic banks, on the other hand,
have more stringent rules and won’t help you invest in something they don’t
consider affordable or a good investment for them. And that’s the key to these
banks: the risk is shared.
This
culture of shared responsibility and willingness to change the banking world
for good has been a goal of Dr. Yahia Abdul-Rahman’s for 45 years.
Abdul-Rahman
is currently the CEO of LARIBA, an Islamic-centric financial institution that
offers interest-free banking, or as he calls it, RF banking, meaning Riba
Finance or responsible finance.
For
Lariba, every transaction is an investment that uses the lease-to-purchase
model.
“We
get the address of the house and ask for three live-market document estimates
of how much would this house rent for if you were buying it as an investment,
and the customer's finance officer does the same,” Abdul-Rahman said. “Then we
use a proprietary model to calculate the rate of return on the investment using
the rent estimates. If the rate of return on investment is higher than what the
shareholders and investors of the house are expecting, then this makes it a
very good investment, and we tell our customer that they’ve found a home that
makes economic sense and we are going to invest with them and we’re going
finance it.”
However,
if the financial models show that the borrower is making a bad investment, the
bank will tell them that it’s a bad economic decision and it will not invest
with them.
The
beauty of the model, says Abdul-Rahman, is that the bank will share the
responsibility in the event of losses, so the borrower is not burdened with all
of the bad debt if the house should lose value. For example, if you own 50
percent of a house valued at $100,000 and the bank owns the other 50 percent,
but then suddenly the house loses 20 percent of its value, you will both lose
$10,000 on your investment rather than you losing $20,000 and still owing the
bank the original loan and interest. However, the strict rules in place and
financial models mean that the bank rarely makes bad investments. The idea for
the consumer is that they will slowly buy their house from the bank over an
agreed-upon period of time at an agreed-upon price without paying any interest.
On the downside for the borrower, however, is that the banks get a share of the
profit, based, again, on the rentable value of the house before the borrower
sells it.
If
you’re in the housing business to make maximum profit and you’ve spotted what
you think is a bargain, then this model may not be for you, but if you’re like
the millions of people who lost money in the housing crash, this may be a much
better and less risky model to consider that can get you on the property market
with just a 5 percent deposit.
In
addition, the bank will not be on your deed for the house, so if a
worst-case-scenario happens to the bank, which seems to happen a lot to small
banks in America these days, you don’t need to concern yourself or worry about
what’s going to happen to the banks' partial ownership of your house. It's
still your house and no one can force you to sell it.
The
underlying message is that the borrower is in a partnership with the bank, so
there are no hidden fees, and the consumer can buy the bank's share of their
home at any moment without any penalty fees.
Abdul-Rahman
came to the United States from Cairo, Egypt, in 1968 with $17 in his pocket, a
fitting start to life in America for someone who likens himself to the
protagonist of "It’s a Wonderful Life," which tells the story of a
banker with a good heart who always tries to do the right thing for the community.
Abdul-Rahman
started Lariba in 1987 but quickly expanded and bought the Bank of Whittier in
California in 1998, which was, and remains, a small bank that only has two
branches. It has been run with what Abdul-Rahman calls the American RF, which
he says allows people to go out and participate in the "American
dream" without over-indulging and renting money by paying interest through
the abuse of "charge cards" --
credit cards and loans.
This
approach has largely worked for Whittier and Lariba. As dozens of small banks
failed during the financial crisis, Whittier spotted it early. In 2006, he
began advising its underwriters to be extremely cautious and tight in its
standards.
Islamic
bank also offer Islamic bank accounts.
“We
look at every demand account or checking account as a trust around our
neck," Abdul-Rahman said. "We cannot use it in lending, it’s a trust.
That’s why you’ll find 15 to 20 percent of our cash in the Federal Reserve,
because these funds are entrusted in our hands by the checking account
holders."