The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

547 Pages·2014·9.23 MB·English

The Art of RF
(Riba-Free)
Islamic Bankingg
aanndd FFiinnaannccee
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The Art of RF
(Riba-Free)
Islamic Bankingg
aanndd FFiinnaannccee
Tools and Techniques for
Community-Based Banking
Second Edition
YAHIA ABDUL-RAHMAN
Cover image: ©Exotica.im/Getty Images; bottom: ©Dimitri Otis/Getty Images
Cover design: Wiley
Copyright © 2014 by Yahia Abdul-Rahman. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
The First Edition of this book was published by John Wiley & Sons, Inc. in 2010.
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Library of Congress Cataloging-in-Publication Data:
Abdul-Rahman, Yahia, 1944-
[Art of Islamic banking and fi nance.]
The art of RF (Riba-Free) Islamic banking and fi nance + website : tools and techniques
for community-based banking / Yahia Abdul-Rahman. — Second edition.
1 online resource. — (Wiley fi nance)
Includes index.
First Edition of this book was published by John Wiley & Sons, Inc. in 2010.
ISBN 978-1-118-77096-2 (cloth); ISBN 978-1-118-77115-0 (ebk);
ISBN 978-1-118-77090-0 (ebk)
1. Banks and banking—Islamic countries. 2. Banks and banking—Religious aspects—
Islam. 3. Finance—Islamic countries. 4. Finance—Religious aspects—Islam. I. Title.
HG3368.A6
332.10917′67—dc23
2014021659
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
CCoonntteennttss
Preface to the Second Edition vii
Preface: My Story with RF (Islamic) Banking
and Finance in America xiii
Acknowledgments xxix
About the Book Cover xxxvii
CHAPTER 1
Introduction 1
CHAPTER 2
The Faith-Based Judeo-Christian-Islamic Foundation of the Prohibition
of Interest and the RF (Riba-Free) Banking System 15
CHAPTER 3
The RF Valuation Disciplines of Commodity Indexation and Marking
to the Market 55
CHAPTER 4
The Law: The Judeo-Christian-Islamic Shari’aa 75
CHAPTER 5
Money and Its Creation: The U.S. Federal Reserve System
(Central Banks) and Interest Rates 101
CHAPTER 6
Towards an RF Monetary Discipline: The RF Commodity
Indexation Discipline 137
CHAPTER 7
Civility and Social Responsibility of the RF Banking System 179
v
vvii CONTENTS
CHAPTER 8
The Conventional Riba-Based Banking System 207
CHAPTER 9
Comparing RF Banking and Conventional Riba-Based Banking:
What Is the Difference? 247
CHAPTER 10
RF (Islamic) Banking in the Twentieth Century 261
CHAPTER 11
RF Banking Model for the Twenty-First Century:
The LARIBA RF Model 285
CHAPTER 12
Putting the RF Finance Movement and Discipline Together 345
CHAPTER 13
Starting an RF Bank in the United States 361
CHAPTER 14
RF Capital Markets 399
CHAPTER 15
Case Studies 431
CHAPTER 16
RF Credits (Loans) in Contrast to Types of Riba-Based Loans 449
CHAPTER 17
The RF Approach to Handling Troubled and Nonperforming
Credits (Loans) 463
CHAPTER 18
Visions for the Future of RF Banking 471
CHAPTER 19
RF Banking: A New Banking Brand for the Twenty-First Century 483
About the Companion Website 487
Index 489
PPrreeffaaccee ttoo tthhee SSeeccoonndd EEddiittiioonn
I
n 2009, John Wiley & Sons called me, stating that they were looking for
an American to author a book on RF (riba-free) Islamic fi nance and bank-
ing because most books authored on the subject, until then, were in fact
authored by authorities who live outside the United States. I welcomed the
idea. The Art of Islamic Banking and Finance was published in 2010. I am
thankful to all those readers who chose to buy the book and who were kind
enough to critique and rate the book on Amazon.com.
We at the LARIBA RF Movement, are most indebted to God, the Lord
of all people, for creating this opportunity to publish the book, to make it
successful worldwide and to help popularize the RF Movement. This move-
ment aims at inviting people of all religions, nations, and beliefs to live riba
free. This RF lifestyle is a lifestyle that is free of debt, of overconsumption,
of trying to use extravagance and “cool” looks to impress others, and of
thinking that money can be rented at a price called interest by using credit
cards, excessive borrowing, and the equity of one’s home as a source of
extra money to extinguish consumptive spasms created by slick advertising
campaigns. The RF Movement is out to popularize a new RF lifestyle—a
lifestyle that is free from the abuse of credit cards to consume more. It is a
movement that promotes the goal of paying debt as soon as one possibly
can. The movement also entices students, the leaders of the future, not to
take the easy way out by borrowing their tuition using student loans. The
RF Movement promotes that it is better for a student not to borrow money,
fi nd a part-time job, and graduate in six years debt free in contrast to gradu-
ating in four years with the heavy burden of debt.
The second edition includes:
■ Many of the recommendations and feedback that were received from
many of the readers of the fi rst edition. I thank all of those readers who
invested their time to carefully read the book and to communicate their
critiques, valuable feedback, and insightful advices to me.
■ Rearrangements of chapters to present the new ideas that cast a new light
on the RF banking, fi nance, and monetary disciplines presented in the
book for the fi rst time in the history of RF Islamic banking. This, I hope,
will make these RF disciplines and the real added value of applying the
vii
viii PREFACE TO THE SECOND EDITION
RF banking, fi nance, and monetary disciplines crystal clear. For example,
Chapter 5 in the fi rst edition was divided into two chapters—Chapters 5
and 6. In addition, a new Chapter 1 2 was added to integrate and wrap up
all the research fi ndings, the RF disciplines, and the pioneered models pre-
sented in the book and how this integrated process is applied in practice.
■ New chapters added to cover:
■ RF capital markets to include a detailed study of fi nancial products
that were not fully covered in the fi rst edition of 2010.
■ The fi nancing products available in the riba-based conventional bank-
ing and their applicability in an RF domain.
■ How to handle nonperforming loans in an RF setting based on the
10-year RF operating experience at the LARIBA Bank of Whittier
since 2003.
It is hoped that the reader of this second edition will fi nd these additions
enriching and most useful:
■ A set of review questions at the end of every chapter. These questions
can be useful to students if the book is taught at a university campus.
The review questions also will help give an intriguing quick insight
about what to expect to learn by reading each of the chapters.
■ The use of a dedicated website for the book. See the page at the back of
the book for details.
Now to a personal note and some words of advice:
In 2014 at the age of 70, I want to leave a message to the new genera-
tion of RF bankers—Muslims and non-Muslims—before I return to God:
■ Try your hardest; never lose hope, which is a manifestation of believing
in God; and try your best by starting from the idea that it is possible to
achieve what others tell you is impossible.
■ Remember that we, the believers in the RF lifestyle, are not out to dis-
credit nor do away with the riba-based banking and fi nance system.
We are out to offer an alternative lifestyle and system that we hope will
shine when contrasted with the riba-based system.
■ Never give up or feel defeated when you face a setback or if you could
not achieve a dream. You will be criticized by Muslims and non-Muslims
with good intentions and sometimes from people who lack experience
and vision for the future. Never let these criticisms get you down. Listen
carefully and fi x the problems they bring to your attention as much as
you can within the limitations at hand. Never discount the criticism of
others to your work. Always pay respect and close attention to what
others say about your work—good and bad.