THE LARIBA RF FINANCE MODEL
FATWAS AND SHARIAA FOUNDATION
The LARIBA Model is based on the Al-Baraka model of financing which has received a series of
Fatwas from several acknowledged and internationally renowned Shari’aa scholars including - -
Sheikh Dr. Yusuf Al-Qaradhawi; Sheikh Al Siddiq Al-Dharir,
Sheikh Mustafa Al-Zarqa, Sheikh Dr. Abdullah bin-Sulayman Al-Manee,
Sheikh Dr. Muhammad Sulayman Al-Ashqar; Sheikh Abdul-Sattar Abu-Ghuddah, and others.
LARIBA has improved on the Al-Baraka Model and has obtained a Fatwa on its application of
the enhanced model from Darul Hikmah, a US-based Judeo-Christian-Islamic Law (Shari’aa)
consulting firm. The following is a summary of the Fatwas.
Three Fatwas were issued, two Fatwas in October 1990 and a third in February 1994.
In October 1990, 5-9 Sha’baan, 1410 AH (“6th Seminar of Al-Baraka”.) The seminar covered the practices of Al-Baraka Bank, London,
including issues raised by the business and banking environment within which the Bank has to operate which are perceived to be similar
to the USA. The goal of this review was to find appropriate Shari’aa solutions to said issues.
The committee of scholars in this 6th Seminar included the following, after appointing Sheikh Abdul-Hamid Al-Sa’ih as Chairman, Dr. Sami Homoud
as Secretary, and Dr. Abdul-Sattar Abu-Ghuddah, as Assistant-s-Secretary:
- Sheikh Abdul-Hamid Al-Sa’ih.?
- Dr. Abdul-Sattar Abu-Ghuddah.
- Dr. Muhammad Al-Mukhtar Al-Salami.
- Dr. Yusuf Qasim.
- Dr. Yusuf Al-Qaradhawi.
Special circumstances prevented Dr. Al-Siddiq Muhammad Al-Amin Al-Darir from participating in the seminar deliberations. However, he sent his suggested answers
to the paused questions, which answers were distributed to all participants along with the other seminar papers.
The following are the issues addressed in that Seminar:
- Question: Is it permissible to use of the term “interest” instead of the term “profit” or “rate of return”, without meaning in fact the essence of interest,
to benefit from the financial advantages granted by the relevant authorities in the West to interest payments in the cases of deposit and financing?
Fatwa: The committee, after reviewing some of the legal benefits that the British tax system gives to paid and received interest in bank dealings,
determined that applying the Shari’aa principle that that states “what matters in contracts are intentions and substance – not words and forms” – the committee
reached a consensus that there is no objection to using the term “interest” as an alternative to the term “profit” or “rate of return”. This opinion is based on
the view that what is intended here is not to effect Riba, which is forbidden in Shari’aa. In this regard, it is imperative to ensure that the term
“interest” in the sense described above is used only in the forms required by entities other than the bank, e.g. tax declaration forms for depositors, or special
forms used in various financing cases.
- Question: Contract Language. What is the ruling in Islamic Jurisprudence regarding the use of a Declining Musharaka Model for Home financing with
certain contract language that allows for-- mutual possession of real estate; expression of ownership in terms of shares with an agreed upon value set at the
inception of the contract; Ownership of the property is transferred gradually to the buyer over the agreed-upon period; buyer pays the bank a rent corresponding
to said usufruct. This rent is labeled “profit” in the contract, and its amount is determined by the Bank’s share in ownership.
Fatwa: the participating scholars discussed the method of financing homes and real estate followed by Al-Baraka Bank, London, in light of the Laws governing
this type of transactions. The scholars recognized the need for Muslims to own appropriate homes to meet their needs. After a long discussion of those topics,
the scholars reached the following consensus:
- That registering the home’s title in the partner’s name, based on trust, from the inception of the contract is permissible under Shari`aa.
- Making the partner alone responsible for costs of the jointly owned property from the inception of the contract, is permissible if the partners agreed accordingly.
- Although insurance should be shared jointly, the bank may take that into consideration when determining the rental of its share of the property to include appropriate
compensation for the appropriate share of insurance costs.
- Since the regulatory framework prevents the Bank from sharing in the profit and loss when the joint venture partnership is dissolved, the model should be altered such that --
- The Bank and the customer share in purchasing the home according to the agreed-upon proportions.
- The Bank sells his share in the physical property ownership (milk al-raqabah) to its partner, while retaining his share of ownership of its usufruct (milk al-manfa`ah)
until the time its partner pays the remaining portion of the price.
- The Bank collects an annual rent in accordance with the actually paid portion of the property’s price.
- If the partner is delinquent in paying the installments for which he is obligated, the Bank has the right to keep the sale agreement intact, and collect its right
to the remaining portion of the price according to the obligatory performance clauses of the lien; or the Bank may void the initial sale and take full ownership the property
if the partner agrees.
In February 1994, (5-7 Ramadan 1414 A.H.) another seminar held - - The Third Jurisprudence Symposium on Contemporary Banking Issues, (“3rd Symposium”). The following scholars
participated in this symposium:
- Sh. Dr. Ahmad `Ali `Abdallah.
- Sh. Dr. Al-Siddiq Muhammad Al-Amin Al-Darir.
- Sh. Dr. `Abdul-Sattar ‘Abu-Ghuddah.
- Sh. Dr. `Abdullah bin-Sulayman Al-Manee`.
- Sh. Dr. Muhammad Sulayman Al-‘Ashqar.
- Sh. Dr. Muhammad Al-Mukhtar Al-Salami.
- Sh. Mustafa Al-Zarqa’.
- Sh. Dr. Yusuf Al-Qaradhawi.
The following issue of concern was discussed:
Question – Permissibility of establishment of pro forma contracts, or formation of sister or branch special purpose entities to benefit from tax advantages given to Ribawi interest.
FATWA ABOUT LARIBA MODEL AND PRACTICES
- Islamic banks should be wary of writing pro forma Ribawi contracts to benefit from tax or other advantages legally offered to Ribawi interest.
- There is no harm done if Islamic banks use language in their financial statements to explain the nature of permissible profit. For instance, the Bank may say that [such profit]
is “the Islamic alternative for interest in the Ribawi system” or that “it is the return on investment” if such language will allow them to benefit from the tax advantages offered by
By: DARUL HIKMAH, Virginia, USA
The LARIBA model improved on the original Al-Baraka model to apply the two important concepts from the teachings of Prophet Muhammad (PBUH) which are - -
the Commodity Indexation Discipline and the Marking to the Market Discipline, as well as to clarify the order of steps of the model which grants to customer
the Right of Ownership (Milkul Raqabah) from the beginning of the transaction. For more information on these disciplines please consult Dr. Yahia Abdul-Rahman’s
text book: The Art of Islamic banking and Finance, Published by John Wiley & Sons, Inc. in 2010. The Model specifies that the Right of Usage (Milkul Manfa’aa)
will be jointly held by both LARIBA and the client proportionate to their share of the property, evidenced by the operation of a lien by LARIBA.
In 2012, Dar Ul Hikamh issued its Fatwa of the LARIBA model validating its roots in the Al- Baraka Model and confirming the permissibility of the improvements/enhancements
The Chief Scholar of Darul Hikmah is Sheikh Dr. Mohamed Adam Elsheikh. Dr. ElSheikh graduated with honors from the faculty of Shari’aa and Law, Omdurman Islamic University,
Sudan, in 1969. He also holds a Master Degree in Comparative Jurisprudence (MCJ) from Howard University in Washington DC, an LLM (Master of Laws) from National Law Center
at George Washington University in Washington DC, and a Ph.D. in Comparative Jurisprudence from Temple University, Philadelphia Pa. Among his most notable experiences
and achievements are – serving as a Judge for the Shari’aa Courts in Sudan, serving as an Imam of Dar Ul-Hijra Masjid in VA, and serving as the Secretary General of
the Fiqh Council of North America, and the Head of the Judiciary Council of the Sharia Scholars Association (SSANA ).
SHARIA SUPERVISION LARIBA has instituted a
Shari’aa Compliance/Supervisory function whose role to review the day-to-day compliance of the activities of the company.
This function is currently overseen by Dr. Yahia Abdul-Rahman who serves as our Shari’aa Supervisor, assisted by a number of other scholars who serve as advisors.
Dr. Yahia Abdul-Rahman has worked with Al-Baraka group in different capacities including the development and implementation of Al-Baraka model. He authored a renowned
book titled – The Art of Islamic Banking and Finance (Wiley Finance 2010; Second Edition will be out in January 2015) in addition to another earlier book: LARIBA Bank published in 1994.
Please note that it is not our policy, discipline nor practice to market our services based on our Fatwa or Scholars. It is our belief that our explanation of the model,
our practices and your own reasoning and understanding should guide your choice of which organization best suits your beliefs.