Chapter 1: The LARIBA Banking System
The contents of this book represent the study notes of Dr. Yahia Abdul Rahman in his pursuit to understand Monetary Theory, Economic Theory, International Monetary Theory, Islamic Banking and Economics as well as The Federal Reserve System of Banking in the US and the World. These studies included references in the above subject matters by Professors Kindelberger, Merklein, Eissa Abdou and Nejatullah Siddiqui as well as the respected scholars like: Dr. Ahmad Al Naggar, Sheikh Yusuf Al Qaradawi and Syed Baqir Al Sadr.
The 1980's witnessed the largest bank failures in the history of the United States.
The deterioration of the savings and loans industry along with the banking industry itself brought about many pressures for the bank and the savings and loans to compete.
Another parallel event was the emergence of the money market accounts, by which checking accounts could earn interest on their deposits.
With the high interest rates prevailing in the early eighties, many banks and saving and loans associations resorted to speculative lending hoping to achieve higher returns and hence pay the money market accounts, the certificate of deposits and savings accounts those high rates prevailing at that time.
When the economy turned from bad to worse and with the recessions of 1987, 1989 and 1990's many of the speculative lending practices were exposed.
Many of the troubled banks and savings and loans blamed the economy to be the real reason for their failure.
It is the author's belief which is based on real life experience, consulting for and communicating with many friends and associates in the banking industry, that the real reason for the failure was the lack of moral responsibility on the part of both the lender (lending officers) and the borrower.
The real honest businessman was deprived the opportunity of getting his/her loan approved only to find the money going to spectaculars with special connections to the loan officers or the bank management.
The result is well known and the damage done not only to the financial markets but also to whole economy will take years to fix.
It is the author's belief that if communities were to flourish again and for the economy to restructure in a fundamental and lasting way, moral community banks should be tried once again.
History shows that such banks (and building and loan societies) were the real locomotives of community developments in the U.S. out of the depression of the 1930's.
That does not mean that the regional and large money center banks have no place in the economy.
Indeed they would be the buyers of the community loan portfolios developed by the community banks.
The step wise approach towards realizing this goal is to create financial institutions which have the capacity of circulating the community savings within the community to activate its economy through financing projects and businesses, and in the process creating job opportunities for the community members and others.
The bank would be an honest-to-goodness community development bank which makes money available for non-speculative and economically productive schemes.
This is essentially the foundation upon which the concepts of LARIBA (Islamic) banks are built on.
These concepts are much needed in every part of the world.
And because the LARIBA system originated in the Islamic doctrine it becomes the responsibility of the Muslim communities in America and the West to provide a living example of such a system.
If successful, it will present America and the world with an important contribution towards the happiness and prosperity of all people, Muslims and non-Muslims.
And the result would be a closer society which harmonious in its relationships, fair and moral in its dealings, and most productive because it was done right.
This book addresses the LARIBA (Islamic) Banking system.
When we describe the Islamic Bank as a LARIBA Bank, we mean the bank which follows the LARIBA Islamic system.
Many translate RIBA as interest (The word LARIBA consists of two parts "LA" which means No and "RIBA" which means to grow, connotating the concept of money growing just because it is lent out regardless of the purpose of lending it.
The LARIBA system is a development banking system at heart).
We define LARIBA as a system which involves the creation of money (monetary system), the creation of credit (banking and financing) and the total economic system (collection of Zakah, distribution of inheritance, and most importantly savings).
The contents of the this book are based on the author's practical experience accumulated through the start up, organization and development of American Finance House-LARIBA in Pasadena, California since 1987, in addition to the author's experience in interacting, consulting and doing business with many Islamic banks world-wide.
It is our hope that this preliminary effort will be the beginning of a series of in-depth writings on each of the concepts discussed in this book.
In conclusion, we ask Almighty God to accept this effort and to forgive us any unintended errors or misconceptions of His system, the LARIBA system of banking and finance.