LARIBA

Has the LARIBA Model been approved?

The LARIBA Financing Model is based on Religious Jurisprudence (Fatwa) and Procedures issued by distinguished scholars (Sheikhs Qaradawi and Sheikh Taqi Usmani and others) and documented by one of the oldest Islamic Financial Institutions in the world. American Finance House LARIB is run as a professional Riba-Free and Shari’aa Compliant Islamic Finance company. It is not associated directly or indirectly with any Islamic Center or Organization. We believe that the nature of running a voluntary non-profit business and the political processes and environment involved dictates the independence of an organization like ours, LARIBA. We beleive in the responsibility of NOT using Islamic Centers and Organizations as platforms for business.

What is Interest / Riba?

Interest is the rent of money, and is called in the Islamic Jurisprudence “Riba” and in the Old Testament “Ribbit”. In a Conventional Riba institution the Riba Banker rents you the money at a rental rate called interest. This interest is defined for all markets regardless of the economic environment of the particular market. In a Riba-free transaction the actual market-defined rental of an actual tangible asset or service is charged. This rent differs from market to market depending on the supply and demand of the tangible asset/property being financed. The LARIBA banker in fact INVESTS jointly with the user of funds while the Riba banker LENDS money to the user of funds. In the LARIBA System we FINANCE and NOT lend. The only loan allowed by the Islamic Jurisprudence is a Loan for Good Cause (Qard Hassan) and is given without interest or added value.

There are two types of Riba:

1. Riba Al-Fadl, which is an added charge to the money loaned because of delayed payment, which is definitely PROHIBITED and
2. Riba Al-Nasi’aa, which is a function of the term of financing (number of years to repay the loan.) This form of Riba is used as a foundation for Murabaha Contracts but with the provision that the added value after a certain number of years does not change if the person cannot pay back due to a legitimate excuse.

What is Interest Rate? How is it determined?

Interest rate is the price of money when the Conventional Riba Banker rents it. The Federal Reserve Board of the US or the Central Bank involved defines its level. Government policy makers use it as a tool to manage the economy.

I heard that in your contract you have a term as interest. What does that mean?

We have a very unique and patented system that has captured the admiration of many experts and scholars. While most others take the interest rate of the day and call it rent (Guidance, HSBC), service charge (Gulf and SE Banks) or Index (South Asia, Guidance and HSBC and some Gulf Banks) we do exactly the opposite!

We structure the Musharakah (Join Venture), go out to the actual market to survey the rent of a similar home (documented rents are obtained from 6 different Real Estate Agents - 3 by the customer & 3 by LARIBA) and come up withe Rate of Return on Invested Capital. This way we look at each deal as an investment to check the real economic prudence of investing Allah's trusted money with us. We take this Return and in order to satisfy the requirements of the US Government we call it IMPLIED INTEREST. As part and parcel of the contract we also have the LARIBA Agreement. It states clearly that: Riba / Interest is Haram - Charging & Taking It - and that we call the return - Implied Interest - to satisfy the US Government requirements and Regulation Z (Truth in Lending Law.) We have arrived to this solution because:

It does not expose the Client to having to sign a non-standard mortgage contract. In case of a dispute, the non-standard contract will require lengthy and expensive legal proceedings. By the way, if you read the Guidance Contract carefully, it says that in court the contract will be looked at as REGULAR FINANCING CONTRACT. I wish our brothers & sisters read that contract carefully!
It does not require the name of the company on the title with the customer. We learned from prior experiences with Al-Manzil (United Bank of Kuwait) and I-Hilal (Dubai) and others that if the company closes down, it takes a long time to disengage and a costly legal proceeding. My own cousin had to pay $6000 to release her home title from Al-Manzil and it took her 8 month to clear it! Also, what happens if the company goes out of business? all creditors will try to capture the properties that have the name of the company on the title! That is; the very home of a brother or a sister. All this and the contract says, that it will be treated as a Finance Contract!
We coined new terminology in the Riba-Free Home Mortgages. We use it in our statements and is recognized by the industry. Terms like: Return of Capital - RonC (Pronounced Ronsee) and Return Of Capital RofC (Pronounced Rofsee). In fact, when our investors audit our home financing files they look for the surveys of rents in the market as part of the unique LARIBA financing.
Doing it the way we follow - using standard agreements - assures our brothers and sisters beyond any doubt that they can benefit from tax deductibility. Remember that other contracts, despite admittedly by those who use like Guidance are mere regular finance contracts - had to get an Opinion Letter on Tax deductibility. As you know Opinion Letters can be reversed retroactively any time by the authorities BUT NOT the Mortgage Deduction laws!

So, metaphorically, it is like trying to attend an important meeting and they require that you bring a bottle of wine. So, a Muslim, who is a minority and who is committed to Allah buys a bottle of grape juice & enters. When they ask what it is he says wine. The problem with what is out there these days if that they take the Wine & call it grape juice.

It has been really sad for me & many other brothers and sisters in the "Live Without Riba Movement for All - Muslims & Non-Muslims". Why? Because we thought that we have succeeded in disengaging the Muslims thinking from thinking in terms of Riba/Interest. Unfortunately, through the vast resources of Gulf countries supporting other companies in the US interest/Riba is now used freely.

We shall not compromise because we know that we are trying our best using our own resources to be on the side of Allah & His Prophet (s).

So, what is the difference? What our model is unique about is that it screens out any bubbly market conditions. In N. California a small home may cost $ 1 million but the same home can rent for $2500. So, using the LARIBA Model one can conclude that the return on investment is very low & LARIBA declines financing. That is NOT done by any of the models out there (Guidance & HSBC) WHY? Because they rent money, which is RIBA - Al-Riba Bi Ainihi - but we rent homes based on actual rent.

Please read the model carefully on our site.

How is the LARIBA Model different from Other Models Used by Conventional Riba Banks and Mortgage Companies?

The Conventional Riba Banker and the LARIBA Finance Institution are first concerned with:

1. The ability of the borrower to repay by evaluating income and expenses of the borrower, and
2. The willingness and track record of the borrower to meet their commitments as reflected by the credit reports.

Then the process differs drastically.

For the Riba Conventional, if one qualifies the Banker will need to start by defining:

1. The Amount of the Loan,
2. The Number of Years of Repayment, and
3. The Rent of the Money, called Interest Rate. The profit he makes by renting the Bank’s money to the borrower.

The Conventional Banker inputs the above data in a computer (amortization) program and solves for the Monthly Payment consisting of Repayment of Principal and the interest on the money.

In contrast, the LARIBA Model starts by asking the homebuyer to:

1. Define the location, address and specification of the house they intend to buy,
2. Survey the rent of a similar properties in the neighborhood and come up with three independent estimates from reliable documented sources.

And the LARIBA Finance officer also gets three independent rent estimates for the same house.

This way, the buyer and the LARIBA Finance officer end up with 6 estimates of the rent. They then negotiate what they agree to as a fair rent for the property.

The following is a numerical example that clarifies the differences between the approaches used in riba (conventional) and Islamic financing:

A family wants to buy a house for $300,000. They only have $60,000 of the purchase price. They approach a bank to help them finance the house. The following is a comparison between how the process will likely go in a RIBA Banking setting as compared to Islamic Banking setting:

Riba Conventional Banker:

1. Evaluates the application form.
2. Concludes that the family derives a good income and that they have a good balance sheet. Also, the banker finds that the family cash flow can help them pay for a larger house or even to take a bigger loan without putting the $60,000 down,
3. Decides to lend the family at a certain interest rate over a period of time.
4. The repayment period defined by the banker can even be longer than necessary because the banker wants to help improve the family’s surplus cash flow. In fact, it also helps the bank derive more interest income from a good qualified family as the loan repayment is extended.
5. In fact, the banker may convince the family to buy a bigger and more equipped house. This is because the higher amount will represent a small addition to the monthly payment and it will be taken care of by prolonging the financing period (term of the loan).

Islamic LARIBA Banker:

1. Evaluates the application form.

2. Concludes that the family derives a good income and that they have a good balance sheet and good tax returns. In addition, the banker finds that the family cash flow is enough to cover the monthly payment for the house purchase.

3. Calls around to ask with real estate agencies such as Century 21, Caldwell Bankers the utility value of the home measured by the lease/rental rate.

4. Draws an agreement with the family that complies with the Islamic Finance legal requirements. In this agreement:

4.1. The family would own 60,000/300,000 or 20% of the house (20,000 shares at $1 per share) and the LARIBA Bank/Finance Company would (temporarily) own 80% of the house (240,000 shares at $1 per share.) In the same agreement the family agrees to buy the bank’s share of the car for the same value or $(300,000-60,000=) $240,000. This way the bank does not own the asset that complies with banking rules and regulations. The family, based on their cash flow agrees to buy the shares owned by LARIBA at the $1/share price and pay back the bank’s share interest free over a period of 30 years or $80,000 per year. This is called the Return OF Capital.

4.2. The family and the Banker, independently, survey the market to find a fair leasing rate for the house. They negotiate a fair lease and agree on it. Here the lease is divided between the family (20% in the beginning and rising to 100% over 30 years) and the Bank (80% in the beginning and declining to 0% over 30 years term.) This is called the Return ON Capital for the Bank.

4.3. The family and the Islamic banker, in order to satisfy the laws of the land, sign a promissory note, which documents the repayment of the debt (no time value of money) and the declining lease rate in a total monthly payment. In order to comply with the laws of the land, the Islamic banker inputs the monthly payments representing the lease rate and the Return of Capital into a conventional amortization schedule to figure the “implied” interest rate. This rate is disclosed to the client in order to comply with the “truth-in-lending” disclosure laws.

Please note that the resulting “implied” interest rate is not uniformly the same. It differs from one home and/or geographic location to another and it differs based on the leasing rate in the relevant market.

In the LARIBA Islamic Banking environment, the Islamic LARIBA banker encourages the family to pay their home off as fast as they possibly can in order to reduce the burden of debt on the family’s cash flow and free more money to save for the future.

Is the Interest Word used in any of the documents?

Yes. We use “implied interest”, which is calculated based on the actual house rent. It is used to satisfy the Mortgage disclosure regulations and laws. It is also used in order to document the process in order to allow the buyer to claim the mortgage tax deduction. In addition to the traditional financing documents, a LARIBA Agreement is used. This LARIBA agreement discloses that Riba (interest) is PROHIBITED in Islam, that the monthly payment was obtained on the basis of lease-to-purchase model and that the word interest is used to comply with the rules, regulations and laws of the United States Government. This approach has been approved by the TOP Islamic Finance Shari’aa scholars in the world and is documented.

Is the LARIBA contract the same as that of a Conventional Riba Bank?

The documentation of a home purchase is a standardized system developed in the US since 1920’s and is the most sophisticated and government regulated in the world. In the interest of all parties and in the requirements of US government authorities LARIBA transforms its Model based on property rental into a traditional mortgage but with the explanation of how the monthly payment was calculated.

This is done in the PATENTED LARIBA Agreement, which indicates clearly how the monthly payment was calculated based on rental value and that interest is HARAM and is prohibited, and that this is done in order to satisfy the requirements and laws of the US. This also allows the buyer to benefit from tax deductibility.

Is the Only Difference in the LARIBA Contract is replacing the word “RENT’ for “Interest.”

NO. In fact, we do exactly the opposite. We take the monthly payments based on the rental of the property and call it “implied interest” and the documented file includes an agreement called the LARIBA Agreement, which clearly indicates that Riba (interest) is Haram and that we use it in order to satisfy the rules and regulations of the US government

Does LARIBA Actually Own the Property? If “not” how can they charge “rent.”

The LARIBA Model is based on the two entities; the buyer and LARIBA, conceptually buying the house jointly. Then the buyer, out of his own will, buys the shares of LARIBA back at the same price but the price is paid, WITHOUT INTEREST, over a 30-year period (or less). The shares are used as a collateral and are released every month with the repayment of the value of the shares. As long as LARIBA conceptually owns the shares in its name (as expressed as a lien on the property – Milk Raqabah) then it is entitled to receive a proportion of the rent in the percent ownership level.

What are the Relationship Between LARIBA and Freddie Mac / Fannie Mae? Does LARIBA sell its client’s loans, like in case of Freddie Mac / Fannie Mae or other Banks?

Freddie Mac (and Fannie Mae) was originally initiated by the US Government to provide liquidity to the housing market, which is a very important backbone of any economy. Building and selling homes has been the locomotive of growth of many associated industries like cement, bricks, tiles, paints, electric wiring, carpets, appliances, furniture, gardening,.. etc. Freddie Mac usually provides a line (an authorized total amount of money to be used by the finance company) for its approved finance/mortgage companies.

In April 2001, LARIBA was the FIRST Islamic Finance Operation in the West to be approved for investing Freddie Mac’s money using the LARIBA Islamic Home Finance Model. In 2002 LARIBA became the ONLY US-Based Shari’aa Compliant Riba-Free Finance Company to be approved by the largest mortgage investor in the world, Fannie Mae. We thank Allah for these historic achievements and the dedicated quality work of all LARIBA Professionals.

LARIBA DOES NOT BORROW MONEY FROM FREDDIE MAC / FANNIE MAE NOR SELL LOANS. Freddie Mac / Fannie Mae is an investor in the LARIBA Financed Homes. Every single home is presented to Freddie Mac / Fannie Mae on line for approval or disapproval. If approved, LARIBA would forward the money from its own funds to purchase the house and is paid within a week or less by Freddie Mac / Fannie Mae. LARIBA does not charge Freddie Mac / Fannie Mae interest for using the money during that week’s time.

How Much Down Payment is required?

We expect as low as 5% of the purchase price of the property.

I heard that if Down Payment is below 20% Special Insurance is required. Is insurance allowed in Islam?

If the down payment is below 20% a Private Mortgage Insurance (PMI) is required by US mortgage industry practice and regulations.

Insurance is NOT haram if done according to Shari’aa. Insurance companies (also called Takaful, which literally means mutual support) are required by Shari’aa to be in the form of cooperatives and they exist in the West as Mutual Benefit Insurance Companies and that the premium collected from monthly payments are invested according to Shari’aa.

In Mutual Benefit Companies, the premiums paid for insurance are used to support losses in the community and the remainder is refunded. Other companies, which are organized, as shareholders’ companies, are NOT allowed because only the shareholders benefit from the premium surplus and not the community at large. Example of Mutual Benefit Companies is State Farm and the shareholders company is AIG, All State and AFLAC.

The other problem in insurance companies is how they invest the premiums. State & Federal Regulators require that premiums be invested in Riba Bonds, Riba Money Market, Stocks and other Riba Financed Real Estate. This part of the problem is very difficult to solve at this stage of our development of Islamic Financial Services.

Does LARIBA Financing Cost More than Riba Banks? Does LARIBA charge High Fees?

NO! We strive to be competitive with Riba-Free Banks and Mortgage Companies. Please BE CAREFUL of the “Bait and Switch” techniques used by others in the industry.

The administration fees charged by LARIBA are extremely competitive with other providers. There are no hidden fees, charges for research, charges for faxes and couriers and the fee is used to provide a humble salary that would provide a comfortable and honorable life to your brothers and sisters who serve you at LARIBA.

How long does it take to get pre-approved?

It takes around 3 days to get pre-approved and usually much less if your application is complete. The application is available on the LARIBA site www.LARIBA.com. It usually takes as little as three weeks to close and usually no more than 6 weeks.

What happens if I wish to sell the House?

The title of the house is registered in your name from day one. You can sell the house any time you wish to. You keep the capital gains. In case there is a loss, then it will be our risk and that of the investor.

Does LARIBA participate in the Profit & Loss as Islam Orders Us?

A16. In fact Islam requires us to participate in a much broader sense by participating in THE RISK. We at LARIBA take the risk of not benefiting from higher rents. We also polled a large number of community members and most of them (over 90%) did not want LARIBA to participate in the profit. In the Housing Cooperative of Toronto, Canada, they participate only in 10% of profit and loss. They use the same model we use. In our case and judging by sad experiences and lengthy court proceedings regarding this subject we decided to participate in 0% in this stage.

What happens if I lose My Job?

You are given a grace period that varies depending on the situation. If, God forbid, you could not get another job, we work with you to sell the house. If you make money, then it is yours. If you lose money, then it is our risk.

Can I Renegotiate my Payments with LARIBA in Terms of Increasing or Decreasing the Monthly Payment? Is there a cost involved? And if so, why?

Yes you can pre-pay at any time with no cost. To decrease your monthly payments and increase the financing term, we need to redo the financing documents. The costs involved in refinancing include re-appraisal, tile and other charges.

Do I still get the Tax Benefit as from a Traditional Mortgage?

YES. That is exactly the reason we document our Islamic LARIBA Model in order to comply with Government laws and regulations.

Since LARIBA "Co-Owns" the House LARIBA should pay its share of Insurance, Taxes and Maintenance.

How Does LARIBA Get Its Financing? Is It From A Muslim Investor?

LARIBA is a Registered Finance Company that is owned by members from the American Muslim Community. They put their money where their mouth is. LARIBA did not go hat-in-hand trying to collect funds from the rich and affluent in the Oil rich countries.

Please understand that in order to finance 10 homes per month at $200,000 each, the company should have at least $20 million available every month or at least $240 million per year. This is a staggering number for our community to afford. That is why we thank God for making Freddie Mac / Fannie Mae our major investors in addition to others in our community who have chosen to support this grass root community effort.