The LARIBA bank obtains its funds from two main sources as compared
to the RIBA bank.
These are:
Shareholders' Capital; which is looked upon as long-term risk money
by the shareholders.In addition, the accumulated earnings of the bank,
can be reinvested in the bank capital.
Depositors' funds from those community individuals and institutions
who have a much lower risk tolerance for their capital.
RIBA banks derive their funds from the same sources outlined above.
However, a very large source of funds for RIBA banks is the Central
Bank of the country where the bank operates.
For example, in the U.S.if the shareholders' capital is $100 million,
then this RIBA bank can create a lending ability to lend up to 20 times
that much ; i.e. $2 billion (provided that it abides by other rules
and regulations set by the Central Bank; i.e. the Fed, in the U.S.).
This represents the most important challenge for the growth and stability
of Lariba banks in a world which operates by Riba concepts.
It is believed that God in the long run will bless those who commit
and have small means (as reported by the Prophet's"Hadeeth"
(saying).
However, prudent planning and management are required to meet the challenge.
In the RIBA banking system the RIBA bank focuses on borrowing money
at low interest rates (money market deposits, and/or CD's) or no interest
rate (checking account/demand deposits) and then lending the money at
a higher interest rate.
The spread between the interest earned by the bank on its loans an
the interest paid to depositors on their different types of deposits
represents a large portion of the profit of the RIBA bank.
The RIBA bank derives its importance from its capacity to accumulate
capital from those who own money but are not capable of placing it in
productive investments either because they do not have the experience
and ability and/or because they are not interested in or can afford
to assuming the risk of losing their capital.
The owners of capital are attracted to the RIBA bank by the level of
interest paid to them on their deposits and the insurance supplied,
in the U.S.A. for example, by the Federal Deposit Insurance Corporation
(FDIC) on their deposits that are less than $100,000.
In this context the RIBA bank's legal relationships can be broken into
the following two entities:-
1. A legal relationship between the depositors as creditors of the
bank and the bank as liable to the depositors
2. A legal relationship of the bank with the business person/entrepreneur
who borrows the money to invest it by putting it to work.
In this case, the bank is the creditor and the business persons are
liable to the bank.
This way, the bank is not legally looked upon as an intermediary between
the owners of capital and the business person who borrows the money
for a business activity.
In fact, the bank in this context has become a real principal in two
different relationships while there exists no relationship between the
owner of capital (depositors) and the real user of capital (the borrower).
In LARIBA banking, the bank is looked upon in a different context,
this can be conceptualized as follows:-
1. If the deposits are looked upon as deposits for Amana (trust), then
the bank has no right to dispense the Amana without the prior consent
of the depositor.
Here comes the question of the effect of inflation and the impact of
it on the deposits which after a certain time may have less purchasing
power.
In fact, if the depositor wants to keep his/her funds without employing
them, as an Amana, their deposits not only decline due to inflation
but also because they are required to pay the 2.5% Zakah on them if
they are kept unutilized for an economic investment activity of a period
of a year or more; Hawl (period/cycle).
2. If the depositors deposit their funds with the purpose of allowing
the bank to manage their money on their behalf, then the bank enters
into a relationship with depositors as Mudarib (money manager) for the
depositors.
The most important ingredient in the agreement is the level of risk
the depositor is willing to accept.
In this context, the depositor becomes an investor.
Other ingredients of the Mudaraba agreement (money management agreement)
would be the time duration of the investment and the distribution of
profits between the bank, Mudarib (money manger) and the owner of capital.
3. If the owner of the capital entrusts the LARIBA bank with searching
for business opportunities to invest their capital directly (Direct
Investments), then the LARIBA bank takes on the role of an investment
banker intermediary who would work on behalf of the owner of the capital
and business person for a service fee.
Now the relationship is direct between the owner of the capital and
the business person.
The LARIBA bank's responsibility is mainly the performance of the due
diligence to assess the business parameters of the relationship and
maybe to structure the deal financially and legally and to make sure
that it follows the tenets of Islamic financing of LARIBA.
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