The Strategic Approach to LARIBA (Islamic) Mortgages

A strategy is the art and wisdom of matching our goals with our available resources in light of the social, business and political environment we live in. Our approach to achieving our goals is to wisely "Start from The Possible to Achieve the Impossible". The following is a summary of our strategy:

1. The Need For Grassroots Community Involvement:

The primary market segment for LARIBA mortgages is large by the American Muslim community’s humble means. A mere $200 million is a "drop in the bucket" by American banking and financing standards. LARIBA (Islamic) banking and financing system does not have a proven track record in the United States. We found from experience that relying on our local resources is a must. That means that we should rely on localized grassroots community effort at every community center. So, in order to do this we must start small in order to achieve our ultimate goal. Also, we must have the flexibility and foresight in order to compete in the market.

2. The Laws of the Land:

Based on our 31 years experience as American Muslims we learned that it is difficult, expensive and essentially impossible to change the laws of the land. We tried to do it regarding marriage contracts. We settled for abiding by the civil code to protect the rights of the married couple and performing the wedding according to the Islamic rights. We encountered the same experience in cases of divorce. We concluded that the Muslims do not have yet the "critical" mass and the ways and means even to attempt to change the laws of the land.

From a strategic point of view, we decided that changing the banking and finances laws of the United States to fit the Islamic Shari'aa is not our goal in this stage of the American Muslim Community's experience. We believe that in the future the passing of the "Financial Services Modernization Act, or "HR10"; the act which will modernize the American banking industry and may soften the Glass Stiegel Act, will help the cause. However, it will take a long time. We are aware that others have tried at huge expense only to dress up the regular RIBA financing contract to make it look and sound proper from the Shari'aa Islamic point of view. We respectfully disagree with the approach and wish those who have tried and are still trying it the best and pray for their success.

We therefore decided and in the same time strongly urge that in dealing with banking and financing matters in the United States strict adherence to the letter of the law is required. We also believe that respecting the laws of the United States and abiding by them is our responsibility to God, the future of the community and the good of the alternative system we hope to lay the foundation of. We know from history that toying with financial, securities and banking laws of America is dangerous. We also know that the punishment is instant, terminal and irreversible. On the other hand many components of the American system represent years of human experience that cannot be thrown away. We simply cannot reinvent the wheel. The Community Re-investment Act (CRA), the laws against usury, the equal lending opportunity laws, the Securities and Exchange Commission rules and regulations, the regulatory functions of the US banking regulators and the laws regarding full and complete disclosures are laws and regulations that reinforce basic human and Islamic values. We also know that the American financial, monetary and banking system is the most sophisticated and reliable in the world. It is our duty to uphold these laws. Our efforts should concentrate on providing an alternative not a substitute to that system. The reliability of that alternative system is in fact enhanced by the already tried and proven regulatory and legal system of America. We should abide by the Prophet Muhammad saying "God bestows peace and mercy unto those who know and who are realistic about their capabilities."

3. Matching The Competition:

It is our responsibility to provide a product that competes in the free market place equally if not better than the traditional mortgage. Title and ownership should be given to the buyer and not delayed. Implied mortgage rates should be disclosed and explained in comparison to the market. Monthly payments should be within the ability of the customer and in light of the monthly apartment or house rent they are paying. Term of the LARIBA mortgage (5 to 8 years) being much shorter than the traditional mortgage (15 to 30 years) should be explained and the pros and cons discussed in great details. The administration and processing fees incurred in a LARIBA contract should be explained and compared to the "points" charged by traditional mortgages. Capital gains realized from the sale of the property before the expiration of the term should be competitive with the traditional mortgage. And most importantly, the LARIBA Puritan homebuyer should not be punished by not being able to deduct the implied interest as done in traditional mortgages. The tax issue is one of the most important. A letter from the IRS may be good but not enough as compared to the announced policies of mortgage RIBA interest deduction.

4. Marketing Approach:

Marketing of LARIBA services in general and mortgages in particular should not follow the traditional "marketing hypes". It is a specialized product, at least at this stage of its product life aimed to meet the needs of the LARIBA Puritans. Using expensive media campaigns and other mediums is extremely expensive and may attract unqualified applicants who may take advantage of the general guidelines of LARIBA financing which does not believe in a time value for money. There is no substitute for a real grassroots effort of belonging to the community, knowing its members well and participating in its activities. That is why the LARIBA system should focus on serving local masjid (and later on church and synagogue) communities in order to achieve the real meanings of "know your client", "community reinvestment" and touching the lives of each household in the community. This approach allows the LARIBA officer to perform a better due diligence and it will reduce cost as the percentage of non-performing loans becomes essentially negligible. In its effort to promote the concept, the LARIBA mortgage organization should rely on personal contacts, recommendations of the leaders and active members of the community and of course all the required due diligence tools of credit checking, salary confirmation, references, tax returns and financial statements. The credibility of the system is enhanced and deepened by performing excellent due diligence. As a result the major source of business becomes referrals and word of mouth about real experiences as compared to the traditional "marketing hype."

5. General and Administrative Expenses and Other Costs:

The success of the LARIBA system in its infancy depends on a voluntary approach in which professional bankers, financing officers and entrepreneurs, who believe in the system, offer their expertise and services on a voluntary basis. This will reduce cost drastically. In fact if they cannot afford working for free they will be content with a salary that is much lower than what the competition offers. It becomes a mission and not a job. In addition, other expenses like travel, hotel accommodations, entertainment, postage and other costs should be kept to a minimum. For example instead of travelling business or regular coach a LARIBA officer would, on his/her own, look for the cheapest excursion fare. Instead of living in a hotel, a LARIBA officer would try to identify a friend or a relative to stay with at their home. Instead of going to expensive restaurants, a LARIBA officer would go to the community restaurant in order to minimize cost, show an example and in the same time network with the community. Another important byproduct is the sever reduction in non-performing loans.

6. Education:

Educating the public using simple and understandable language about the LARIBA and traditional mortgage facts is a must. For example, the fact that a 30-year mortgage is seldom kept to maturity due to the fact that the average American family replaces it with another once every 5 to 8 years. This is due to job mobility, the growth of the family, the growth in income and the proximity to school. The fact of not making an impact on the principal of the loan in a traditional mortgage should be publicized. Education is also needed to explain that paying rent to oneself is equal to investing in ourselves, tax free, and realizing a return that is competitive with the average return on stock market investments (approx. 10% - Yavas). Familiarization with the mortgage schedules and the time value of money used in traditional mortgages are needed for many that are doing it to "go with the flow." The value of saving money for the children in a trust account (or a Roth IRA account) to save for a sizeable down payment for their future home as they grow up and get married should be made understood by the community. These investments can be used to finance the mortgages of today and benefit the generations of the future. All these will bind the community together, increase mutual trust and help in the economic development of the community. This education will help bring the real spirit of the Community Redevelopment Act (CRA) to life.