Muslim communities in the United States are finding an increasing number of commercial operations are vying for their patronage. As with other faiths, this demographic can be more or less exacting in terms of religious observance. Nevertheless, a large portion of the followers of Islam seek to honor its requirements in every area of life, up to and including the cherished goal of home ownership.
Consequently, Muslim consumers look not only for responsive customer relations and reasonable costs from a home finance company, but also seek a lender that conducts its business in a manner that comports with Sharia law.
This review aims to answer these primary questions:
- Does LARIBA American Finance House meet the halal criteria as set forth in Sharia law?
- What products and services does LARIBA offer its clientele?
- What do religious scholars and customers say about LARIBA as a home finance company?
About American Finance House LARIBA
American Finance House LARIBA (going forward simply LARIBA) is the finance arm of the Bank of Whittier. Founded four decades ago, this bank operates locations in Whittier, California and Richardson, Texas. The Bank of Whittier is a riba-free bank that charges no interest to its customers, instead working from a unique business model based on the principles of Islamic finance. Worth noting is that, although this institution makes clear that its business practices are firmly halal, it markets itself as a community, as opposed to exclusively Islamic, bank.
The Bank of Whittier and, by extension, LARIBA – inaugurated in 1991 – stress that to charge or pay riba, i.e. interest, is to rent funding, a strictly forbidden undertaking according to Sharia law. In avoiding this, it adheres to a business model based on declining participation in usufruct (DPU), meaning the financing partner’s rights to a given property recede as the resident partner’s rights advance. This is also known as declining Musharaka in rent. Other halal lenders share this financial foundation.
As an institution with depositors, the Bank of Whittier offers checking and savings accounts as well as retirement instruments. None of these increase their value by means of interest. Rather, the bank invests these funds for an expected profit. In this way, they grow these accounts without benefit of riba. By contrast, an institution that does not comply with Sharia guidelines, for example, lends savings account deposits out to others. Interest is what those banks pay to their customers to use their money.
The Bank of Whittier offers checking accounts that are not invested as well as those that are – the latter generally apply to customers maintaining higher daily balances. While also riba-free, the bank discloses an annual percentage yield (APY) to give account holders a general idea about how much income these accounts might earn.
The retail banking products and operations at the Bank of Whittier are part and parcel with the halal practices of LARIBA. Although these businesses take care to adhere to Sharia in every respect, they seek a broader clientele of religious believers and others who would share an objection to the practice of renting money via interest. How does LARIBA fare, then, with regard to halal financing?
LARIBA and Sharia Finance Principles
The general ideals of Islamic finance boil down to these:
- Risk is distributed among all parties to a transaction.
- Investors can make money but they should be enhancing the larger community in doing so.
- Profits must follow from selling a legitimate commodity or service. No renting money to make money.
- Eschew any practice or thing that is haram.
Dovetailing off the last element, prominent haram practices are:
- Charging or paying of interest
- Investment in businesses like gambling, pork production, pornography or illegal drugs
- Highly speculative or extremely risky financing or investing
- Ambiguous contracts
Other than the second haram plank, these can be open to interpretation. Financiers are challenged with this task.
LARIBA bases its financial practices on a revised version of the business model set forth by Al-Baraka Bank of London in the United Kingdom. Adopting the DPU concept, LARIBA calculates property rent, i.e. the profit payment, based on rental charges of similar houses in the vicinity of the subject property. As a residential customer enters into agreement with LARIBA, he or she puts forward their own share while the finance company makes up the difference – usually a majority share.
The customer and LARIBA purchase the home together but the deed is in the customer’s name alone. In this capacity, the buyer serves as an agent for the finance company. The new owner of the house is considered the Milkul Raqabah, literally “owner of the neck.” Still, LARIBA is accorded the usufruct – in Arabic, Haqul Manfa’aa – i.e. the right to use and occupy the premises.
Since the bank is ceding the whole house for the client’s occupancy, the latter compensates the former for the privilege. Subsequently, the client proceeds to return the bank’s purchase contribution over the course of the contract. As the customer’s debt to LARIBA decreases, the rental obligation likewise declines.
A traditional mortgage lender adheres to a corresponding principle called amortization whereby interest payments decrease as principal gets paid off. The fundamental difference, however, is that interest is paying for the use of money whereas the profit payment is for use of space.
TRADITIONAL MORTGAGE: Bank lends to borrower –> Borrower buys house –> Borrower pays back loan with interest
DPU: Customer and LARIBA combine funds to purchase house –> LARIBA retains usufruct rights while customer owns the property –> LARIBA maintains lien until purchase funds are returned in full –> Customer pays back LARIBA for purchase adding profit payment for full use of and access to property.
During the course of this contract, LARIBA may measure its return on investment, raising or lowering the rent payment for usufruct accordingly.
Prior to entering into any contract, LARIBA analyzes its return on investment. If the figure is higher than the original estimate, LARIBA will lower the usufruct payment. Should the ROI turn out lower, LARIBA may adjust the rental payment up or, in some cases, decline to go through with the transaction.
The Fatawa
Confining the review to residential finance for the moment, against what scholarly yardstick does LARIBA measure its business transactions? The company itself points to three Fatawa, the last issued by Darul Hikmah, an outside firm specializing in what the LARIBA website calls “Judeo-Christian-Islamic Law.” The first Fatwa – coming out of a 1990 seminar of religious scholars – evaluates the Al-Baraka Bank model upon which the LARIBA template is based. Among its conclusions were:
1. Making the applicant/customer the sole legal owner of the property during the whole term of the contract is indeed halal per Sharia. It follows that the LARIBA partner is assuming, by voluntary agreement — legal responsibility for maintaining the property in good order.
2. Insurance premium costs should be shouldered jointly but the financing party can build that expense into its rent or profit payment. So, in formulating usufruct rental remittances, LARIBA is permitted to consider the homeowner insurance premiums.
3. The bank can retain its ownership of usufruct until the last dime (or shilling) is paid off by the customer. Again, that share shrinks with each monthly payment by the title owner of the house.
The succeeding Fatwa, made in 1994 at a symposium covering Islamic jurisprudence and banking, served to clarify the language relative to Ribawi, emphasizing that the term “interest” could be invoked in contracts only insofar as it was a comparative term that demonstrated the alternative nature of the profit payment. As noted above, LARIBA observes these two Fatawa, yet required further guidance since they applied to an Islamic bank operating within the British regulatory system.
This Fatwa counseled caution in using pro forma contracts that acknowledged interest simply to gain the benefits regarding tax and legal positions. Better, it asserts, to reference the benefits as “returns on investment.”
Thus, the third Fatwa upon which LARIBA relates directly to its operations in the United States and on the manner in which it modified the Al-Baraka model. Composed by Darul Hikmah’s Chief Scholar, Sheikh Dr. Mohamed Adam Elsheikh, the Fatwa comments positively on LARIBA’s adoption of two specific disciplines rooted in the Quran.
The first is the Commodity Indexation Discipline, that is, testing the price of a commodity, e.g. in this case rented space, against another commodity to determine a reasonable price. The cost of shelter to owners and renters is a primary component in the government’s calculation of the Consumer Price Index (CPI). LARIBA factors fluctuations in the rental market into its own pricing.
The second discipline is known as marking to the market. This involves the financial institution adjusting its asset accounting if and when customer defaults occur. Contracts gone bad, after all, tend to lower the value of an institution’s entire loan portfolio. Under mark to market, this decline must be duly noted and accounted for, i.e. their accounts receivable column must be debited. This more precisely reflects fair market value.
In addition to affirming these disciplines, Dr. Elsheikh prescribed the correct sequence of steps to take before a customer can assume sole legal ownership of any given property. LARIBA asserts these Fatawa as the foundation of its financial dealings with its customers.
Sharia Compliance Supervision
To confirm fidelity to these approved principles – and to Sharia in general – LARIBA retains a supervisor, educated and published in Islamic finance, to evaluate specific transactions. This specialist, Dr. Yahia Abdul-Rahman, consults with outside advisors as well. In addition, LARIBA submits to regular examinations by certified Islamic auditors.
A single supervisor, as opposed to a board of several experts, may be for good or for ill. On the one hand, decisions on transactions might come faster with one supervisor. On the other, customers might feel better knowing several heads contributed to the deliberations.
LARIBA’s Financial Products and Services
1. Residential Funding
LARIBA finances primary and other residences under its own authority or through licensure of the Bank of Whittier, depending on the state of jurisdiction. While the unique financing model is outlined above, individual borrowers – as with any lender – must meet certain criteria for approval. The financing company wants to know if applicants pay their bills on time. Do they have sufficient income to make a housing payment in addition to servicing other debts? Do they have a stable job history?
With employment and steady, adequate revenue established – and an acceptable credit record – LARIBA recognizes that these favorable attributes can disappear through no fault of the client. Company bankruptcies, personal injuries/illnesses as well as legal losses can each or all undermine what was a strong financial position. For this reason, the finance company looks for assets that can bring an individual or family through rough financial patches. Accordingly, checking and savings accounts; investments; and various retirement funds are assessed for value.
These considerations protect both LARIBA and its customers from the sad event of an owner losing the house and the finance company having to sell it. If income is adversely affected, LARIBA cooperates with a wide range of government sponsored efforts to assist struggling homeowners:
The Making Home Affordable (HAMP) program helps owners to modify the terms of their mortgage – or their contract in cases of halal financing – in order to maintain payments when cash flow is constricted.
The Home Affordable Foreclosure Alternative (HAFA) option aids owners who must end up leaving the house to do so in a manner that bypasses the credit damage inflicted by foreclosure proceedings. Ways to cede the property back to the finance company are short sales, i.e. selling ownership shares back to the financier at a discounted price, or a deed-in-lieu of foreclosure.
The Hope for Homeowners is an advisory program that works with those on the precipice of foreclosure to refinance the subject property on more manageable terms.
The Department of Housing and Urban Development (HUD) maintains a battery of telephone counselors who provide information to distressed homeowners with regard to ways they can stabilize financially and remain in their homes.
LARIBA provides jumbo financing to customers who qualify. To distinguish between conforming and jumbo amounts, consult Fannie Mae’s pertinent web page.
LARIBA provides jumbo financing to customers who qualify. To distinguish between conforming and jumbo amounts, consult Fannie Mae’s pertinent web page. Jumbo financing is also called non-conforming, meaning the amounts are too high for the contract to be purchased in the secondary market, e.g. by Fannie Mae or Freddie Mac, two government-chartered investor corporations. Although limits fluctuate, jumbo transactions generally start at $650,000 or more for single-family homes.
One last comment regarding residential financing: Because the customer has sole possession of title to the house, that party may legally sell the house to someone else. As with any conveyance, the lien holder (read LARIBA), is the first to be paid from the proceeds. Whatever is left goes to the seller – and any vendors involved in the transaction.
In the event that the customer loses a job or source of income, LARIBA collaborates with the client to sell the home. Anything left after the debt is paid belongs to the client. Worth noting is that the word “foreclosure” is rarely used on the LARIBA site, except the application where past foreclosures are listed.
2. Commercial Properties and Business Loans
Commercial financing is approached differently from residential. This applies to traditional mortgage lenders and riba-free financial providers like LARIBA. With primary and secondary residences, the owner’s credit-worthiness and personal financial situation is paramount when assessing an application. Commercial property transactions are more about the building itself or the business occupying it.
Commercial buildings could be multi-unit apartment houses; office buildings or parks; retail spaces or industrial facilities. Places of worship, restaurant sites and meeting halls also qualify. As such, finance companies want to know as much as they can about the prospective owners – most often businesses – and those tenants paying the rent. Since these properties are not owner-occupied in many, if not most, cases, they are considered purely investment properties.
Because of this, commercial applications are distinct from those for a home. Often, they require documentation establishing the legality and frequently the longevity of a business applicant. Such evidence is found in Articles of Incorporation or LLC formation agreements; minutes of shareholder meetings; and corporate director profiles. In addition, tenant leases and rent rolls show the lender that the building makes money enough to pay off the contract.
Sharia-compliant lending in the business realm is designed to foster unity and prosperity in the community. Focusing on franchises and small to medium-sized enterprises demonstrates the desire of Islamic banks and finance companies to create jobs and improve the quality of life. LARIBA utilizes its halal model for commercial and residential financing alike.
Regardless of business size, there are variations in the way taxing authorities and regulators approach landlords under the Al-Baraka modified model that LARIBA uses as opposed to the co-ownership template that other Islamic finance companies employ.The LARIBA model also differs from other Islamic financiers, Guidance Residential to name one, that adopt a formal co-ownership (mushakara) of the home with the customer. Whereas these companies appear on the deed and hold joint title to the subject property, LARIBA follows an “implied co-ownership” principle whereby its lien and right to usufruct serve as de-facto ownership claims.
Usufruct rents can reflect that the customer/owner is receiving favorable tax treatment under federal, state and local codes.
3. Automobile Financing
LARIBA also offers vehicle financing that conforms to Sharia guidelines. As with houses, customers who personally meet the financing criteria are at liberty to select the car of their choice. The difference is that LARIBA will purchase the car and hold title while entrusting the vehicle to the customer. Over a period of one to five years, the client pays LARIBA for the price of the automobile. When the contract is fulfilled, the customer receives title.
How does LARIBA gain from this process? In this case, the owner, LARIBA, gives the customer full use and enjoyment of the vehicle. As a consequence, the user pays the owner for this privilege. The amount is worked into the monthly remittance.
LARIBA does not make clear its policy on whether the purchased car must be halal for financing approval. Some Sharia experts expect that, among other things:
- The vehicle be environmentally friendly
- No pig skins are used for upholstery
- No child labor was exploited in the manufacturing
Ecological compatibility, of course, changes with the times. A combustion engine is acceptable today as long as catalytic converters and other emissions inhibiting technology are present. With the advent of electric vehicles, however, collateral standards might evolve. In principle, the idea is for the customer to research the cars and get the most compliant one available.
Doing Business with LARIBA
LARIBA stresses that its fees and charges are competitive with other halal finance companies. However, it does not publish its fees on its website. Of course, all financing consumers are well-advised to look at a loan estimate before going forward on any application for home financing or auto loans. The company has several financing programs, and down payments start at three percent, and the amount is determined by LARIBA. They recommend that clients put down at least 20 percent, to avoid PMI.
While LARIBA’s website is clunky and a bit out-of-date, they offer a typical home finance application. There is a secure form on their site, where they ask for the amount you want to finance, how much you are putting down, how much you make and other basic questions. Once submitted, LARIBA will look over your information and contact you to provide documents and evidence of earnings.
LARIBA shares its headquarters with the Bank of Whittier in Whittier, California. The bank also maintains an office in Richardson, Texas. Nevertheless, this finance company does business through agents across the United States. Most customers interface with LARIBA and BoW online. Both pre-qualifications and loan applications are electronically submitted. Once these are received, the customer can establish an account and have access to a portal through which progress is displayed.
Other features of the LARIBA website include a Zakah calculator to work out an accurate amount for the Almsgiving. Taking into account savings in cash; the value of 2nd and 3rd (if applicable) vehicles; real estate holdings aside from the primary residence; assessed value of owned businesses and inventory; and worth of luxury items like jewelry, the calculator aids in discerning how much to give to the poor and needy. Those who have drifted from the community, those on a pilgrimage and those who are politically oppressed are also acceptable recipients.
Another supplementary spiritual resource displayed on the site is a link to a prayer time calendar. An international currency converter is yet another online convenience for LARIBA customers.
Also, those who enter into contracts with LARIBA can access their payment histories and other activity. Making monthly payments is another online option, made even easier by opening a checking account with the Bank of Whittier. BoW’s riba-free banking services are linked to the LARIBA website. Perhaps the most striking thing about this company’s online presence is the amount of information dedicated to its legitimacy relative to Sharia principles.
In many U.S. states, LARIBA closes transactions as the Bank of Whittier. This is a huge benefit as no other Islamic financing institutions can operate in every state in the union. Although the financing is processed, underwritten and approved by LARIBA staff settlement is not always made under that name. With states passing divergent regulations governing lender licensing, it makes sense in many that the BoW is the lender of record. Whether closed by BoW or LARIBA, settlement agents and other vendors serve as affiliates of the finance company.
Outside Opinions on LARIBA and Sharia
In 2018, the Assembly of Muslim Jurists of America (AMJA) issued a statement concerning a claim made on the LARIBA website. The assertion was that the then-chairman of the AMJA, Dr. Hussein Hamid Hassan, found that the LARIBA model was in line with Islamic finance fundamentals. The responding AMJA statement clarified that Dr. Hassan theoretically endorsed the model but in no way affirmed the company’s practices. He could not, Hassan continued, because he was unfamiliar with how banks operate in the United States.
This disagreement followed the AMJA finding that LARIBA’s practices were too similar to traditional mortgage lending and therefore not halal. LARIBA counters that its profit payment, unlike other Islamic companies, is based on market rental rates and not the prevailing interest rate. As with many AMJA criticisms, finance companies make efforts to demonstrate the Sharia-compliant nature of their products and services. When dissonance exists between the companies and the scholarly community, customers are left to sort things out themselves.
Though an outside observer, the Federal Reserve Bank of Richmond contends: “Islamic finance may be rooted in ancient texts, but as an industry it is relatively young.” The thrust of its opinion is that clerics and experts have expressed conflicting thoughts on various subjects for centuries; it is only reasonable that they do so now with regard to finance, given that the first Sharia-compliant bank opened in Egypt only 60 years ago.
Dynamics like this can explain why LARIBA takes pains to bolster its Islamic bona fides by posting auditor reports on its site. Raqaba LLC Shari’a Audit & Islamic Financial Advisory examines LARBA’s transactions annually; its findings – in addition to abundant reference material on Islamic finance – appear on the LARIBA’s website.
While LARIBA has been around since 1987, its digital experience leaves something to be desired. However, while not aesthetically-pleasing, all necessary and pertinent information is provided. There is a knowledge base, a contact page and a form to fill out to get the process started. Once you start the application process, which is on the front page, LARIBA will contact you via email or phone to get the process started.
Customer Reviews of LARIBA
Most consumers, Muslim or not, lack the time to hash out divergent judgments among highly learned doctors of Islamic law and finance. At the same time, they do respond to LARIBA’s riba-free advertising. They also expect superior customer service. Like the scholars referenced above, customers walk away with varying impressions of their finance experience. LARIBA does not post testimonials on its website, so an online survey of reviews is the only way to discover what people are saying.
A search for opinions on Yelp yields three reviews, two leaning negative. There was criticism of slow customer service as well as suspicion over ethics. The third evaluation was glowing, even going so far as to name a competitor that disappointed the reviewer. Facebook, by contrast, is replete with positive statements concerning LARIBA, its customer relations and its finance contracts. One critical statement reflected AMJA’s concern about interest; another believed her private information was not secure.
A Reddit thread was lukewarm on LARIBA but did not relate direct experience. There was second-hand opinion and general cynicism about the state of Islamic banking in the United States. This begs an important question: how many observant Muslims are taking out traditional mortgages because they question the reality of interest-free institutions like LARIBA?
Are LARIBA’s competitors more or less conforming to Sharia? While we know that scholars give some of them affirmation, is there a suspicion among rank and file Muslims that none can truly comply with Sharia law? One Reddit commentator resignedly opined: “Islamic Banks don’t have the strength or equity to finance property loans.” A look at other halal lenders may give some clues.
Reddit threads related to experiences with Devon Bank, Guidance Residential and UIF show the usual satisfactions and frustrations. Some respondents expressed appreciation to each of these institutions for a relatively smooth purchase or refinance experience. Others despaired over high rates and fees as well as sluggish processing and closing. One participant reflected the resignation noted above:
“When you accept that it’s okay to replace interest rate with profit rate, I can accept that it’s okay to go with any mortgage lender who is at-least being honest and transparent.”
On the face of it, it would appear that frustrations with LARIBA carry over to other finance companies vying for the same demographic. One reasonable conclusion is that each of these companies – doing business in many if not all of the 50 states – enjoys greater success in some states than in others.
A second insight is that there is a cynicism among some recent customers about Islamic lending practices, no matter who is doing it. Fishbowl forums echo this sentiment. Since LARIBA does not solicit its own positive testimonials, it is difficult to determine whether it is aware of this. The copious information on Sharia finance that it does display, however, may constitute pushback against this pessimism. At any rate, LARIBA, like its peers, represents a mixed bag of experiences.
Should I Finance a Property with LARIBA?
Those contemplating a financial relationship with LARIBA should ask themselves the following questions:
1. Are you comfortable owning the property solely, with all the legal autonomy that implies? Alternatively, would you rather co-own with a lender, with the shared legal exposure that implies?
2. Would you rather a profit payment be calculated according to prevailing interest rates? Rather, would you prefer that the profit payment rise and fall per market conditions relative to rents, as LARIBA’s do?
3. Do you prefer a finance company enjoy widespread approval from religious scholars with regard to halal practices? Are you instead OK with disagreements about Sharia conformity as long as you receive honesty and competence from the professionals arranging the financing?
4. Do you insist on universal celebration by past customers or do you prefer to make up your own mind?
The choice of a real estate finance company is a personal one. These questions go to your personal preferences.
A key component to bear in mind is you, the prospective customer of LARIBA. Until you sign your contract application – and pay the requisite fee – you risk nothing. A well-timed phone call, full of informed questions and, hopefully, responsive answers can reveal things that online forums and social media blurbs never could. Also, hold fast to one more truth: honest disputes, among economists and Islamic academics, do happen. The more you learn, the easier these conflicts are to navigate.