The Art of RF (Riba-Free) Islamic Banking and Finance: Tools and Techniques for Community-Based Banking, 2nd Edition

CHAPTER 10 RF (Islamic) Banking in the Twentieth Century

The efforts to start RF (Islamic) banking and finance in the mid-1970s resulted in the development of a major model, which became very popular because it was very close to the conventional riba-based financing model. The model is called the cost-plus (murabaha) model, which, as described in Chapter 3, includes the following steps:

1. The finance institution buys the item at the order of the ultimate buyer (who wants to finance it) at a certain price.
2. Then the financial institution sells the item back to the ultimate buyer at the original price plus a declared profit element. The profit element usually reflects the accumulated implied interest—called profit—that would accrue over the period of financing.
3. The ultimate note signed by the customer includes the total price including the profit. That may impact the credit report of the customer (in the USA) and limit the customer's “borrowing” or financing capacity.

The model focused on the fact that there is a buy/sell transaction and that interest is not charged, as required by the Judeo-Christian-Islamic Shari'aa law. This model was very convenient to the new and emerging RF (Islamic) banking industry, because it was a straightforward application of the interest-based model used in conventional riba-based banks. It was also applied in many of the newly established financial institutions at that time, such as the Kuwait Finance House (KFH), Dubai Islamic Bank, and Dallah Al-Baraka ...