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

CHAPTER 17 The RF Approach to Handling Troubled and Nonperforming Credits (Loans)

One of the unpleasant experiences in the banking and finance business is a nonperforming credit (loan), meaning that the customer does not make the monthly payments on time and eventually stops making these payments altogether for a number of reasons like his financial inability to do so. In this chapter, I will share with you case studies that will hopefully show the benefits of the RF culture, mentality, and approaches that have been employed while operating the LARIBA System since 1987 to resolve this challenge.

Nonperforming credits (loan) represent a significant drag on the profitability of the bank and the financial institution. These nonperforming credits may eventually result in reducing the bank capital, which may lead to the need to raise more capital or the closure of the bank.

The standard approach to nonperforming credits in a riba-based bank is to notify the customer and remind him of the covenants of the credit agreement and ending with transferring the loan to the legal department to take action. In most cases, the attorneys in the legal department start by filing a lawsuit to recover the assets using the collateral pledged against the credit facility or the other assets owned by the customers in order to recover as much as possible of that loan. Legal proceedings are necessary and useful but should be used as a last resort and in a wise way based on analyzing the reasons the customer ...