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Dr. A. Hussain
Islam is a complete way of life providing guidance on all issues of life including economic issues. For a happy and fruitful life man must strike a balance between his material and spiritual needs. However, due to continued degeneration of the Muslim ummah over centuries, the state of the present day Muslim is a far cry from the Muslims depicted in the Qur'an and Sunnah.
Material satisfaction is the overwhelming force in modern society. The ardent desire to get the biggest house and fastest car leaves little time for spiritual pursuits. Many have even resorted to corruption and non-permissible forms of earning (dealing in alcohol, riba, making illegal benefit claims etc.) in a culture of self-display and pace-setters.
There is no doubt that riba has been prohibited by both the Qur'an and the Sunnah of the Prophet (SAWS). The Qur'an has prohibited it in four different revelations (30:39, 4:161, 3:130-2 and 2:275-81). The last of these revelations came near the end of the Prophet's (SAWS) life and stated that those who took riba were declaring war on Allah (SWT) and the Prophet (SAWS).
The Prophet (SAWS) prohibited riba in the most unambiguous terms, condemning not only the recipient of interest but also those who give interest and the one who records it and those who act as witnesses to such a transaction(1). To stress the seriousness of the prohibition of riba the Prophet (SAWS) equated the willful taking of riba with committing adultery thirty-six times(2). And we all know what the punishment for adultery is.
Allah's Messenger (SAWS) said, "Riba has seventy parts, the least important being that a man should marry his mother."(3) So for what price will a Muslim commit incest with his mother?
Dealing in riba has become so widespread amongst Muslims that we feel no guilt or shame when engaging in such transactions. The interest involved in modern banking transactions is almost universally agreed amongst the scholars to equate to riba. This particular type of riba is called riba al-nasi'ah. The term nasi'ah comes from the root word nasa'a which means to postpone, defer, or wait and refers to the time that is allowed to the borrower to repay the loan in return for the "addition" or the "premium". This is the sense in which riba is used in the Qur'an ayah 2:275. It is also referred to as riba al- Qur'an or riba al-duyun (riba on loans).
Prohibition of riba al-nasi'ah in Shari'ah prohibits the fixing in advance of a positive rate of return on a loan as a reward of waiting. It makes no difference if the return is large or small, fixed or variable, paid in advance or maturity, cash, gift or service as a condition of the loan. The important point is the predetermined positiveness of the return. According to Shari'a law the waiting involved in repayment of a loan does not in itself justify a positive reward.
As an exception out of absolute necessity based on the juristic principle that under extreme necessity (darurah) unlawful matters become lawful, some modern scholars including Sheik Yusuf al Qaradawi at the First international fiqh conference, Detroit MI 1999 and at the Fourth Ordinary Session of the European Council for Fatwa and Research in October 1999 have passed a fatawa allowing the use of conventional, interest-based mortgage for the purpose of buying a house.
The scholars under the chairmanship of Sheik Yusuf al Qaradawi at the Fourth Ordinary Session of the European Council for Fatwa and Research in October 1999 who passed this fatawa made the following comments:
1. The council endorsed and stressed that what has been agreed upon by the Muslim ummah that riba is haram, it is one of the seven gravest sins, those who commit this sin are considered as waging war against Allah (SWT) and His Prophet (SAWS) and that bank interest is riba.
2. Muslims must do their utmost to seek an Islamic alternative to convention interest-based mortgages.
3. Islamic organisations in Europe should enter negotiations with European banks to find formulae that are acceptable to the Muslim buyer.
4. If no Shari'ah compliant alternatives are available then it is permissible to buy a house using conventional interest-based mortgage with the following restrictions:
i. The house to be bought must be for the buyer and his family
ii. The buyer must not have another house
iii. The buyer must not have any surplus assets that can help him to buy a house by means other than a mortgage
Examining the details of the fatawa it becomes clear that the vast majority of the Muslims in the UK do not fall in the realm of permissibility granted therein. Permission is granted only for one's primarily residence (mortgage for investment purposes either through resale of income is forbidden) to fulfil an absolute need. That is exactly when such a fatwa should be applied, indulging in opulence is a misuse at the least. The Council itself stated that what has been made permissible due to extreme necessity must be dealt with great care and taken in measure.
Many scholars of similar stature have criticised and disagreed with the above fatawa, arguing that rarely does purchasing a house reach the level of necessity required by Shari'ah law. The fact that people pay rent all their lives and acquire no property to show for it does not constitute necessity. The fact that rental properties are not available in nice areas does not constitute necessity
Over the past few years some institutions based in the UK have tried to address the predicaments of the Muslims who wish to own a house but at the same time do not wish to take out a conventional interest-based mortgage/ loan. In the UK three different Shari'ah compliant schemes for home finance are available.
1. Murabaha
In the case of home finance this is a contract of sale which is based on the sale of a property for a deferred price, which includes an agreed profit, added to the actual cost. Murabaha is the most common form of financing by Islamic banks in the Middle East. Although many ordinary Muslims see the murabaha transaction akin to interest-based loans; the murabaha is lawful by consensus of Muslim scholars. However certain conditions have to be met to make this transaction to be Islamically lawful. The murabaha sale of the property by the bank to the client must take place after the bank has purchased and is in possession of the property. Murabaha involves two separate transactions; the bank must first own a property then sell it to the client.
The client (prospective buyer) selects the property he wishes to be financed by the bank. The bank purchases the property and sells it to the buyer with a profit mark-up. The buyer pays this amount to the bank in form of monthly payments over a fixed period of time. The ownership of the property is transferred after all the capital borrowed has been paid off. Such a scheme is currently being offered by the Ahli United Bank Ltd. (UK), Manzil Home Purchase Plans, www.iibu.com/buy_home/murabahahow.htm.
For its murabaha scheme Ahli United Bank requires a deposit of 17- 25% depending on the value of the property and residential status of the applicant. Currently the payment term is a minimum of 5 years and a maximum of 15 years.
2. Ijarah
This is a contract of leasing (ijarah) of equipment or real property. Under this contract, the client (prospective buyer) selects the property he wishes to be financed by the bank. The bank purchases the property and rents it out to the buyer for a fixed period of time.
The leasing of the property is combined with a promise to buy (and a promise to sell), this is referred to as ijarah wa iqtinah. The buyer makes monthly payments to the bank which includes the rent for the property and also an amount towards the capital borrowed (i.e. sale price of the house minus deposit). The amount of rent paid is dependent on the outstanding capital borrowed by the client and prevailing market forces. After the agreed term of rental, the bank transfers ownership of the property to the client. The client may attain complete ownership at any time by paying off the balance of the purchase price of the property.
It should be noted that not all properties qualify for such home finance schemes and require a deposit of between 10-25% of the purchase price of the property depending on the value of the property and residential status of the applicant. However, as stated above the client may attain complete ownership by paying off the balance of the purchase price of the property earlier than agreed term of the contract.
Unfortunately, the institutions which offer this type of home financing have tied the rent to the prevailing interest rates although this may not be openly declared. Pegging the rental rate with prevailing interest rates (market forces as some may say) is in itself not against Shari'ah. The monthly rental is reassessed either annually or bi-annually. This means that the bank is guaranteed a return whatever happens to the actual value of the property.
This also means that the client is unaware of the rental rates in the future and hence the total cost of the property (total rent paid plus the sale price) is not known to the buyer at the time of the contract. In line with Shari'ah the price of goods must be known at the time of a sale contract. One could argue that the price of the house is fixed at the time of the contract. However, the rent is variable and dependent on market forces which is permissible under Shari'ah law.
As the landlord of the property, the bank is obliged to maintain and insure the property. Yet the bank expects the client to pay for the building insurance.
From a Shari'ah point of view it is permissible to sub-let the property, however, this needs to be discussed with the bank providing the finance before hand as the terms and conditions of the contract may be different if the property is for "buy to let."
Despite the drawbacks highlighted the ijara model of home finance is probably more Shari'ah compliant than the murabahah model of home finance. It is important that the act of buying the property by the bank and then selling or leasing it to the client constitutes two separate transactions for it is not permissible in Shari'ah to combine two transactions in to one.
From a purely financial aspect the home finance schemes outlined above (murahabah and ijarah) do not fair well with conventional interest-based mortgages.
The ijarah model of Islamic home finance is available through Ahli United Bank (http://www.iibu.com/buy_home/ijarahow.htm), United National Bank and was being offered until very recently by HSBC Amanah home finance.
3. Diminishing Musharakah
Musharakah is an investment partnership in this case it involves joint ownership of a property and the partners are the prospective buyer/client and the financier. The scheme of diminishing musharakah is well demonstrated by the model used by Ansar Finance based in Manchester. The two partners in this model are the Ansar member and Ansar Housing Limited (AHL). The share of AHL is divided into a number of units which the Ansar member buys over a period of time, thus increasing his own share of the property until he is the sole owner. Until the Ansar member becomes the sole owner of the property he pays rent to AHL. All the Muslim scholars are agreed on the transactions involving joint ownership and the financier (AHL) leasing his share of the property to the client and charging rent. There is a difference of opinion on the permissibility of the client to rent out the property to a third party.
The different transactions (joint ownership; leasing to a partner; selling share to a partner) involved in diminishing musharakah must be kept separate as required by Shari'ah law. One transaction cannot be a pre-condition to another transaction.
Ansar Finance (http://www.ansarfinance.com) is based in Manchester and their home finance scheme works on the principle of shared ownership (musharakah) and rental (ijarah).
In order to qualify for a home loan the prospective house buyer must become an Ansar member and purchase shares in the house financing organization called Ansar Housing Limited (AHL). The Ansar member must own shares in AHL valued at a minimum of 20% of the value of the house that he intends to purchase. This is akin to a 20% deposit on the property. On buying the property the Ansar member (client) and the AHL form a musharakah partnership. On paper the AHL is the legal owner of the property and leases it to the Ansar member (client). The Ansar member (client) pays monthly rental on the property according to what his share is in the property. The client is required to increase his share in the property over a period of time by buying more shares in AHL and this will have the effect of decreasing the monthly rent. The ownership of the property is transferred to the client once his share in the property is 100% plus a final payment is made to take into account the increase in value of the property.
All the available Shari'ah compliant home financing schemes available at the present require a deposit of between 10-25% deposit. This is a lot of money considering the price of houses nowadays. On top of that there are additional fees to be paid which are substantial and considerably more than conventional interest-based mortgages. This in itself may place such schemes out of reach of many prospective Muslims buyers. However, over time if there is sufficient demand for such Shari'ah compliant schemes competition will work in favour of the buyers. Those wishing to purchase property using these relatively new Shari'ah compliant home finance scheme must read the fine print as the banks have obviously laid down terms to their advantage. Furthermore, these Shari'ah compliant home financing schemes are not available in all parts of the UK.
The cynical will say that some of these schemes are just re-engineering of interest. In a truly Islamic contract the sharing of business risk is an essential element of a contract . The banks have indeed engineered the murabahah and ijarah schemes to avoid risk. Although it would be wrong to go so far as to equate them with the conventional interest-based mortgages. Muslim scholars have categorically stated that conventional interest-based mortgages are haram while those Muslim scholars murabahah and ijarah overseeing schemes such as the Ahli bank Manzil home scheme and HSBC Amanah home finance have judged these schemes to be within the bounds of Shari'ah law. It seems that although the banks offering Shari'ah compliant home finance have at best complied with the letter of the law, they have certainly failed to live up to the spirit of the law.
The purists amongst us will no doubt continue to find objections in the home finance schemes currently on offer, and rightly so. The schemes on offer have amalgamated contracts which are essentially different, namely contract of sale, contract of rent and contract of investment to the extent that the nature of the final contract is unclear. For instance, is the bank in the business of buying and selling property? If so, then where is its portfolio of property. Or is the bank in the business of leasing property? If so, it should buy the property first then leasing it out, rather than placing any conditions beforehand.
The practical ones amongst us will point out that under the current circumstances these are the only "Shari'ah compliant" schemes available albeit not perfect.
Over the last few years the number of financial institutions offering Islamic home finance has increased. The Islamic Bank of Britain, Ahli United Bank, HSBC, Lloyds TSB, ABC International Bank (ABC) and Bristol & West (Ireland Bank Group) all offer Islamic home finance schemes.
The nature of the contract offered by these different financial institutions is virtually the same and many of them use the AlBuraq (http://www.alburaq.co.uk) home finance product which is based on the ijarah plus musharakah (diminishing musharakah) model. Indeed many of the scholars sitting on the Shari'ah boards of these different financial institutions are the same.
All the current Shari'ah compliant home financing schemes only operate on properties based in England and Wales with the sole exception of the UNB IslamicMortgage which is available for properties based in Scotland as well England and Wales.
Out of the three home Islamic financing models outlined above, the most Shari'ah compliant is the diminishing musharakah model. The diminishing musharakah contract also offers more protection to the client from a financial point of view than the ijarah scheme.
If Muslims are unwilling to take up such home finance schemes because they feel that they are not 100% "Shari'ah compliant" then such schemes may disappear altogether.
Then there are those Muslims who are so involved with conventional interest-based mortgages themselves they claim that the so these so-called Shari'ah compliant home finance schemes are no more Islamic than the conventional interest-based mortgages. This is surely out of sheer ignorance or a mere utterance of an uneasy conscience. Is the Almighty referring to such people when He says, "That is because they say, "Trade is just like riba but Allah has made trade halal and riba haram."" (Qur'an 2:275).
To my Muslim brothers who claim that these so-called Shari'ah compliant home finance schemes are no more Islamic than the conventional interest-based mortgages because they cannot see any difference between the two, in fact they look almost identical, and furthermore the Shari'ah compliant modes of finance are more costly. I would like to give them the analogy of one chicken which has been slaughtered according to Shari'ah and another similar chicken which has been slaughtered while pronouncing the name of a false deity. Even if these two chickens are cooked by the same chef in an identical manner and their final cost is the same, one chicken remains halal and the other remains haram.
When a Muslim has the opportunity to conduct an affair in a halal manner or a haram manner it is obligatory upon him to chose the halal option.
One could argue that the so-called "Shari'ah compliant" home finance schemes are not 100% Shari'ah compliant. This is probably true, but, then again, those of us living in the West may ask ourselves, which aspects of our lives are 100% Shari'ah compliant?
Perhaps the reason that such financial schemes are unlikely to become 100% "Shari'ah compliant" is simply because the goals of the two parties involved is the transaction are very different. While the aim of the Muslim is to try and live his life according to the will of God, the aim of the bank is to make money and these Shari'ah compliant home finance schemes are just another way of making money. The modern banking system is so entrenched in interest that banks view these Shari'ah compliant home finance schemes simply as another form of making profit. Until we have banks or financial institutions whose intentions are the same as those of the Muslim home buyer we have to live with what we have.
Indeed, it may be that perhaps one should be envious of those who have had the patience and taqwa to live in rented accommodation for decades refusing to take an interest-based mortgage rather than those owning multiple or large luxurious properties financed by interest-based mortgages. For indeed the rizq (provisions) of each man is determined while he is still in his mother's womb (4). "And whoever fears Allah, He finds a way out for him, and feeds him from sources he did not reckon." (Quran 65:2-3)
Dr. A. Hussain,
September 2006/ Shaban 1427
Email: ah1999@hotmail.co.uk(This article was first written in August 1994 and has been updated as of September 2006.)
1. Sahih Muslim, hadith no. 3881
2. Narrated by Ahmad and al-Daraqutuni from Abdullah ibn Hanzalah (Mishkat al-Masabih hadith no. 2825)
Bayhaqi transmitted it in Shu'ab al-Iman on the authority of Ibn Abbas with the addition, "Hell is more fitting for him whose flesh is nourished by what is unlawful."
3. Narrated by Ibn Majah and al-Bayhaqi (in Shu'ab al-Iman) from AbuHurayrah (Mishkat al-Masabih hadith no. 2826)
4. Sahih al Bukhari (hadith 8.593/ 6594)
