RIBA AND MORTGAGES: Part - 3
We speak to bankers, both Islamic and conventional
, and laymen, both sincere and cynical, and compile twenty-one of the most commonly asked questions about riba and mortgages:
1. In an Islamic home financing, the rent follows the rate of interest and is always a certain percentage above the base rate. Does this mean that the rent is simply replacing the interest to make it sound permissible?
Interest is forbidden on the basis of it representing "rent" on the use of cash. The concept of benchmarking, on the other hand, in which rental rates are measured against a well-known benchmark, like the US Federal Funds Rate or LIBOR (London Inter-Bank Offered Rate), constitutes a measurement, not an actual interest charge.
Scholars cite the example of selling wine: a Muslim vendor selling juice would be perfectly entitled to measure the price of his product against those of his wine-selling competitors in order to remain competitive.
The variation in rental rates after the contract is signed could be a potential source of uncertainty leading to dispute (gharar), but scholars provide two mitigants: 1) mutual agreement by both parties to benchmark against a well-known measure; and 2) flooring and capping of rate levels. While scholars permit benchmarking, they acknowledge that it is the less ideal (though still no less permissible) alternative to a truly Islamic measure such as an asset-based benchmark.
2. Islamic banks use the word "interest" in their documentation. Is this permissible?
In the absence of government documentation specific to Islamic home financing in most countries, Islamic banks are required by law to use conventional home mortgage contracts, including those that use the word "interest" in their documentation. Scholars state that this does not compromise the permissibility of the transaction, saying that the legal substanceand realityof an Islamic home financing contract is not affected in this case by a third party's terminological usages.
3. Islamic home financiers require clients to engage in insurance. Is this permissible?
Given that property insurance is a legal requirement in most, if not all, localities in the West, and given that properly capitalized Islamic cooperative insurance (takaful) options do not exist in the West, scholars have allowed the use of conventional property insurance for homebuyers.
4. Islamic banks use credit scores similar to the ones conventional banks use to check on the eligibility of a potential homebuyer. Is this permissible?
Credit scoring, among other risk assessment measures, is only a measure. Just as one would check on the credentials of a business partner before entering into a partnership, so too, an Islamic bank checks on the customer before entering into what amounts to an actual partnership.
Credit scores provide institutions with a clearer understanding of a prospective customer's credit worthiness. In order to be sustainable and continue to provide Muslims with Shariah-compliant financial alternatives, Islamic banks must remain financially stable, and credit scores are an indispensable tool for promoting this stability.
5. If I am not allowed to take a conventional mortgage, am I permitted to work in the conventional real estate business?
The Prophet (Allah bless him and give him peace) said in a rigorously authenticated (sahih) hadith, reprinted from above:
"The Messenger of Allah (Allah bless him and give him peace) cursed whoever eats of riba, feeds another with it, writes an agreement involving it, or acts as a witness to it." (Muslim)
Assisting in an act of disobedience is an act of disobedience.
As it relates to the real estate business, one should not be involved in the solicitation, execution, or any form of assistance, of an interest-based conventional mortgage, though scholars have permitted accountants and others to make post-transaction records in financial statements and the like.
Growing globally at an annual rate of 15-20, and considerably faster in some countries, career opportunities in Islamic banking abound, particularly for those already familiar with conventional finance, as many real estate professionals are.
9. How do some banks, claiming to be "Islamic", trick me?
While there is no end to the possibility of indiscretion on the part of insincere "Islamic" bankers and lawyers, the customer's final line of defense, amid the paper shuffling, is a quiet read of the actual contract.
Whether in a Diminishing Musharakah, Ijarah, or Murabaha contract, if the financier never owns the property, one is not engaged in an Islamic home financing transaction.
One "Islamic" home finance provider in North America claims to "conceptually own the shares in its name as expressed as a lien on the property," while another provider, this time in Australia, "assumes an interest in the property (rights') other than a right to possession."
According to scholarly consensus, neither of these represents actual ownership.
These banks effectively charge rent on a claim or a right (as opposed to the valid rent on an asset, service, or usufruct), a practice not acceptable to regulatory bodies.
In the absence of a governing regulatory body that unifies and imposes global Shariah standards, customers are on their own. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is widely regarded as the industry's leading standard-setting body, and may one day provide the criteria for global licensing and auditing, but it currently only serves as a guide, not as a watchdog.
Even so, as one bank learned when it was stripped of its "Islamic" label by its government regulators, word gets around.
10. The concept of ownership has changed since the classical jurists first formulated their rulings.
Some have argued for a new theory of ownership, stating that, among other financial innovations, a lien represents a new form of conceptual ownership that did not exist when the classical jurists declared all forms of riba forbidden.
First, secured lending was not foreign to classical jurists. Second, a conventional mortgage is a lien against a property, not an interest in it. The liabilities associated with the property never return to the lender. Not convinced? Light a bonfire in your front lawn this weekend and see who the authorities fine, you or the lender.
On the other hand, look at the assets side of an Islamic bank's balance sheet and you will find actual home ownership19, unimaginable to a conventional bank.
11. Interest is now customary practice in most of the world. Don't rulings change in the Shariah when something becomes customarily acceptable?
Customary practice (urf) affects rulings related to the permissible, not the decisively prohibited.
As always, changes in rulings are subject to the agreement of qualified scholars, who must possess, among other things, a highly sophisticated understanding of the primary texts, classical Arabic, the rulings and methodologies of previous scholars in their respective schools, a thorough understanding of the needs of our time, and deep familiarity with the specific topic the ruling relates to, in this case, finance and economics.
12. After much thought, I have decided to leave interest-based finance. What should I do now? What happens to the mortgage and the property?
Allah says: "And those who, when they do an evil thing or wrong themselves, remember Allah and implore forgiveness for their sins - Who forgives sins save Allah only? - and will not knowingly repeat (the wrong) they did." (Quran 3:135)
The Prophet (Allah bless him and give him peace) said in a rigorously authenticated (sahih) hadith: "There is no one who commits a sin, goes and performs ritual ablutions, and then prays two rakats after which they seek Allah's forgiveness except that He forgives them." (Tirmidhi)
Imam Nawawi says in Riyad al-Salihin: "Sincere repentance consists of abstaining from the sin instantly, having a firm intention not to be involved in that sin again and being remorseful and regretful of one's actions."
One takes the means to extricate oneself from the mortgage: one would be religiously obligated to remove oneself from the situation, and when not reasonably possible, to repay the loan as quickly as possible by the most effective means available to one; most readily by reducing one's expenditure and, if possible, taking interest-free loans from friends and family. Ownership in the house itself and proceeds from its eventual sale are both considered lawful. A number of Islamic banks now offer refinancing options that convert one's conventional mortgage into its Shariah-compliant equivalent.
And Allah knows best.
Source: Ethica Institute of Islamic Finance.
RIBA AND MORTGAGES: Part - 3
By: Aaron Supplanter
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