Riba And Mortgages: Part 2
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. Arent Islamic home financiers simply changing labels, replacing interest with rent? Whats the difference between a conventional mortgage and an Islamic home financing?
Shariah-compliant Islamic banks, which certainly does not represent all of them, use one of three forms of home financing: 1) Diminishing Musharakah (also called declining partnership or declining balance); 2) Ijarah; and, 3) Murabaha.
Very briefly, in a Diminishing Musharakah, the Islamic bank and the client purchase the property jointly. The client moves into the property and begins acquiring the banks equity in the property while paying rent in proportion to the banks remaining equity, with each successive rental payment diminishing to the extent of the banks reduction in its share of the property.
In an Ijarah, or Islamic lease, the bank, acting as lessor, acquires a property and rents it out to the lessee client. Much later, as part of a separate agreement, the bank offers to sell the property to the client.
In a Murabaha, or cost-plus financing, the client selects a property and the bank acquires it. The bank adds its profit and sells the asset to the client at an agreed upon price on a deferred, usually installment, basis. No different from the shopkeeper who sells goods (not money) on credit. For the purposes of facilitating execution, it is permissible for the client to act as the banks agent, provided the risk of ownership resulting from this agency role devolves back to the bank.
The key difference between a conventional mortgage and an Islamic home financing is that a conventional mortgage involves the loan of cash on interest, whereas an Islamic home financing is strictly the exchange of an asset. Each of the above transactions involves an asset and actual ownership by the bank. Ultimately, the bank must own some (Diminishing Musharakah) or all (Ijarah and Murabaha) of the asset for it to be Islamically acceptable.
Exacting conditions related to timing, usufruct, and the proper allocation of potential penalty charges (to a designated charity), among other things, govern these Islamic products. When things go wrong, the fact of the Islamic bank having undertaken the liabilities associated with asset ownership makes all the difference.
So while changing labels is, alas, true in the case of some Islamic banks, to make a blanket statement condemning the entire Islamic banking industry as fraudulent is simply inaccurate. If only to earn the reward for having tried, one should probe a bit further into a banks dealings, at the very least, by asking a relied upon traditional scholar about the qualifications of the banks Shariah board.
2. Isnt home ownership an important step in establishing Muslim minorities in the West? Surely, that should make conventional mortgages permissible.
As a general Shariah principle, avoiding harm takes precedence over seeking benefit.
Establishing Muslim communities is important, but not at the level of the obligation of avoiding the enormity of dealing in interest. With Islamic home finance options readily available in most areas where large Muslim populations reside, there is no need to resort to conventional mortgaging to build communities of Muslim homeowners.
3. What about necessity (dharura)? Are there any situations in which conventional mortgages are permissible?
In the words of the respected Damascene scholar Sheikh Muhammad Sa'id Ramadan al-Buti:
The necessity which allows usurious loans is the same necessity which allows eating the meat of a dead animal, pig and the like, in which case the one necessitated is exposed to perish from hunger, nakedness or losing lodging. Such is the necessity, which makes such prohibitions lawful.11
And in the words of another leading scholar, Sheikh Wahba Zuhayli:
"only when there is absolute distress (dharura qaswa) in which all the conditions of genuine distress are fulfilled. In such situations, it would only be permitted to the extent of the distress, such as someone being unable to find a house through rental, for example, and if they don't take a mortgage they'll actually end up sleeping on the street or end up hungry such that they'll have genuine fear of death. This is the criteria for the
genuine distress that would entail an exception."12
4. Imam Abu Hanifa said that there is no riba in Dar al-Harb (lands where the rules of Islam do not exist), basing his opinion on a hadith13. Doesnt this entitle me to take a conventional mortgage?
The traditional schools of Islamic jurisprudence consist of rulings and methodologies that rely on the expertise of a body of scholars who base these rulings and methodologies on a specific socio-economic context. It is not simply a matter of lifting an opinion from a classical jurist and inserting it, decontextualized, into a modern framework. The job of todays scholars is to apply the interpretive tools of their respective schools within this framework.
The position of the Hanafi school and the Hanafi scholars with whom we spoke, including several leading muftis specializing in Islamic finance, is that one is not permitted to deal in riba, whether in Muslims lands or non-Muslim lands, and whether with Muslims or non-Muslims.
5. I dont qualify for an Islamic home financing and I cant afford to rent. But I do qualify for a conventional mortgage. Can I then enter into a conventional mortgage since this is my only reasonable option?
As Sheikh Muhammad Sa'id Ramadan al-Butis states, quoted from above, the necessity which allows usurious loans is the same necessity which allows eating the meat of a dead animal, pig and the like, in which case the one necessitated is exposed to perish from hunger, nakedness or losing lodging.
In such a case one is expected to explore all possible alternatives, including the inconvenience of a longer commute, the prospect of a less desirable neighborhood (provided it is not clearly dangerous or harmful), or, in the longer term, seeking work in another city.
The monthly payments on a conventional mortgage, after adding principal and interest, property taxes, and the usual expenditures that go with home ownership, come to an amount similar to renting property, and in many localities, an amount greater. Often we impose a pre-conceived limit on the kinds of options available to us before we fully explore all of these options.
6. Can I live in a conventionally mortgaged house that somebody else bought for me as a gift and is currently making payments on?
Scholars have permitted one to live in such a house, though it is still best avoided. Of course, one is not permitted to assist in the decision-making process or transaction of obtaining the property through unlawful means.
7. Why do Islamic banks charge more for a home financing than a conventional bank? How is that Islamic?
Rates are a function of market dynamics. Not sincerity.
In more mature Islamic finance markets, it is cheaper to purchase property using Islamic finance than it is to borrow funds through a conventional bank.14
Growing market competitiveness, and the resulting growth in volumes, ensures that financing rates will continue to fall. Islamic banks in the West are catching up. On the supply side rates continue to fall as more Islamic home finance providers enter the market, while on the demand side a rapidly growing and increasingly sophisticated customer base asks for greater Shariah compliancy at competitive rates.
In relation to conventional mortgage transactions, which number in the millions each year in the US and UK, Islamic home finance transactions are but a fraction. But within only a few years, Islamic banks in the West have made considerable strides in lowering financing rates, with one Islamic home finance provider stating that their product is no more expensive than a 30-year fixed-rate (conventional) product15
8. Islamic banking is inherently less competitive because extra paperwork for Shariah-compliancy means higher costs.
This returns to the above point about scale, and the need for greater volumes to bring rates down. Shariah compliance is less a matter of additional paperwork, though additional paperwork is often necessary, than a matter of properly executing existing paperwork. Even so, demonstrable costs associated with collapsing conventional banks and their associated products, most tellingly seen in the global financial crise, far outweigh any perceived or real costs associated with Islamic finance and the additional steps necessary to legitimize a contract.
9. What about the moral hazard of Islamic banks using their own paid for Shariah boards?
Shariah advisors are paid a fee for their services regardless of their legal opinions. These opinions are not commission-based, volume-based, or linked to the success of any given transaction. The Shariah advisor plays an auditory role, not a marketing role, so there is no financial incentive for the advisor to win hearts.
And given the relative simplicity of Islamic banking products, and the fact that industry-wide Shariah standards16 are accessible to everyone, including customers, central bank regulators, and independent auditors, means that there is little room for advisors to exercise personal agendas.
Notwithstanding the handful of scholars whose fringe positions are well known to the industry, if there is a worldly motive that a Shariah advisor might aspire to, it is the need to preserve his reputation. And in an industry in which the number of institutions entering the market far outpaces the number of qualified scholars available to serve them, reputations are paramount.
The way that one ensures that an Islamic product is Shariah-compliant is to speak directly to the Islamic bank and then check their responses against the opinions of a qualified scholar.17
Source: Ethica Institute of Islamic Finance.
by: Aaron Mighty
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