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The Islamic Mortgage: Paradigm Shift or Trojan Horse?

The Islamic Mortgage: Paradigm Shift or Trojan Horse?

All praise is due to Allah and may His peace and blessings be upon our Prophet Muhammad, his family and all his Companions.

During recent years there has been an unprecedented expansion in the range of commercial banking products labelled as “ Shari`ah compliant” in many countries of the world. Popular interest among Muslims in the Shari`ah of financial transactions has increased likewise, and in the United Kingdom the permissibility of so-called “Islamic mortgages” is among the most frequent topics of enquiry. We therefore thought it appropriate to record here what we see as the main problems associated with this product class from the perspective of Shari`ah, knowing that many of our criticisms can be equally well applied to other types of product that are currently available from the Islamic banking sector. Scholars who have approved the main forms of Islamic mortgage will no doubt disagree with some elements of our criticism. We mean them no harm, and remind the reader that Allah has decreed the existence of differences among people, including Muslims, as one of the tests by which Paradise may be attained.

Although we conduct a purely contractual examination of the issues, it is important not to forget the socio-political context of the discussion. Muslims in the West are attempting to implement certain elements of Shari`ah within an environment that is frequently inhospitable, and the formulation of an appropriate strategy is therefore rather complex. The question is not limited to whether particular financial products are contractually valid. Wider concerns are also in play. For example, is it permissible to establish an Islamic bank that initially has some dealings with interest if the intention is eventually to become interest-free? Should we be content with a structure in which an essentially un-Islamic industry accommodates some Islamic products? Or should banking as an industry be avoided until a completely interest-free opportunity presents itself? If so, how will Muslims satisfy their banking needs in the meantime? Perhaps most fundamental of all, is the Western model of Islamic banking and finance something that can be ‘Islamised’ in the first place?

When approaching this subject some scholars of Islam may give greater weight to the surrounding context than they do to narrow contractual issues, particularly in Western countries where the institutional and legal framework is rooted in practices that are often prohibited in Islamic law. It is surely unreasonable to expect a wholly Islamic banking paradigm to suddenly sprout from un-Islamic foundations, and some sort of transitionary phase is therefore to be expected when developing Islamic alternatives. Moreover, in many countries of the world, Islamic and non-Islamic, the Muslim community is not in a position to effect the wide ranging institutional changes that would be required if a genuine Islamic financing paradigm is to emerge.

Whatever approach is taken to dealing with the problems that face us, we feel that one key rule to be obeyed is that Islamic principles and teachings should not be twisted to fit preconceived solutions. The basic Islamic prescription for success in these matters is, as always, to deal with the causes of a problem and not its symptoms. If we are asked to provide an Islamic solution to the economic problems caused by interest, without eliminating interest, then we say that Islam does not have that solution. To those who argue that “partly Islamic” financial products are an acceptable stepping stone towards an ideal solution, we respond that such products may already be part of the problem. {quotes}Many of today’s Islamic financial products are neither presented nor perceived among the Muslim population as temporary solutions dictated by force of circumstance. Because of this, the drive towards improvement in the Islamic finance industry is being diminished. If existing products are already “Islamic”, why develop new ones?{/quotes}

Now referred to as “home purchase plans” by the UK Treasury and Financial Services Authority, Islamic home financing products usually adopt one of three basic forms of Islamic contract. These are murabahah, `ijara wa iqtina (sometimes referred to as ijara muntahia bitamleek) and musharakah mutanaqissa.

Murabahah is a sale of an item to a buyer at a disclosed profit margin over cost. In order to implement a murabahah mortgage, a bank will buy from the vendor the property that is desired by its home-buying client for the agreed price, and immediately sell it to the client at an agreed profit margin over cost. The home-buyer will pay the price of the property in installments over several years, and mortgage the property to the bank in order to secure the installments that are due. Banks that offer this form of finance usually borrow (at interest on the money market) the amount of money that they use to purchase the property in the first leg of the murabahah transaction. The installments paid by the client are therefore set at a level that is sufficient to repay the money borrowed by the bank from the money market, and provide the bank with a profit on the deal. The installments paid by the client must be fixed in total (since a contract in which the price is not specified is invalid under Shari`ah) hence a bank often uses the interest rate swap market in order to fix its interest costs. By fixing its own borrowing costs, the bank can fix its client’s installment payments. Rises or falls in interest rates during the term of the murabahah will not then have an effect upon the cash-flows of either the bank or its client.

`Ijara is a rental of an item by its owner to a client, and `ijara wa iqtina is a rental of an item followed by its sale to the client. In the case of home financing using `ijara wa iqtina, the bank will buy from the vendor the property desired by the home-buying client at an agreed price, rent it to the client for a period of years, and then sell it to the client at the end of the period at a price agreed between them at the outset of the contract. The client’s monthly payments to the bank will comprise two main payments. One is rent, the other an amount that is held by the bank as an assurance that the client will be able to pay for the purchase of the property when required to do so at the end of the rental period. The “assurance money” is loaned out at interest by the bank to the money market, producing a financial benefit for the bank. The client’s monthly payment under an `ijara corresponds approximately to the payments under an amortising interest-based loan in which capital and interest are repaid in changing proportions over the term of the loan. This similarity allows a bank to easily adapt its interest-based lending processes to the requirements of an `ijara mortgage.

Musharakah mutanaqissa is a diminishing partnership between a financier and a homebuyer. There are several ways in which this partnership can operate. In the case of the Al- Buraq scheme in the United Kingdom , the bank purchases the property desired by the home-buying client using its own funds plus a deposit provided by the client. Although the property is registered in the name of Al-Buraq at the Land Registry, the diminishing partnership contract splits the so called “beneficial interest” in the property between the bank and the client so as to reflect the relative size of their contributions to the purchase price. The client now lives in the property as a tenant and pays rent to the bank. The amount of the rent is adjusted to reflect the fact that the client owns part of the beneficial interest in the property. In addition to the rental payment, over time the client buys the bank’s beneficial interest in the property and eventually becomes the owner of all of that interest. At this stage, the client’s total rental payment is zero and the final formal step is taken of transferring ownership into the name of the client at the Land Registry. It should be noted that in some other diminishing partnership contracts, the property is held by the financier in trust for itself and the client. Of itself, this modification need not affect the cash-flows described above.

Ahli United Bank in London offers products that are described as murabahah and `ijara. United National Bank, HSBC, and Al-Buraq offer what they call a diminishing partnership contract. The Al-Buraq contract has been adopted by Bristol and West, Lloyds TSB and Islamic Bank of Britain . Until recently, HSBC offered an Islamic home financing contract in accordance with `ijara wa iqtina principles, but this has now been replaced by its diminishing partnership product.

The Islamic principles of financial transactions are found within a part of Islamic law called muamalat. As a rule, muamalat states what is prohibited, not what is permitted. If a contract can be shown to contain a prohibited feature, it is deemed void or partly invalid under Islamic law. The onus is on the one who prohibits to prove his case, not on the one who permits. Hence, it is not for the bank to show that its mortgage product is halal (permissible). Rather, it is for detractors to show that the product contains a prohibited feature such as riba (usury, of which the charging of interest is one form) or gharar (deception or uncertainty in contractual terms). It is worth pointing out that the fashion of issuing religious judgements to approve financial products as halal goes against this basic legal approach. However, it seems that the spread of riba and unlawful features within most contemporary financial transactions has encouraged Shari`ah scholars to issue such judgments to signify conformity rather than non-conformity.

Islam defines riba in such a way as to prohibit any benefit received by a lender for the giving of a loan, no matter how big or small the benefit. (Riba can also occur in certain other forms of trading transaction that we do not deal with here.) The main point for our purpose is that modern interest falls under the scope of the riba prohibition. In contrast, a transaction in which goods are exchanged for money cannot contain riba. This is called trading. It is however possible that such an exchange will be invalid on other grounds, such as coercion or misrepresentation. Muslim merchants are therefore allowed to make a profit by selling goods for more than they purchased them, but they are not allowed to make a profit by lending money. This is the way in which we may understand the Qur’anic injunction that:

“… Allah has permitted trading and forbidden riba … “

from ayat 275, Surah al-Baqarah

Islamic law also prohibits hila (legal trickery) that can produce a usurious loan from otherwise permissible contracts. For example, a usury-free loan, a promise and a gift are each permissible in Islam. However, if Person A gives Person B a usury-free loan of £100 on condition that Person B promises to give Person A a gift of £10 upon repayment of that loan, then this is clearly a usurious loan when looked at as a whole. It is therefore prohibited by all schools of Islamic thought that we are aware of. In other words, combinations of Islamically acceptable contracts cannot be used to defeat the usury prohibition. In E`lam al-Muwaqi`in, ibn Qayyim al-Jawziyyah comments: “What matters in contracts is substance, not words and structure.”

Speaking of such contracts in a more general sense, the late Arab scholar ibn Uthaymeen described modern day Islamic banking as the “usury of deception”. This he viewed as more serious a sin than usury on its own, for the former entails deception as well as usury, while the latter does not attempt to present itself as anything other than what it is. Similarly, at a conference in Dubai during March 2004, Justice M. Taqi Usmani is reported to have said that: “What we are developing now is not fiqh-ul-mu`amalat (the jurisprudence of financial transactions), but rather fiqh-ul-hiyal (the jurisprudence of legal tricks)”.

Contract combination has become very common in modern Islamic banking. For example, in the murabahah model, Person A (the bank) might buy a property for £100,000 from Person B (the seller of the property) and immediately sell it on to Person C (the homebuying client) at a price of £150,000 to be paid in equal installments over 15 years. Person C must begin the process by promising in writing that if Person A buys the property from Person B, then Person C will immediately buy the property from Person A. The few Shari`ah scholars who approve this transaction say that it is trading (buying and selling of properties), not borrowing and lending money at interest, and that it is therefore halal. But viewed from the bank’s perspective, as soon as the bank transfers £100,000 to Person B, the agreement with Person C automatically comes into effect requiring Person C to repay £150,000 to the bank at a later date. The transaction is referred to as “murabahah to the purchase orderer” in the Islamic banking literature.

The contractual documentation used in a murabahah to the purchase orderer transaction usually includes an offer letter which states that the bank does not agree to execute any one leg of the transaction unless all legs have been agreed among the relevant parties. In this way the bank avoids the situation in which it owns the property for any meaningful period of time, and from the bank’s perspective the transaction is merely one of “moneynow for more money later”. In effect, the property is used as a means of lending money at interest. The possibility that contracts of sale could be used in such a way was well recognised by ibn `Abbas. When asked about a piece of silk that was sold for a deferred price of 100 and re-purchased for a payment of 50 in cash, Ibn `Abbas commented: “dirhams for dirhams, with a piece of silk in between”.

The use of an offer letter may maintain the appearance that the transactions (property purchase followed by property sale) are independent and therefore not similar in analogy to the combination of contracts described above as hila. However, we are not convinced by this structuring of documents, since the legal effect is identical to the inclusion of all legs of the transaction in a single contract. For example, a United Bank of Kuwait murabahah mortgage offer letter in 1998 states that: “We [UBK] will not buy the Property from the Vendor or sell it to you [the Client] until all the matters set out in the Schedule of Offer Conditions have been completed to our satisfaction”.

We feel that if the obligations of the parties to a given financial product are to be spread among more than contract, then it is obligatory for jurists to look at the scheme as a whole rather than at its separate components before forming an opinion on its permissibility.

Turning our attention to the method by which rental levels are set in `ijara and diminishing musharakah mortgages, we note that in many such contracts rent is linked to the London Inter-bank Offered Rate (LIBOR). This rate is determined on a daily basis for specified periods going forward. For example, the six month Sterling LIBOR rate for 11 August 2006 was 5.07688%. This means that a person borrowing £100 for the six month period starting two days after 11 August will pay an annualised interest rate of 5.07688% for the period (approximately £2.54 for the contract in question). Given that we cannot know what LIBOR will be for any period starting tomorrow or on subsequent days, clients whose rental payments depend upon that interest rate are in a position of ignorance as to what their future rental payments will be. With regard to the rental payments, the Al-Buraq contract states that: “Before the start of each Rent Period, we will send you an Adjustment Notice notifying you of the adjusted Rent and Acquisition Payments which will be payable on each of the Payment Dates in that Rent Period. The rent payable on each of those Payment Dates will be found by applying the formula P% x AC/12 where P% = the percentage found by adding LIBOR to the Margin …” [the Margin being an amount added to LIBOR in order to provide Al-Buraq with a profit]. Clause 6, Al-Buraq Lease Agreement, 2006

Scholars have argued that setting rental levels in line with market interest rates is not in itself haram. They argue this by analogy, on the basis that it is permitted for a Muslim shopkeeper to make the same percentage profit selling lemonade as the non-Muslim shopkeeper makes selling alcohol. However, we identify a rather different and serious problem arising in the link to LIBOR, namely one of gharar. This is because the client does not know what rental amount he must pay to the bank until the beginning of each new period, remembering that the client is contractually bound to rent the property for the subsequent period. If interest rates increase dramatically, then the rental payments will likewise increase and the client may find himself locked into the payment of rentals that he cannot afford. This is one basic reason that traditional scholars in Islam have made the specification of price a basic requirement of any sale contract. One cannot agree to buy or rent something without knowing the price one must pay. Wahba al-Zuhayli summarises: “… general conditions specify that the sale must not include any of the following six shortcomings: uncertainty or ignorance (al-jahala), coercion, time-restriction, uncertain specification (gharar al-wasf), harm (al-darar), and corrupting conditions (al-shurut almufsida)” Dr. Wahba al-Zuhayli, Islamic Jurisprudence and Its Proofs, Dar al-Fikr (2003), p. 33

“A sale without naming the price is defective and invalid”

Dr. Wahba al-Zuhayli, Islamic Jurisprudence and Its Proofs, Dar al-Fikr (2003), p. 56

If the home-buying client later decides that he can no longer afford the rental, both the HSBC and Ahli United `ijara contracts require that he or she must guarantee to repay the cash sum initially provided by the bank to fund the purchase of the property. In those cases where the property has to be sold to achieve this, the possibility arises that, if property prices have fallen in the meantime, the sale proceeds may not be sufficient to repay the financed amount. In this case, by requiring the client to make up any shortfall to the bank, the possibility of “negative equity” arises, a position in which the client owes more to the bank than the property is worth.

Clause 6.3 (d) of the United Bank of Kuwait `ijara agreement from 1998 provides an example of the way in which banks seek to protect themselves from capital loss. Here, the bank is allowed to sell the client’s property in the event of default and to subtract such amounts as are necessary from both the proceeds of sale and the on-account payments made by the client in order to protect the bank from a loss on its investment.

From the Shari`ah perspective, it is clear that a client can only be renting a property if he doesn’t own it. Yet if the legal reality is one of rental, a question arises as to why the client must bear the risk of a fall in the property’s price. Those who rent cars from hire companies are not expected to compensate the hire company for a fall in the value of the car during the period of the hire. On the other hand, if the client is bearing the risk of a fall in property value precisely because he owns the property, then it must be asked why the client is expected to pay rental to the bank.

In answer to this question some Shari`ah scholars have argued that, in a modern `ijara agreement, the bank only buys the property and rents it to the client because the client has expressed a need for the property. It would be unfair, they argue, for the bank to suffer a loss if the client does not proceed to purchase the property at the price agreed at the outset of the `ijara.

Once again, we are not convinced by this argument. The essence of an ‘ijara contract is to free the tenant from bearing responsibility for loss or damage to the property (unless it results from the tenant’s misuse of the property). A compensation for loss of capital value is a condition that defeats the purpose of an `ijara contract, and this kind of condition is not permitted in muamalat. Another example would be to sell a watch to a buyer on condition that the buyer must give the watch back to the seller after one month without compensation. Such a condition defeats the purpose of sale, which is that ownership passes permanently to the buyer in return for payment of the price to the seller. If such conditions are to be permitted on the grounds of intention, what is to stop Partner A in a partnership from asking Partner B to guarantee him against capital loss, on the basis that Partner A entered into the partnership merely as a favour to Partner B? Such an argument would be seen as invalid under Shari`ah because it defeats the purpose of partnership, yet it is almost identical to the argument used by those scholars who defend the rights of the bank in the aforementioned `ijara agreement.

Furthermore, an `ijara mortgage typically requires that the client purchases the property from the bank at the end of the `ijara term as a means of protecting the bank’s original capital contribution. This transaction, involving a deferred delivery of both countervalues (property and price), has been prohibited by the four main schools of thought: “Delay from both sides is not permitted by consensus either in corporeal property or in liabilities as it amounts to a proscribed exchange of a debt for a debt.” Ibn Rushd, Bidayat al-Mujtahid (English translation), Garnet (1996), p. 154

The final issue that we wish to address here is the purchase of shares by a home-buying client under the diminishing partnership form of contract. Here, the price and timing of share purchases is usually fixed at the outset of the contract. We are aware that in one particular case, the price of share purchases is related to the market value of the underlying property at the time of the purchase, and that in this same case such purchases are not forced upon the client contractually. This case is however an exception and the majority of financial institutions adopt the former model. For example, the Al- Buraq contract forces its home-buying client to purchase shares in the partnership at monthly intervals: “We agree to sell and you agree to buy Our Share of the Property for the Acquisition Cost on the terms of this Deed. The Acquisition Cost shall be payable by way of the First Acquisition Payment, which shall be paid on the date of this Deed; and the Acquisition Payments … which shall be paid on each Payment Date …” Clause 2, Al-Buraq Diminishing Ownership Agreement, 2006

It is worth noting that the Shari`ah standards of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) prohibit the purchase of shares in a diminishing partnership at a price that is fixed in advance. This is on the basis that partners in a contractual investment (in this case, a rental property) must share any losses on their investments in proportion to their capital contribution. If one partner forces another to buy his shares at a predetermined price, he may effectively be able to protect himself against loss, thus breaking the principle of loss sharing that must apply if an Islamic partnership is to be valid. For example, if two partners put £50 each into a business partnership, the partnership capital is £100 in total. If it is further agreed that the first partner will purchase the shares of the second partner in one year’s time at a price of £50, then the second partner has assured himself, contractually, that he cannot make a loss on his investment in the business. AAOIFI clearly recognises the risk that a halal partnership contract can be transformed into a riba contract by means of pre-agreed share transactions: “It is permissible for one of the partners to give a binding promise that entitles the other partner to acquire, on the basis of a sale contract, his equity share gradually, according to the market value or a price agreed at the time of acquisition. However, it is not permitted to stipulate that the equity share [sic] be acquired at their original or face value, as this would constitute a guarantee of the value of the equity shares of one partner (the institution) by the other partner, which is prohibited by Shari`a.” AAOIFI Shari`ah Standards 2003 – 2004, section 5. Diminishing Musharakah, p. 214

The diminishing partnership contracts that have come to our attention protect the bank from capital loss on its share of the partnership by various means and to varying degrees under English law. In the event of a deterioration in the United Kingdom property market, Muslims who default under such contracts may therefore find themselves required to guarantee the bank’s original capital contribution to the property purchase. If property prices fall sufficiently far, the position of negative equity that was described earlier could become widespread. This would no doubt be an unexpected surprise for many clients, given the language of “risk sharing” that typically accompanies Islamic home finance products.

In summary, we believe that any Islamic home financing scheme in which the financing organisation stipulates conditions to protect itself from a negative return on capital is equivalent to an interest-bearing loan. Contracts in which the financier buys a property for a client while requiring the client to buy it back at a higher deferred price are the most common (but not only) means of implementing such loans. In these cases, the property is used firstly as a tool to transact the loan, and secondly as a means of securing it.

Given that it is possible to produce genuinely Shari`ah compliant Islamic property financing contracts under English law, we feel that to permit the present range of products on contractual grounds is a flawed strategy for the Muslim community to follow. The risk is that the benefits possible under a proper implementation of Islamic finance will not emerge, and that what could have been the beginning of an interest-free economic renaissance will in fact become a mechanism for its suppression.

Allah knows best and may His peace and blessings be upon our Prophet Muhammad, his family and all his Companions.

DISCLAIMER: All material found on Islam21c.com is for information purposes only. The views expressed on this site or on any linked sites do not necessarily represent those of MRDF & Islam21c.


About Shaikh (Dr) Haitham Al-Haddad and Tarek El-Diwany

Dr. Haitham al-Haddad is a jurist and serves as a judge for the Islamic Sharia Council (UK & Eire). He has studied the Islamic sciences for over 20 years under the tutelage of renowned scholars such as the late Grand Mufti of Saudi Arabia as well as the retired Head of the Kingdom's Higher Judiciary Council. He specialises in many of the Islamic sciences and submitted his doctoral thesis on Islamic jurisprudence concerning Muslim minorities. Shaikh Haitham is highly respected having specialised knowledge in the field of fiqh, usul al-fiqh, maqasid al-shari'ah, ulum al-Qur’an, tafsir, aqidah, and fiqh al-hadith. He provides complex theories which address the role of Islamic jurisprudence within a western environment whilst also critically re-analysing the approach of Islamic jurists in forming legal rulings (ifta’) within a western socio-political context. He has many well known students most of whom are active in dawah and teaching in the West. The shaikh is an Islamic jurist (faqih) and as such is qualified to deliver verdicts as a judge under Islamic law, a role he undertakes at the Islamic Sharia Council as Islamic judge and treasurer. Dr Haitham al-Haddad also sits on various the boards of advisors for Islamic organisations, mainly in the United Kingdom but also around the world.


  1. ansar finance
    yes they both approve ansar finance as if you check their website they do not put all the risk/reward onto the lender & their model is different from std bank model see link for details


  2. Ansar Housing ltd

    Further to comments made above, if this is the opinion of the scholars, why has Tarek el Diwany approved of Ansar Housing ltd’s shariah structure, which is also Diminishing Musharakah? Unless I’m mistaken. But on his website, Zest Advisory, it states that his company provided shariah guidance to Ansar Housing ltd – and they are currently operating a diminishing ijarah/musharakah mode of finance.

  3. Toronto Home Staging

    We feel that if the obligations of the parties to a given financial product are to be spread among more than contract, then it is obligatory for jurists to look at the scheme as a whole rather than at its separate components before forming an opinion on its permissibility.


  4. Another alternative

    First of all, there’s nothing wrong with people making money off transactional charges. That is a risk/reward of doing business and is halal.

    If you really wanted a halal house, then don’t get a mortgage – simple!

    Rent a property (which is totally variable and renter carries risk), and save for cash for a house. So you won’t get a house at the same time as your non-muslim peers, but trust me, you’ll be happier for it, when you pay for a house in cash 20 years before they complete. In the mean time, while you are saving that cash, you could be investing (trade – halal!) and taking a risk with that money in halal business, perhaps even surpassing the initial target.

    We keep thinking in the UK/US that house ownership is a right, but look at Europe and it largely isn’t. And even in the UK, a lot of people are looking at renting for their whole lives.

    It took me 15 years of renting and saving before I had the cash amount to buy the house. I used that free capital to invest in riskier businesses ventures. But when I bought my modest place, I paid cash and then didn’t have to worry every month whether the debt collectors would come around.

    Do it, and we won’t need to create products that offer no real value.


  5. Mr.
    i use to be very confused about this whole Halal Mortgage concept. Alhamdulillah, with a bit of research of the quran and Hadith and guidance for Allah (swt), it is clear to me that Halal Mortgage is nothing but rebranding of the conventional mortgage and it invloves usury one way or another.

    i ask people who are worried about owning a house, do you not believe in Allah (swt) as the sustainer. Yes, renting a property may lead to hardship at some point and times, but Allah (swt) will not grant paradise without testing us. Allah (swt) says in the Quran

    ‘Be sure we shall test you with something of fear and hunger, some loss in goods or lives or the fruits (of your toil), but give glad tidings to those who patiently persevere, Who say, when afflicted with calamity: “To Allah We belong, and to Him is our return”:-They are those on whom (Descend) blessings from Allah, and Mercy, and they are the ones that receive guidance. – [Quran 2:155-157]‘

    Further again Allah (swt) says ‘Do men think that they will be left alone on saying, “We believe”, and that they will not be tested? – [Quran 29:2]‘

    Allah (swt) says about Usury, ‘
    O you who believe! Be afraid of Allâh and give up what remains (due to you) from Ribâ (usury) (from now onward), if you are (really) believers[]. (278) And if you do not do it, then take a notice of war from Allâh and His Messenger[] but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums). (Sura 2 – Al-Baqara Verse 279).

    Can any one muslim in the world standup and tell me that they are prepared for a war with the Allah (swt) and his Massenger (pbuh)? Satan may temp you over and over again with excuses, but dont fall into this ever regretful trap. just think, there are millions upon millions of people in world struggling for daily bread, owning a house is last of their concerns. Allah (swt) provides, not only to human being but to every single creation. His bouties are endless and so is his mercy.

    May Allah (swt) save us all from this grave sin and guide us all to the righteous path.

    criticism is easy, where is the solution/??

  7. Islamic Financing with Guidance Financial
    Assalamu Alaikum,
    This article is very interesting and eye opening indeed.

    You mention regarding the home-buying under the diminishing partnership form of contract that “We are aware that in one particular case, the price of share purchases is related to the market value of the underlying property at the time of the purchase” . So do you mean that one company has the halal contract? If so, which company is it?

    I live in the USA and I wanted to find out about the halalness of one of the major Islamic financing company called Guidance Financial. You can read about them at the following website http://www.guidancefinancial.com/products/ourprogram.asp . I also have some friends and families who are really interested in a home purchase in the near future because of the reduced home prices due to the economy. We would really appreciate your expert analysis of Guidance Financial contract. At least, if you know that any part of their contract is questionable – please do let us know.

    One more confustion I have regarding the Islamic financing is where these companies get the money from? For example, Guidance or Lariba they probably get their money from Fannie Mae or Freddie Mac or other large financing/mortgage corporations. Is that not questionable on its own? Or as long as the contract is fine, you can deal with those financial institutions.

    Really looking forward to your detailed response.

    JazakAllah Khair.

  8. The great deception
    Jazak Allah Khayrun for a great article.

    I am completely convinced that the “Islamic Mortgages” are nothing but interest loans disguised.

    They are generally founded by people who are only interested in making money from money.

    I feel sad that with all the money that Muslims have world wide (especially our brothers with all that black gold in the Gulf) and intellect, we are unwilling to come up with a truly halal financing option for Muslims. In a truly halal structure, it would be a partnership in the investment of property etc. In the long term I believe such partnerships would be beneficial to all parties.

    But no, unfortunately, we are all so obsessed in making money for money.

  9. Zeeshan Ahmed

    Prospective House buyer
    I absolutely agree with your writing, Halal Mortgage and anything similar is nothing but a regular Mortgage and on top of it they add a point or more to call it Halal mortgage. This is a rip off. I am in Calagary and planning to get a house, I call the UmFinancial in Toronto (Scarborough) and talked to Mr. Shafiq and asked him Just one Question:
    Q) If the Bank Of Canada decides to increase the interest rate, will this affect my monthly payment?
    A) Yes…. So how can this be an Islamic Mortgage as it is directly tied up to the interest rate coming from the Bank of Canada?
    To My Understanding: If I borrow cash from anybody (my brother, uncle, Bank or a Friend) if the lender asks anything over the borrowed amount is nothing but Interest I don’t care what anybody say or trys to justify it.

  10. Capitalist Infidel

    Response to: Market Price Risk – The Other Side
    Your question:

    The banks do surely hedge themselves against the risk of falling prices, but that protects the client from appreciation of rentals and property prices as well. For instance, if the price of the property appreciates, the stake of the bank will become of higher value than the original purchase price. In such a case, the borrower (home owner / client) will have to pay a higher price to offset the bank’s share.

    Response: In the structures (Ijarah or Diminishing Musharakah) the amount owing is not contingent on the value of the home, it is set at the outset as a portion of the purchase price of the home (i.e., net of the downpayment). This decreases with time as periodic payments (made up of principal and rent, for lack of a better word) and, at the end of the amortization schedule, becomes zero. Thus, if the price appreciates then the equity for the homeowner increases.

    In such cases as when the lender (I’m using non-Muslim terms here, but I think you know whom I mean) has a shared-risk/profit-share clause then as a home might appreciate the amount owing to the lender upon sale or completion/termination of the contract will escalate. In some countries this is a tax challenge, but basically there is more owing because of the shared-risk/profit-share clause. All things being equal, though, the rent charged should be less than a conventional rent/interest payment (realizing Islamic financing is rarely in a perfect vacuum) and this would, along with shared losses if value decline, make the halal option more paletable for borrowers.

    Your other query is most insightful: Also, in case the rent market goes up, the client will have to pay a higher rent per month, which will not contribute towards offsetting the bank’s equity.

    Response: I say this not because it’s clever to see that rents increase over time, but that a halal mortgage should not be tied to interest rates, but on other factors such as rent. Of course, at the end of the day, interest rates affect cap-rates on real estate (as non-Muslim investors will choose one over the other) but how can a halal mortgage be linked to as diverse a price as rents? Is it local rents of the same type of dwelling? (That would be fine if it’s an apartment or condo.) Is it regional or national increases? Is it an index of some sort? Given that rental contracts are typically (very) private it would be difficult to find this information. True, though, if rent increased (similar to interest rates increasing in a Western mortgage) it will be more expensive to increase equity in the home–but the converse is also true.

    The kicker here is that if rents rise then property appreciation is likely also occuring (rent prices in dollars increase along with property values in dollars to keep a relatively constant cap-rate: defined as annual rent / property value) so shared-profit with the lender would be increasing just as it was becoming more difficult to increase equity in the home.

    Basically, no way is perfect, but there is a way to structure these to satisfy religous, social and economic/commercial concerns.


    Capitalist Infidel

  11. Imran Adeel Haider

    Market Price Risk – The Other Side
    Salam Alaikum

    Being an observer of the Islamic Financial market, I read the article with great interest. The part where the authors say that the bank is entering into haram territory when it secures itself against the falling prices of the property (in Ijarah or Diminishing Musharakah contracts), is warranting comments for the reverse situation: What is the price of the property appreciates? The banks do surely hedge themselves against the risk of falling prices, but that protects the client from appreciation of rentals and property prices as well. For instance, if the price of the property appreciates, the stake of the bank will become of higher value than the original purchase price. In such a case, the borrower (home owner / client) will have to pay a higher price to offset the bank’s share. Also, in case the rent market goes up, the client will have to pay a higher rent per month, which will not contribute towards offsetting the bank’s equity. I am quite confused over this issue and would like someone or the learned scholars to clear my mind.

    I completely agree that the current Islamic Finance activities are distorted forms of conventional financing, and we need a more thorough product structure and a parallel money market (which is a paradox, essentially) to run Islamic Finance business.

    Jazak Allah.

    Brother in Faith,
    Imran Adeel Haider.

  12. Incoherent strategy by the scholars of the UK
    Assalaamu Alaykum,

    Why do we have Shaykh Suhaib Hassan advising the uptake of the available mortgages, and Shaykhs Haitham and Tarek Diwany discouraging them?

    My point is not that one is correct and not the other, my point is that clearly those who have assumed positions of leadership on our minbars are not talking, and agreeing on strategies on this subject to take us forward.

    Where is the strategy? Which memebr of the same shariah council are we supposed to listen to??

    What we need, even more urgently than an atricle like this, is a proper leadership structure. Grass-roots can only do so much.

    A coherent leadership must come from the minbars soon.

    Once we have a coherent statrgey to follow on the issue of Islamic mortagages, and other issues, we can make real progress in this society.

  13. a definitive analysis
    great article and quite informative however it would interesting to look in detail at all islamic mortgages on the market and give a indepth analysis of each.If possible could the authors comment on the mortgage offered by ACHC in toronto canad http://isnacanada.com/achc.htm in principal from the information given on their website it appears to be sharia compliant but as in every situation its the finer details that count. If this approach is sharia compliant is there a similar situation in the uk?

  14. just another brother

    response to 1st comment
    salaam bro, I’m not the author, but the passage you mentioned is clear. The author argues that at present there are no truly shariah compliant mortgages on offer in the market place (at least by the major banks). The author is saying that this will continue unless the ummah of the UK rejects the current so called shariah compliant mortgages on offer. This will send the clear message to the banking industry that if they wish to financially benefit from Muslim clientele then their financial products will have to be truly shariah compliant. However, at present, there will be no need for them to develop such products if the Muslim community as a whole is complacent with what is currently on offer.

  15. Bismillahir Rahmaanir Raheem,

    Salamun alaikum.

    So have you come across a single ‘Shari’ah Compliant’ mortgage or loan in the UK that is actually not Haram, and if so, which one(s)?

    Peace and blessings of Allah on our prophet Muhammad.

  16. Muhammad
    ‘Given that it is possible to produce genuinely Shari`ah compliant Islamic property financing contracts under English law, we feel that to permit the present range of products on contractual grounds is a flawed strategy for the Muslim community to follow.’ clarify please, where are those contracts, if they are possible why are they not in the market and being followed.

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