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ISLAMIC BANKING

Islamic Ijara Mortgages by HSBC and Other Banks

Let me first brief the reader regarding the manner in which the scheme works.

Under the ijara (rental) variety of Islamic mortgage, the bank purchases a property selected by the client, following a promise from the client that he or she will live in that property and purchase it after an agreed period of time. In return, the client pays monthly installments to the bank, mainly composed of two payments. One portion of the installment is considered to be a payment of the purchase price for the property, and another portion is counted as rent that the client pays for living in the property in the meantime. The purchase price paid by the client is equal to the purchase price initially paid by the bank for the property. Once the client has paid all of the installments, in other words the purchase installments plus the rental installments, the bank will transfer the ownership of the property to the client. The bank makes its profit from the difference between the price it pays for the property (including related transaction costs) and the amounts received in installments from its client.

This type of scheme, with some minor modifications, is used in the United Kingdom by HSBC Amanah Finance, Ahli United Bank and United National Bank. [1]

In principle, an ijara scheme can be structured in such a way as to be acceptable under sharî’ah so long as certain conditions are met, the discussion of which is beyond the scope of this judgement. However, the implementation of the scheme by the above banks is highly problematic.

Firstly, the contract is ambiguous in terms of its nature. Is it a lease contract, a purchase contract or a combination of the two? Some scholars have prohibited combined contracts (for example, a transaction that combines both lease and purchase), as the Prophet, peace be upon him, prohibited two transactions in one transaction. This is the opinion adopted by most of the scholars, and although there are some who have allowed this type of transaction under certain strict conditions, there is a consensus that the presence of a significant amount of ambiguity invalidates a contract. Among the many Prophetic traditions on this point is that of Ibn ‘Umar, who related that the Prophet ,upon whom be peace, forbade sales that involve uncertainty or gharâr (ambiguity). [Narrated by Muslim]

Many scholars, including the foremost fiqh councils of our times [2], believe that if rental and sale are mixed in such a way that one cannot distinguish at any point of time whether the client is a tenant or a buyer, then such a contract is invalid according to Islamic jurisprudence.

When pressed to clarify the nature of the ijâra mortgage, staff in Islamic banking departments frequently describe it as a ‘lease ending in a purchase’. Yet if this really is the case, then the ijâra mortgage should display the features of a lease throughout the entire time-span of the contract (often as much as 25 years) until it concludes with a purchase event. In other words, the bank will rent the house for a period of time with the promise that it will sell to the client at the end of the tenancy. During the tenancy, the bank will be the legal owner of the property. After the tenancy the client will be the legal owner.

Although many scholars do not allow this type of combined contract, let us for the sake of argument consider it to be valid according to the opinion of those scholars who accept it. When we examine the available ijâra schemes more closely, we find that the theoretical structure outlined above does not exist in practice. The ijâra contract as it stands is neither a lease nor a purchase. Rather, it is closer to a conventional loan where the bank lends money to a client for a poperty purchase, and requires that the client must repay with a markup (under the guise of ‘rent’).

Consider the following questions which illustrate the ambiguity of the contract:

1. Why does the tenant need to pay a large down payment? (Frequently an amount equal to 10% of the price is required. A genuine tenant does of course make some kind of down payment, relevant to the period of the tenancy, but no credible tenancy agreement can bind the tenant to place such a large down payment.)

2. Who pays the insurance of the house? Is it the bank or the tenant? (Technically, the owner of an asset is the one who should pay for its insurance.)

3. What will happen if there is loss or damage to the property and the insurance company refuses to cover the losses incurred? Who will pay for this? (Once again, if the bank is the actual owner, and such a loss or damage occurred through no fault of the client, then the bank cannot hold the client responsible for damages.)

4. If the tenant decides to stop the tenancy agreement, the bank will sell the property. If the price of the property has depreciated in the meantime (which means the bank as the owner of the property suffers a loss), why is the client bound to compensate that entire loss while being only a tenant?

The point of all these questions is to address the central issue, namely, who is considered the actual owner (and thus liable for any damages or depreciation in value) for the duration of the lease? Is it the bank (in which case all of the above scenarios do not make sense), or is it the client (in which case this contract is not a lease contract in the first place, but rather something else)?

A bank may give an answer to all or some of these questions, supported by quotations from jurists past or present. Some of these answers may indeed prove to be acceptable when looked at in isolation but, when taken as a whole, such practices may invalidate the contract.

To illustrate our point, the bank might state that, according to a particular school of thought, the down-payment is not a part of the price of the property since it is not a purchase agreement. Rather, it is an assurance that the tenant is serious in renting the property for a given period of time (up to 25 years, perhaps). Such a condition is acceptable according to some jurists. Furthermore, the bank may state that the insurance is paid by the tenant based on a mutual agreement, and there is nothing wrong with such a condition, for the Prophet, peace be upon him, said:

“Muslims are bound to the conditions taken on by themselves.”

In the meantime, they might claim that they are bound by English law to hold the title of the property, and will only pass it to the client upon the final payment. However, the contractual agreements that are signed between the bank and its client put all of the risks of ownership upon the client, and these factors defeat the purpose of ijâra, even if technically speaking the bank claims to follow the letter of the English law as the ‘owner’ of the property.

In the above we see arguments that are each, on their own, widely considered to be valid. However this should not lead us into the grave error of assuming that three valid matters when combined produce a valid outcome. Take, for example, the plain riba transaction, but in the following framework:

1. An interest-free loan, (which is something recommended)

2. A gift, (which is again, something recommended)

3. A promise.

Taken individually, these three transactions are completely valid. However, if they are combined in a single contract, the result is pure riba. For example, I say, ‘Grant me a loan which I will repay you (a valid matter), and I promise you (a second valid matter) a gift (a third valid matter) in addition to the repayment when it becomes due’. Is this contact valid or is it riba? The answer is that it is manifest riba without any doubt, since the one who gave the money was promised that same amount back along with some profit.

So, we need to look at the end-to-end process here and evaluate it as one transaction. And we need to answer the critical question: who is the real owner of the property during the whole process? Is it the client while the bank is just financing the deal as it does in a normal conventional mortgage? Or is it the bank? If the owner is the bank, then does a real owner free himself from any responsibility towards his property? Why does the bank avoid owning the property?

Here, we need to explain an enormously incorrect methodology in deriving Islamic verdicts. A verdict should be derived by looking at a matter in its totality, in light of the aims behind it. When we break the matter of discussion into sub-issues and treat issues separately, without looking at the overall picture, then we are contradicting the right methodology in deriving verdicts. The reason is very simple: verdicts based upon sub-issues might not necessarily be the same as verdicts based upon a consideration of the general situation.

A very good example is the previous one. Each sub-contract taken individually is completely valid, but taken as a whole the entire contract becomes null since it is a clear riba transaction. Based on this, many if not all jurists forbade contracts which try to employ such deception.

As another example to further illustrate our point, let us look at the transaction known as ‘iynah. This transaction is strictly prohibited by the Prophet, peace be upon him, and its prevalence is a sign that the Muslim ummah will decline. The Prophet, peace be upon him, said:

“When you trade with one another with ‘iynah, and hold on to the tails of oxen, and are content with farming, and give up jihâd, Allâh will cause humiliation to prevail over you, and He will not withdraw it from you until you return to (your commitment) to Islâm.” [Narrated by Abû Dâwûd and classed as sahîh. The intent of the hadîth is that when Muslims are going to be content with this world, and not care about how they acquire wealth, Allâh will inflict upon them humiliations and disgraces that will remain with them until they repent and give up their ways]

This transaction, when broken down into individual parts and examined solely upon these parts, appears to be valid. However, when taken as a whole, it is clearly a type of riba.

How exactly does ‘iynah occur? One of the means of practising ‘iynah is that one party sells a product to a second party on a deferred payment. The second party then sells it back to the seller at a lesser price, but in cash. If you break this transaction into sub transactions you can conclude that there are two acceptable sale transactions. It is allowed for a person to sell a product for a deferred payment, and it is also allowed to buy a product for cash. However, the ultimate aim of this transaction is to enact a pure riba transaction. This is because the second party receives an amount of cash from the first party and is then required to pay back an amount of greater value at a later time. As for the product itself, since it changes hands twice, it returns to the initial ‘seller’. Therefore, the product is used merely as a loop-hole to avoid the prohibition on riba.

This clearly illustrates that we cannot ignore the total aims of any transaction. Jurists mention this rule as a principle (qâ’idah) that is employed for all business transactions. This principle states:

“The consideration of a transaction is to be paid to its intention rather than its format.”

or, alternatively:

“Transactions are judged according to intention.”

Of the evidences for this principle is the hadîth of the Prophet:

“Actions are judged according to intentions.”

It is true that some people might say that scholars disagree with this concept, but those scholars who disagree with this concept (like Imâm ash-Shafi’i), agree with all other scholars that the aim of the transaction should not be to overcome a prohibited transaction. In other words, all scholars are in agreement that it is sinful for two parties to try to devise a scheme that appears to make permissible something that the sharî’ah declares impermissible.

I therefore conclude that there is no significant difference between the ijâra scheme outlined above and the conventional mortgage which is a pure riba-based loan. Under the ijâra scheme, the bank performs what is essentially a money lending transaction, placing such conditions upon its clients that guarantee, for all practical purposes, that it will obtain the same amount of money in return plus a profit disguised as ‘rent’. It might be true that many of the individual clauses and conditions of the contract are permissible (or, at best, subject to a difference of opinion among scholars), but when put together and examined as a whole, it is apparent that there is little that separates this contract from a simple mortgage. Of the many matters that clearly illustrate this is that the risks and rewards of ownership of the house are carried by the tenant, not the bank, regardless of who is the ‘paper-owner’ under English law.

Allow me to provide a real Islamic scenario for acquiring a house, and also mention a philosophical and ideological approach in explaining a very important principle in Islamic finance. If two or more parties enter a business transaction, then of course their ultimate aim is profit. Islâm, being the religion of ultimate justice, does not confer advantage to any party based on one’s worldly and materialistic power. In other words, in a permissible Islamic transaction, a powerful, richer person will not have any guaranteed advantage over a powerless, poor person. Both parties have to share the same risk of loss, just as they want to share the joy of profit. This is a very logical and simple – yet powerful – principle, which is an explanation of the Islamic rule:

‘There shall be no profit without (a risk) of loss.’

This principle is based on many Prophetic traditions, such as:

“It is not permissible to sell something on condition that the purchaser lends you something. And it is not permissible to have two conditions in one transaction. And no profit is permissible unless possession has been taken of the goods. And you cannot sell what is not in your possession.” [Narrated by Ahmad, Abû Dâwûd, at-Tirmidhî and Nîsa’î; classed as sahîh by many scholars]

In another hadîth, the Prophet, peace be upon him, forbade selling any item from the same place where it was bought; a buyer must first physically acquire these items (lit. ” … add them to his own luggage … “), then he may sell these goods. [Narrated by Ahmad and Abû Dâwûd; classed as sahîh by Ibn Hibbân and others]

The point of this rule is that whenever an investment contract is structured such that one party is guaranteed a profit, something is simply not right. Only in a pure riba transaction will there be guaranteed profit. Any permissible transaction in the sharî’ah must have an element of risk involved, no matter how small that element is.

Therefore, when looking at this particular transaction, it is essential that the bank (the stronger party) not take advantage of the client (the weaker party) by exploiting the financial power of the former and the desperate need of the latter. If these banks enact their transactions with this principle as an underlying morale framework, I think such contracts that we now see will disappear. Yet, the reality is far from this ideal. In light of this principle, we should always ask the following question: Do these banks share with their clients the risk of loss, or are they are stipulating all possible conditions to protect themselves against any foreseeable loss? Additionally, do these so-called Islamic banks own the properties they are renting to people?

If we give sincere answers to the questions in discussion, we will see that the current ijâra schemes are almost identical to conventional mortgages. They appear to be a ruse designed to promote conventional interest-based practices using Islamic terminologies and sharî’ah expressions.

Based on this, the ijâra scheme as it is implemented here in the UK by major banks: Ahli United Bank (formerly called the United Bank of Kuwait), United National Bank and HSBC is totally prohibited. In fact, it is a deception rooted in riba. Until the Muslims in charge of these schemes prove that the above argument is invalid and give clear answers to the questions highlighted earlier, I believe that such transactions are totally prohibited, and I warn brothers and sisters not to get involved with them. I would also like to emphasize that the view of some Muslims, that this scheme is better than the conventional riba-based mortgage alternative and should therefore be used until a pure halâl scheme is available, is incorrect. This is because there is no significant difference between the two schemes.

And Allâh knows best.

1st Dhul-Qa’dah 1425 – December 12th 2004

Notes; Click here for the new Halal Money Guide produced by 1st ethical.
Source: www.islam21c.com

[1] This is based on the their respective online documents available here, here and here [cited Dec 09, 2004].

[2] See resolution no. 110 (4/12) of the Islamic Fiqh Academy (IFA) which is a subsidiary body of the Organization of the Islamic Conference (OIC).

DISCLAIMER: All material found on Islam21c.com is for free and is for information purposes only. All material may be freely copied & shared on condition that it is clearly attributed to Islam21c.com [hyperlinked] as the original source. The views expressed on this site or on any linked sites do not necessarily represent those of Islam21c.com


About Shaikh (Dr) Haitham Al-Haddad

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.

8 comments

  1. shame on us we forgot the life of the prophet peace be upon him
    think abou after the death, how you answer the question when Allah asked you. didn’t you see my Prophet, peace be upon him and his followers live in this dunya. Prophet, peace be upon him and his followeres live a life , married have kids, how can’t you live like them. (Atee-ul-Allah wa Atee-ur-rasuul.

  2. Practical solution
    Assalam Alayikum dear brothers and sisters,

    It was already been suggested what is the point of aiming to own a house. The fact is I have been renting for 10 years and I might be renting for the rest of my life depending on what Allah wills. And I am thankful Allah has given me means to not need to ask people for handouts. Also I am thankful Allah helps be stay on the path of trying to live in a halal manner. For that is the test and point of this life are we going to worship Allah and live by his rules no matter the hardship we have to go through, or are we going to follow our desires. Allah has made it clear in the Qur’an and looking at the prophets we are meant to go through hardship and we are tested if we will obey or disobey Allah.

    I ask Allah to guide all of us to the straight path and not to test us beyond our abilities as it say end of the second surah in the Qur’an.

    If I have said anything incorrect I ask you and Allah to forgive me.

    Wassalam.

  3. What about Security Cheques and Delays
    The writer is requested to confirm the validity of posessing security cheque for an amount equal to loan amount and profit by the bank. The use of security cheque is never indicated in the Ijarah agreement
    Also when there is a delay in completion of the property which resulted in loss for customer, is Bank as the owner of the property not responsible to reimburse the same?

  4. mr
    If you cant afford to buy house out right then stop dreaming
    Plus whats point, you will die and someone will inherit your properties, marry your wife and raise your children as there own
    Spend your wealth wisely, spend your wealth in the way of Allah, do we aspire to be like those men and women mentioned in the holy quran who gave there wealth and lifes in the path of Allah?
    Build your self mansions in an everlasting abode that will never depreciate, surely a profitable investement with no risk or Loss

    Take it easy brothers n sisters
    Asalamu alaykum

  5. Mohammed Akteruzzaman MBE

    So Called ‘Shariah Compliance Mortgage’
    I don’t believe so called Shariah compliance Mortgage is halal. Think about where from the banks get their original capital investment to finance purcahse of the property they later on rented out to individual purcahser? Obviously it comes from interest based income of the parent bank which is haram. I have taken quotations from both Amanah Finance & traditional Mortgage from the same bank (to compare monthly repayment).The result is Amannah finance is more expensive i.e. 1% more interest is loaded on . Whereas, for bank’s security Amanna Finance is more secured than traditional mortgage as the title deed of the property rest with the bank. Repossession, if needed, is easier on halal finance than traditional mortgage as the later scheme, the lender has to go through fairly complecated legal compliance procedure to secure possession. Everything is linked with interest in so caled halal finance. It’s nothing but a marketing gimic to sell the concept of Halal & try to make borrower (purchaser)fool. There should be a practical meaningful debate on the subject. I have written to the Chairman of Islamic Finance Conference on the subject. It seemed he was initallly enthogeastic & replyed to my initial e-mail but later on stopped replying when I was going into depth with my arguments.

  6. A solution?
    With more and more muslims pouring money into the rental market due to not wanting to involve themselves with riba we really need wealthy members of our community to establish housing associations. This would at least enable our wealth to remain within our community and InshaAllah thereby improve our situation to some extent… but a Halaal alternative is required.

    Remember fear Allah!

  7. Deception yes, but how should someone buy a house?
    Salaams,

    I completely agree that the wave of “Islamic” banking now available
    is somewhat rooted in deception.

    However, advice has to be practical – what is the ordinary Muslim
    citizen supposed to do? How should they manage their finances
    and buy a house?

    Talk of the Islamic ideal is all very well but the jurists need to recognise:
    1) the entire global finance system is rooted in fiat currencies
    – not commodities like dirhams and dinars; 2) such fiat currencies inevitably lose value with time;
    3) the purchasing power of capital is significantly diminised
    by the wide availability of credit in the banking system.

    Irrespective of the rights and wrongs of modern banking, we cannot
    simply apply the classical economic regulations to this completely
    different scenario.

    I would like to see some coherent argument from scholars with
    credibility in both jurisprudence and economics.

    Wa’salaams

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