Demystifying Islamic Finance Mortgages: Understanding the Debate

There seems to be a confusion among some Muslims when they realize that often times the amount paid using conventional banking loans is the same as Islamic finance companies and at times even more. For some reason, people think the Islamic option should be cheaper. However, this is not always the case even in other Islamic rulings, for example, many of us are willing to pay more for halal chicken than conventional chicken even though the end result is the same: a dead chicken on a plate.

I just want to clarify a few things about this particular issue of Shari’ah compliant mortgages from a bird’s eye view on the debates surrounding it:

The debate over whether something is a Shari’ah compliant mortgage or not has nothing to do with the final amount but how the contract is written and what each party is responsible for. It is these detailed guidelines that are debated among scholars to see if something qualifies as a valid Islamic mortgage contract or not. Yes, in Islamic law there are things you cannot do in a sales contract. Some of the things are agreed upon to be forbidden while for others there is a difference of opinion. For example, you cannot sell an item without the owner’s permission. You cannot hide major flaws in an item and then try to sell it as a functional item. The price of the item must be clear and not obscure, etc. These details and their evidence from Qur’an and Sunnah are usually laid out in fiqh works. When it comes to mortgage contracts for houses, the two major things being debated to see whether it qualifies to be Shari’ah compliant or not among Muslim scholars are:

Riba

Conventional Mortgage: In a conventional mortgage, interest is charged on the loan amount. Borrowers pay interest to the lender as a cost of borrowing money.

Islamic Finance: Islamic finance prohibits the charging or paying of interest in this manner. So in an Islamic mortgage contract they will try to assure that the language is not used in the contract in a way that suggests riba in this manner.

Most Muslim scholars I have come across will agree on this point but there are some who debate whether modern financial banking practices qualify as riba or not.

Let’s take an example to help understand this point. Let’s say Zayd wants to buy a house that costs $100,000 but does not have enough cash to purchase it on his own, so he goes to Company A and Company B for financing options.

Company A Option

They say that they will give him the cash that he needs to buy the home but he must pay 4% interest on top of it over a period of 30 years.

Company B Option

They say that they will buy the property with their own money for themselves and then resell it to Zayd for a 4% profit, which he can pay over a period of 30 years.

Under Islamic finance, Company B would be considered Shari’ah compliant and not Company A. Why? Because Islamic law does not allow the contract to be prepared in that manner. This is a simple example to show that the process itself is the determining factor in such sales on whether a contract is contradictory to Islamic law or not, even if they end up being the same price at the end.

Ownership and Risk

Conventional Mortgage: In a conventional mortgage, the lender provides funds to the borrower, who then uses those funds to purchase the property. The borrower takes full ownership of the property, and the lender’s interest is secured through a lien or mortgage on the property.

Islamic Finance: In Islamic finance, the concept of ownership and risk-sharing is emphasized. Islamic financing contracts often involve partnership between the financier and the borrower or the financier purchases the property under its own name and then resells it to the borrower for a profit. In this way, the financier shares in both the profits and losses associated with the financed asset.

There is a debate among Muslim scholars over the amount of risk a financier should take to qualify as Shari’ah compliant and what constitutes ‘ownership’ in such a contract and whether it is being fulfilled or not.

There is also a debate among Muslim scholars on whether Islamic mortgage companies offering financing through a partnership contract are fulfilling what constitutes valid partnership or not.

Conclusion

There are some other things debated as well but the above two are the main things. It’s the intricacies of the contract and how it is written that is the root of the debate of whether it qualifies as a valid Islamic mortgage contract or not. This shouldn’t be surprising since we have other examples in our religion where how something is done is the main reason to determine whether something is permissible or not. The most common example: halal meat. I’ve seen some people argue that what is the point of halal slaughter when the end result is the same: death of an animal. Who cares whether it dies with a knife or is choked to death or is found dead on the road? Why does that determine if the meat is permissible to eat or not? The reason is simply because we believe Allah allowed it to be killed in a certain manner for consumption and prohibited us from eating it if it dies in a different manner.

In the same way, we believe Allah allowed certain things to be done in a sales contract and not others even if the end result is the same. This confusion about a riba contract being very similar to a sales contract existed to the ancient Arabs as well at the time of the Prophet ﷺ, hence, Allah revealed the following verse:

“That is because they say, “Trade is no different than riba.” But Allah has permitted trading and forbidden riba.”

[Qur’an 2:275]

There are papers written which try to show the wisdom behind its prohibition but the main answer is submission to Allah. Just as we submit to Him when we pray, obey our parents, not eat pork, not drink alcohol, fast Ramadan, etc., we also engage in sales contracts in a permissible manner and do not include in it terms which He forbade. Notice how Allah in the verse above did not provide reasoning to the prohibition but simply stated that it is thus because He said so.

Finally, I should note that generally speaking Muslim Islamic finance experts that I’ve come across do not believe that Islamic finance companies are 100% halal contracts but they say that this is the closest thing we have right now to Shari’ah compliance in obedience to our Lord and are less haram than conventional loans. They say given the nature of the market and the laws surrounding it, it is very difficult to do 100% halal without running into problems. Some also allow conventional loans out of necessity especially if the person cannot afford Islamic options.

As a general rule, when it comes to this issue, I do not believe it is a good idea to go around judging people’s choices when one does not have any idea what their background situation is and why they are opting in for an option that another may disagree with. This is especially true if they are known to care about Islamic law and try their best to abide by it and not fall into disobedience and have consulted a person of knowledge that they trust.

I took a course with Sh. Joe Bradford a few years ago on the topic of Home Financing. You can refer to the notes from that course here where Sh. Joe discusses different options available in the West.

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