MORTGAGE IN ISLAM
It is the dream of every person to own a house. Mortgages have been the major channels of enabling individuals to own a house in the modern day world. However, mortgages are forbidden in the Islamic faith since they are based on payment of interest, which are termed as unjust. The issue of mortgage however has been a topic of debate between Sunni and Shia.
According to Hilliard (1838), a mortgage is a conditional transference of land which is designed as a security for the payment of money and to be void upon such payment. A mortgage secures once promise that the funds borrowed shall be repaid. According to Hassan (2006, 35) to most of us, the mortgage is one of the most serious financial obligations we ever get to make. Various views have been expressed by different religious scholars including those regarding buying of property or business on mortgage Some look at the positive side of it where one can go ahead and buy business or property from financial institutions and banks, while others believe its better to live in a rented house till one can afford to buy business or property on hard cash. While considering questions like these, there are certain principals of Islam that one should also put in mind especially considering the conditions prevailing in our world in general or particularly in a certain area. To begin with, it is essential to remember the purpose of Islamic legislation which is to serve the community's interests, mankind community in general and the community of Muslims in particular. One of the rules of Islamic law clearly states that whenever the interest of people happens to be, it will be sanctioned by God's law. What this means is that when a particular matter lacks a firm ruling, then what best serves the community's interest is endorsed and sanctioned by God's law. Islamic law looks to protect five major things in human life. They include mental discipline, faith, life, family, and property. Shelter for instance is not only one of the basic human rights a society is required to fulfill, but it is also basic to human existence. And since Muslims live in all types of societies, democratic, monarchial, theocratic, communist, socialist, they are forced to deal with their situations in line with Islamic law. This means they are not allowed to violate any of their principals except that which may be relaxed as an emergency, and attempting to meet their needs in order to live comfortably, which facilitates their productivity in society. Usury for instance is known to be the excess amount on the principal a borrower is required to pay to the lender in addition to the initial principal. The lender here is seen to exploit the borrower's needy situation by not only charging high interest but also by taking unjustified profit with no effort of his own. The lender here is seen to put the borrower plus his or her family at financial risk. In usury, it is the element of oppression and exploitation that Islam forbids according to Hassan (2006, 36). It is quite clear that many Muslims - especially those living in non-Muslim countries have given up on the idea of ever owning their own home (El-Gamal, 2006, 21). Many families prefer renting or leasing homes rather than engaging in a bank loan, which involves the taking or paying of interest (Mumisa, 2002, 3). Nonetheless, in the past few years, many banks have opened up mortgages that are compliant to the Islamic law and have created two common types of mortgages which are offered by banks.
The Murabahah and Ijara type of transaction
The Murabahah transaction involves a bank purchasing a house and then reselling the house to a buyer at a fixed profit while the house is registered in the buyers name and he/she can pay the bank in installment, which are fixed. On the other hand, Ijara transaction involves the bank purchasing a house and retaining ownership of it, while the buyer makes payment to the property until he/she completes and that's the time the person gains full ownership of the house (Mumisa 2002, 3). From this, two types of transactions, interest in not applicable to the property, yet the debate continues on whether or not such transactions are acceptable.
Under this form of finance, the home buyer starts by identifying a home, then he goes ahead to approach the financier. He then asks the financier to buy the house and promises to consequently buy it from him. The financier then not only buys the particular house but also resells it to the buyer and with a mark-up against payments that are periodic. Taking an example of the United Kingdom for instance, since 1998, the Ahli United Bank has been known to offer murabaha finance all along. The bank customers pay the bank a monthly installment, fixed, over a 10 to 15 year period of time. The profit margin which is included in the purchase price then takes the place of periodic interest payments, all under a conventional mortgage contract. Under such a conventional mortgage usually, the mark-up normally equals current value of future interest payments. Murabaha type of home finance might seem straight forward at first sight but its suitability may be questioned because in the first place, it is a form of trade finance. The following points should be considered important for anyone considering to murabaha home finance. To begin with, what murabaha does is that it replaces interest with mark-up. Like all other Islamic forms of home finance, this puts it at a great disadvantage vis-à-vis the interest based conventional finance in circumstances where payment of interest on home finance for the purpose of income tax are deducted. Second, In comparison to conventional home finance where it requires only one transfer of property, murabaha requires two. This ultimately brings with it higher costs. Here the house if first and fore most bought by the financier who later resells it to the client, who is the ultimate buyer in this case. Stamp tax, public notary fees, and registry therefore end up being paid twice. As if that is not enough, the mark-up which is included in the price of that particular home facilitates a substantial increase of price at the second sale transaction and consequently a proportional stamp tax increase (Visser 2009, 107). One notable feature that makes murabaha finance seem unattractive to the financier is one: it can not be securitized. Debts can only be treated at par or else riba al-fadl will inevitably be involved. Murabaha loans portfolio can therefore be said to be very illiquid.
In this particular case, a financier and a home buyer own a home jointly and as time go by the financier's share continuously diminish while on the other hand the buyer's share increases. Musharaka mutanaqisah in most cases is combined with ijara. A client can for instance lease the financiers share in the property and then agree to buy the same property but over a period of about 30 years. In most cases, the client buys the home from the vendor as the agent of the financier and then directly registers it into their own name. In both the ijara and murabaha cases, the Muslim legal requirement stating that interest should be paid is met. The effect however is the same as a mortgage that bears interest where individuals over time buy their homes and the bank receives extra payment for this risk. As the influence and wealth of Muslims spread in the future, there will be an inevitable increase for businesses allowing their followers to operate in international business while at the same time assisting them, most importantly, to meet the requirements of their faith.
Among the different types of mortgages discussed, Murabaha is apparent is most appropriate as even most jurists in Islamic law seem to agree on its permissibility. They base their judgment on the Koran principles of trading custom and Shariah which not only encourage people to sell and buy goods at profit but also permit trading without interest
Ijara wa iqtina
It is clear that murabaha has some attractive features. According to Visser, (2009, 109), it is not surprising that some financiers found themselves abandoning it and switching to other new forms. For instance, the first “Islamic mortgage” which was written in 1987 was a murabaha mortgage. Later however they moved to ijara wa iqtina, or lease purchase. What happens under ijara wa iqtina, a client first of all begins by finding and identifying a house, then goes ahead to ask the financier to buy it. The financier on the other hand sells the particular house to the client against delayed payments, probably at the same price, retaining the title however, until the last payment is made. At this stage, both parties enter into a lease agreement. This particular agreement however is separate from the purchase agreement as sharia requires for each individual transaction there be a separate contract. An agreement is made regarding the monthly payment and it includes both the amortization of the principal and the rent. The monthly lease payments are normally geared to an interest rate and are subsequently subjected to periodic revisions. The ijara wa iqtina phenomenon has however not gone well with some Muslim scholars. Visser (2009, 109) states that the scholars noted some dubious points about it. One, if the levels of rents are revised in annual terms, it brings about uncertainty which might consequently be labeled as gharar. Secondly, clients bear the risk of fall of price of the house. For instance, if the client is unable to pay the monthly installments and it requires for the house to be sold so as to facilitate repayment of the loan, he is subjected to suffer loss if the house prices happen to have fallen in the meantime. Ijara wa iqtina therefore is not a full sale nor is it a full rental, but a mixture not necessarily sharia compliant.
Ruling on mortgage by the various Sunni schools of thought
As it can be highlighted, each school of thought has its own ruling on mortgages. For instance, the Hanafi school of thought rules that a Muslim in a non-Muslim country may be allowed to enter into a mortgage with a bank. Nonetheless, it can be documented that it is illegal for a Muslim to pay interest but on issues concerning mortgages, the question about taking and giving interest is not be raised. According to the Hanafi school of thought, the issue of interest in mortgages is mainly concerned on the pro and cons of the transaction since some of them have a real need of owning a house (El-Gamal 2006, 22).
The Maliki school of thought is dominant in Muslim areas of Africa and in France except Egypt (Mumisa 2002, 4). This school of thought do prohibits taking of mortgage, however, it stipulates that a Muslim living in a non-Muslim country can take mortgage but the interest rate should be low in such a way that it does not benefit the giver. Due to the fact that mortgage interest are unacceptable because one party gains at the other's expense of the other, regardless to the price paid for the home, it usually prohibits most of the Muslims from taking a mortgage (El-Gamal2006, 20). Under the shafi'i school of thought and Hanbali school of thought on mortgages, they also rules that Mortgages are illegal and hence a Muslim should not take it since they end up paying interest, which is Haram, and thus benefiting another person. However, a mortgage can be taken if it does not involve paying interest and they have various arrangements concerning how a Muslim can take mortgage. Some form of flexibility however is offered to those Muslims living in non-Muslim lands. The fatawa for instance which is issued by Iraq's most prominent Shi's cleric, Ayatullah Sistani, is seen to facilitate the many and varied forms of conventional finance for these Muslims.
Ruling on mortgage by the various Shia schools of thought
Ahlstrom and Bruton (2009, 86) note that though not often, Muslims are guided by sharia based law irrespective of the fact that they might be living in a country or countries that are not muslims however are ‘Twelvers' and are known to follow jaafari legal school of thought which recognizes Quran as a source of law, but add the practices of the twelve imams to it. Shia interpret the various elements of the Koran in a very different way from their brothers the governed by the law. There exist a number of different sects within Shia Islam. Most Shia Sunnis. Regarding mortgages for instance, the Shia schools of thought states that no interest should be charged on loans. Hence, the banks can not charge interest on money loaned from the banks to others or pay interests on deposits directly and remain consistent with sharia law. In accordance to sharia law, mortgages for the purpose of buying homes could not in any case be allowed to exist since they involved paying of interest.
The Islamic character regarding Islamic home finance according to Visser (2009, 106) is founded in the absence of interest payments. Not all Muslims concur that their Islam faith requires them to eschew interest, but even among those that do believe, there are those who find interest based home finance acceptable for those Muslims living in non-Muslim nations. This is particularly fuqaha who follow the Hanafi madhhab. Both the conventional and Muslim financial institutions have been engaging in the development of sharia compliant home finance products in an attempt to respond to a wide and varied demand from various market segments. The products are available in different forms and they include: murabaha, ijara wa iqtina, and musharaka mutanaqisah.
Analysis of the school of thought on mortgages
It is quite evident that all the four schools of thoughts have the similar views on mortgages since interest is paid on them. However, there are some views, which differ from one school to the other. For instance, the Hanafi and Maliki school of thought allow a Muslim living in non-Muslim country to take mortgages and they mainly address the pro and cons of mortgage and not the interest that is paid. Mortgage is allowed to them based on the advantage of taking it even though one ends up paying interest. Conversely, each school of thought has its ruling on mortgage. For instance, there the Hanbali advocate for an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item. This is done by a bank buying the house itself from the seller and re-sells it to the buyer at a profit while allowing the buyer to pay the bank at a profit (Mumisa 2002, 3). Therefore, they perceive the profit to be different from interest. Another form of ruling that has been quite prominent with the Hanafi school of thought is the use of Murabaha whereby the house is registered under the name of the buyer from the beginning of the transaction (El-Gamal 2006, 22). In addition, the Maliki school of thought usually suggests an approach called Ijara wa Iqtina, which is similar to real estate leasing (El-Gamal 2006, 21). In conclusion, it is evident that the four schools of thought have different ruling on mortgage and this is mainly based on the issue of paying interest, which is illegal in Islam.
According to El-Gamal (2006, 19), Ayatullah Sistani for instance allowed the deposit of fund with banks and collection of interest thereof, in the name of permissibility of interest charging to non-Muslims in these lands.
In addition to this, he went ahead and allowed Muslims to take mortgage loans from non-Islamic banks. This he did even knowing at the back of his mind that they will be submitted to paying principal plus interest, so long as they do not do it with the intention of “borrowing” in “iqtirad” classical sense. In a similar case, Sunni jurist, Yusuf Al-Qaradawi issued a fatwa which allowed Muslims living in North America to finance their homes purchases by use of conventional mortgages. This ruling he based on three considerations: (1) Invoking the rule of necessity, (2) Abu Hanifa's opinion that permitted the dealing with riba in non-Muslim nations, and (3) determination that the mortgagor is the key beneficiary from the mortgage home financing. For Muslims living in Muslim nations however, the rules are much stricter. Within this context, Sistani is seen to revert to Sharia's alternatives which have been quite popular in Sunni majority Islamic nations. He for instance forbids borrowing from both public and private banks which have stipulated conditions of paying interest. This he characterized as forbidden riba.
In Saudi Arabia for instance, in the year 1981, the general council committee instructed all notaries public and qadis which were acting as notaries in small towns not to accept any form of mortgages that were being used to secure loans by commercial banks. This ruling had a significantly large impact as it prevented the use of bank mortgages. This order was prompted on notaries asking the council to relieve them of these particular actions which they were quite sure implicated them in “usury” which sharia prohibited, referring to the prophet's hadith condemning the usurious loan “writer”. In a previous order, the council's permanent committee required that whenever a notary was sure that a particular transaction he was being required to register involved the paying of interest, he was not to ahead and register it. That particular order was simply a specific implementation of the existing law, as it is against fiqh facilitating usury, and more to it under the regulations, a notary is expected to register acts on condition they are in agreement with the Hanbali School and are at the same time in proper sharia form. In its 1981 order however, the council took the matter to yet another step when it made a factual finding about commercial bank mortgages, that it had been established to the Supreme Judicial Council's body that the loans that were being granted by commercial banks were usuries, according to Vogel (2000, 113).
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