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Islamic Mortgages

Q. I have a problem, my husband does not want to buy a house here in USA because of mortgages (interest) but we are paying 1800 US$ dollars every month. So could you please send me the lists of those Islamic banks that do interest free banking. Thanks

S. S
USA

A. Thank you very much for your e-mail. Regarding Islamic financial institutions that offer Shariah compliant mortgages in the US, please contact:

1) United Bank of Kuwait
(Al Manzil Islamic Finance)
New York 10022
Tel 1 212 9068500
Fax: 1 212 3194762
2) Ameen Housing Co operative
800 San Antonio Road, Suite 1
Palo Alto, san Francisco CA 94303
Tel: 415 8560440

Q. I am a Muslim resident of NY, USA, a US citizen. Our family has been living in the US for about 15 years now. We are in the process of looking for a suitable house for our family. I would like to know if you offer interest free loans, even if they cost us more than interest loans in the long run, anything not to involve ourselves in riba.
Please get back to me with your answer.

R. K
USA

A. Thank you very much for your enquiry. Unfortunately we are not a financial institution, hence do not provide any Islamic financial services. Our institute is dedicated to the promotion of Islamic Banking, we are involved in publications and offer training and research programs. There are financial institutions in the US that do offer Islamic housing financing.

Q. I wonder if you can send me details of the banks that are offering Islamic mortgages in the UK preferably on a flexible payment scheme etc.

L. M.
UK

A. Please contact the Islamic Investment banking Unit of the United Bank of Kuwait, London, they offer Islamic mortgages. Contact details: 0207 487 6626.

Q - A person who owns property in a European country and pays (real estate) taxes on it, subsequently has the money earning interest in a European bank. Is it lawful for this person to take interest and use it to pay the property taxes?

 

A - It is an established rule that interest earned from deposits in riba-based banks must be disposed off by charitable means, other than the construction of mosques or the printing of the Qur'an. No obligation may be discharged with the interest; so it may not be used to pay taxes or debts.

Q - People in western countries buy homes by means of mortgages. My question concerns the lawfulness of buying a home in cash (no mortagage) from an owner who originally bought the home with a mortgage, and for which there is still an outstanding amount owed to the bank? Once the home is sold, the previous owner will pay off the mortgage with the proceeds of the sale and keep the rest. Secondly, if I own a home, can I sell it to a person who will finance his/her purchase of the home by means of a mortgage? Should I care where the money I receive as payment for the home is coming from?

M.F
U.S.A

A - This question brings up some important issues. To begin with, it is clear that conventional home financing in most western countries is based on the idea of mortgaging which, in turn, is based on riba and thus repellent in the extreme to all Muslims. Even so, a number of reputable Muslim scholars have written fatwas which allow, on the basis of legal necessity (darurah), the purchase of homes in the west through mortgages. These fatwas are based on the assumption, however, that no Shari`ah-compliant alternative is available. Should such alternatives become available, however, the legal necessity will no longer exist, and the fatwas will no longer be valid. Allah willing, in the near future, Shari`ah-compliant alternatives to mortgages will become available to Muslims worldwide. None of this, however, changes the question above.

The first part (a) of the question asks whether or not it is lawful to purchase, for cash, a home financed by the seller through a mortgage which, at the time of sale, has not matured (i.e., the seller has not finished paying off the mortgage and plans to use the cash from the sale to do so). Thus, the concern of the questioner in this instance would appear to be in regard to hadith prohibiting one's direct and indirect participation in riba. In the case mentioned in the question, a part of the cash payment advanced by the questioner would undoubtedly be used by the seller to pay off a mortgage. In this manner it would appear that the buyer is indirectly involved in the payment of riba.

The second part (b) of the question is similarly concerned with indirect involvement in riba, but from another perspective.

In fact, there is no involvement in either case, neither direct nor indirect. The most that can be said is that there is an appearance of involvement, but appearance and reality are two different matters.

In the first part of the question, the transaction of sale is compliant in every aspect with the teachings of the Shari`ah. It takes place between two compentent parties, there is an offer and its acceptance, the object of the sale (a home) is itself halal, and the purchase price is paid by halal means, or cash. The subsequent uses to which the seller may put that cash is of no legal consequence to the sale. The seller may give it to the poor, or he may spend it on sin. In either case, the sale of the house is valid, and the buyer may rest assured that s/he has done nothing wrong. The same is true in regard to the second part of the question because there, again, the sale is completely Shari`ah-compliant. Even though the buyer has financed his end of the deal by means of a mortgage, the bank with which he has contracted, or the mortgage company, will pay cash to the seller. In this manner, then, the transaction described in the second part of the question will be perfectly halal.

While the caution on the part of the questioner is to be admired, it must be understood that a Muslim is responsible for ensuring that his or her transactions are halal. Beyond that, money will pass through the hands of all manner of people, honest and dishonest, just and unjust, and for all manners of purposes, halal and haram. In his work entitled The Book of the Halal and the Haram, Imam Abu Hamid al Ghazali wrote:

One who knows for a certainty that the wealth of the world has definitely had the Haram intermixed with it need not abstain from buying and selling, or from eating, because that would be an undue burden. And Islam is not a burden. This is attested to by the fact that in the time of the Prophet of Allah, Allah bless him and grant him peace, when a shield was stolen, and when an abba was misappropriated from among the spoils of war, no one refrained from buying shields or abbas. The same applies to anything stolen. Likewise, it was known at that time that certain people were making usurious transactions in dinars and dirhams, yet neither the Prophet of God, upon him be peace, nor his Companions refrained from dealing with dinars and dirhams. Essentially, then, the world will be free of the Haram only when people stop doing wrong, and that is impossible.

Q Muslims in the UK are greatly interested in purchasing homes through Islamic financing. What procedure does this entail and how does it function?

A. A Islamic banks can participate in home financing on the basis of diminishing Musharakah.

This concept requires the financier and the client to participate in the joint ownership of a property. The share of the financier is further divided into a number of units.

The client is then able to purchase those units one by one periodically, thus increasing his own share till all the units of the financier are purchased making the client the sole owner of the property.

Transactions involved in Diminishing Musharaka

The proposed arrangement is based on the following transactions:

The first step is to create a joint ownership in the property. There is no objection from Islamic scholars against structuring this transaction.

The second part of the arrangement is that the financier leases his share in the house to the client and charges rent to him.

Islamic scholars also permit this transaction, however where the undivided share is leased out to a third party, its permissibility has been a point of contention between Muslim jurists.

Imam Abu Hanifa and Imam Zufar are of the view that the undivided share cannot be leased out to a third party, while Imam Malik and Imam ShafiT, Abu Yusuf and Muhammad Ibn Hassan hold that the undivided share can be leased out to any person.

But so far as the property is leased to the partner himself, all of them are unanimous on the validity of this Tjarah leasing transaction that eventually results in full ownership.

The third step in the arrangement is that the client purchases different units of the undivided share of the financier. If the undivided share relates to both land and building, the sale of both is allowed according to all the Islamic schools.

Similarly if the intention is to sell the undivided share of the building to the partner, all the Muslim Jurists also, unanimously, permit it. Again, there is a difference of opinion if it is to be sold to a third party.

It is clear from the previous three points that each of the transactions mentioned above are allowed per se, but the question is whether this transaction maybe combined in a single arrangement.

The answer is that if these transactions have been combined by making each one of them a condition to the other, then the Shariah does not permit this.

It is a well-established rule of the Islamic legal system that one transaction cannot be made a pre-condition for another.

However, the proposed scheme suggests that instead of making two transactions conditional to each other, there should be an undertaking from the client.

Firstly, to take the share of the financier on lease and pay the agreed rent, and secondly, to purchase the units of the share of the financier of the house at different stages.

This leads to the fourth transaction, which is the enforce-ability of such an undertaking or promise. It is generally believed that an undertaking or promise to do something creates only a moral obligation on that person, which cannot be enforced through courts of law.

However there are a number of Muslim Jurists who hold the view that promises are enforceable, and the court of law can compel people to fulfill their promise, especially, in the context of commercial activities.

Some Maliki and Hanafi jurists have declared that an undertaking or promise can be enforced through courts of law in cases of need. The Hanafi Jurists have adopted this view with regards to a particular sale called bai-bilwafa.

Bai-bilwafa is a special arrangement for the sale of a house where a buyer promises the seller that whenever the seller repays him/her the price of the house, he/she will resell the house hack to the original seller.

Hanafi jurists, on the other hand, have argued that if the resale of the house to the original seller is made a condition for the initial sale, it is not permitted.

However, if the first sale is effected without any condition, but alter effecting the sale, the buyer promises to resell the house whenever the seller offers him the same price. Then this promise is acceptable and it creates not only a moral obligation, but also an enforceable right of the original seller.

The Muslim jurists allowing this arrangement have based their view on the principle that "the promise can be made enforceable at the time of need".

One may raise an objection that if the promise of resale has been taken before entering into an actual sale, it practically amounts to putting a condition on the sale itself, because the promise is understood to have been entered into between the parties at the time of sale.

Therefore, even if the sale is without an express condition, it should he taken as conditional because a promise in an express term has preceded it.

This objection can be answered by saying that there is a big difference between putting a condition in the sale and making a separate promise without making it a condition. If the condition is expressly mentioned at the time of sale, it means that the sale will be valid only il' the condition is fulfilled, meaning that if the condition is not fulfilled in future, the present sale will become void.

This makes the transaction of sale contingent upon a future event that may or may not occur. It leads to uncertainty (Gharar) in the transaction, which is totally prohibited in Shariah. Conversely, if the sale is without any condition, but one of the two parties has promised to do something separately, then the sale cannot be held to be contingent or conditional upon fulfilment of the promise made.

It will take effect irrespective of whether or not the promise is fulfilled. Even if the promise is backed out of, the sale will remain effective. The most that the person whom the promise has been made to can do is to compel those undertaking the promise, through the courts of law, to fulfil that promise.

A claim for actual damages suffered resulting from a default can consequently be made. This makes it clear that a separate and independent promise to purchase does not render the original contract conditional or contingent. Therefore it can be enforced.

Conditions of Diminishing Musharaka

On the basis of the above analysis, diminishing Musharakah may be used for House Financing subject to the following conditions: The agreement of joint purchase, leasing and selling different units of the share of the financier should not be tied up together in one single contract.

However, the joint purchase and the contract of lease may be joined in one document whereby the financier agrees to lease his share, after joint purchase, to the client. This is permitted because Ijara can be effected for a future date.

At the same time the client may sign a one-sided promise to purchase different units of the share of the financier periodically and the financier may undertake that when the client purchases a unit of his share, the rent of the remaining units will be reduced accordingly.

At the time of the purchase of each unit, sale must be effected by the exchange of an offer and acceptance at that particular date.

It is preferable that the purchase of different units by the client be effected on the basis of the market value of the house as prevalent on the date of purchase of that unit.

It is also permissible that a particular price is agreed in the promise of purchase signed by the client.

Q - Is it lawful for the Finance House to purchase real estate owned jointly between partners (four brothers, each with their own share) and then to sell it to one of them at his request? Secondly is it legitimate for the Finance House to purchase the share of one of two partners who jointly own real estate, and thereafter to sell the share to the other partner?

A.K
India

A - With regards to the first question, if the Finance House buys the shares of the other heirs, and not the share of the person who came to it, and then sells the shares of the house it bought to that person, there is nothing to prohibit it legally from doing so, as such a deal is lawful and without reproach. On the second question, if the Finance House buys the entire house from the heirs, and then sells it to one of them, that will be lawful from a Shari'ah perspective so long as the purchase by the Finance House is not made conditional upon its selling the house to one of the heirs.
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