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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.
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