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The Islamic Mortgage: Paradigm Shift or Trojan Horse?

All praise is due to Allah and may His peace and blessings be upon our Prophet Muhammad, his family and all his Companions.
Speaking of such contracts in a more general sense, the late Arab scholar ibn Uthaymeen described modern day Islamic banking as the 'usury of deception'. This he viewed as more serious a sin than usury on its own, for the former entails deception as well as usury, while the latter does not attempt to present itself as anything other than what it is. Similarly, at a conference in Dubai during March 2004, Justice M. Taqi Usmani is reported to have said that:

'What we are developing now is not fiqh-ul-mu`amalat (the jurisprudence of financial transactions), but rather fiqh-ul-hiyal (the jurisprudence of legal tricks)'.

Clause 6, Al-Buraq Lease Agreement, 2006

Scholars have argued that setting rental levels in line with market interest rates is not in itself haram. They argue this by analogy, on the basis that it is permitted for a Muslim shopkeeper to make the same percentage profit selling lemonade as the non-Muslim shopkeeper makes selling alcohol. However, we identify a rather different and serious problem arising in the link to LIBOR, namely one of gharar. This is because the client does not know what rental amount he must pay to the bank until the beginning of each new period, remembering that the client is contractually bound to rent the property for the subsequent period. If interest rates increase dramatically, then the rental payments will likewise increase and the client may find himself locked into the payment of rentals that he cannot afford. This is one basic reason that traditional scholars in Islam have made the specification of price a basic requirement of any sale contract. One cannot agree to buy or rent something without knowing the price one must pay. Wahba al-Zuhayli summarises:

'... general conditions specify that the sale must not include any of the following six shortcomings: uncertainty or ignorance (al-jahala), coercion, time-restriction, uncertain specification (gharar al-wasf), harm (al-darar), and corrupting conditions (al-shurut almufsida)'.

Dr. Wahba al-Zuhayli, Islamic Jurisprudence and Its Proofs, Dar al-Fikr (2003), p. 33
'A sale without naming the price is defective and invalid'.

Dr. Wahba al-Zuhayli, Islamic Jurisprudence and Its Proofs, Dar al-Fikr (2003), p. 56

In answer to this question some Shari`ah scholars have argued that, in a modern `ijara agreement, the bank only buys the property and rents it to the client because the client has expressed a need for the property. It would be unfair, they argue, for the bank to suffer a loss if the client does not proceed to purchase the property at the price agreed at the outset of the `ijara.

Once again, we are not convinced by this argument. The essence of an 'ijara contract is to free the tenant from bearing responsibility for loss or damage to the property (unless it results from the tenant's misuse of the property). A compensation for loss of capital value is a condition that defeats the purpose of an `ijara contract, and this kind of condition is not permitted in muamalat. Another example would be to sell a watch to a buyer on condition that the buyer must give the watch back to the seller after one month without compensation. Such a condition defeats the purpose of sale, which is that ownership passes permanently to the buyer in return for payment of the price to the seller. If such conditions are to be permitted on the grounds of intention, what is to stop Partner A in a partnership from asking Partner B to guarantee him against capital loss, on the basis that Partner A entered into the partnership merely as a favour to Partner B? Such an argument would be seen as invalid under Shari`ah because it defeats the purpose of partnership, yet it is almost identical to the argument used by those scholars who defend the rights of the bank in the aforementioned `ijara agreement.

Furthermore, an `ijara mortgage typically requires that the client purchases the property from the bank at the end of the `ijara term as a means of protecting the bank's original capital contribution. This transaction, involving a deferred delivery of both countervalues (property and price), has been prohibited by the four main schools of thought:

'Delay from both sides is not permitted by consensus either in corporeal property or in liabilities as it amounts to a proscribed exchange of a debt for a debt'.
Ibn Rushd, Bidayat al-Mujtahid (English translation), Garnet (1996), p. 154
The final issue that we wish to address here is the purchase of shares by a home-buying client under the diminishing partnership form of contract. Here, the price and timing of share purchases is usually fixed at the outset of the contract. We are aware that in one particular case, the price of share purchases is related to the market value of the underlying property at the time of the purchase, and that in this same case such purchases are not forced upon the client contractually. This case is however an exception and the majority of financial institutions adopt the former model. For example, the Al- Buraq contract forces its home-buying client to purchase shares in the partnership at monthly intervals:

'We agree to sell and you agree to buy Our Share of the Property for the Acquisition Cost on the terms of this Deed. The Acquisition Cost shall be payable by way of the First Acquisition Payment, which shall be paid on the date of this Deed; and the Acquisition Payments ... which shall be paid on each Payment Date ...'

Sheikh Haitham al-Haddad

haitham1234@hotmail.comTarek El Diwany

London, UK
25th Shawwal 1427 H
18th November 2006


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