The
Ruling on the Permissibility of Financing Properties
using Islamic Ijâra
Mortgages
as currently implemented by HSBC and other banks
By
Shaykh Haitham Al-Haddad
Many people have enquired about
the permissibility under sharî'ah of the so-called
Islamic ijâra mortgages recently announced
by banks such as HSBC. As it is in the interest
of all Muslims to have a current and accurate understanding
of the issues involved here, I have concluded the
following judgement based upon the Qur'ân
and sunnah in accordance with the understanding
of the main school of thoughts.
Let me first brief the reader regarding
the manner in which the scheme works.
Under the ijara (rental) variety
of Islamic mortgage, the bank purchases a property
selected by the client, following a promise from
the client that he or she will live in that property
and purchase it after an agreed period of time.
In return, the client pays monthly installments
to the bank, mainly composed of two payments. One
portion of the installment is considered to be a
payment of the purchase price for the property,
and another portion is counted as rent that the
client pays for living in the property in the meantime.
The purchase price paid by the client is equal to
the purchase price initially paid by the bank for
the property. Once the client has paid all of the
installments, in other words the purchase installments
plus the rental installments, the bank will transfer
the ownership of the property to the client. The
bank makes its profit from the difference between
the price it pays for the property (including related
transaction costs) and the amounts received in installments
from its client.
This type of scheme, with some minor
modifications, is used in the United Kingdom by
HSBC Amanah Finance, Ahli United Bank and United
National Bank. [1]
In principle, an ijara scheme can
be structured in such a way as to be acceptable
under sharî'ah so long as certain conditions
are met, the discussion of which is beyond the scope
of this judgement. However, the implementation of
the scheme by the above banks is highly problematic.
Firstly, the contract is ambiguous
in terms of its nature. Is it a lease contract,
a purchase contract or a combination of the two?
Some scholars have prohibited combined contracts
(for example, a transaction that combines both lease
and purchase), as the Prophet, peace be upon him,
prohibited two transactions in one transaction.
This is the opinion adopted by most of the scholars,
and although there are some who have allowed this
type of transaction under certain strict conditions,
there is a consensus that the presence of a significant
amount of ambiguity invalidates a contract. Among
the many Prophetic traditions on this point is that
of Ibn 'Umar, who related that the Prophet ,upon
whom be peace, forbade sales that involve uncertainty
or gharâr (ambiguity). [Narrated by Muslim]
Many scholars, including the foremost
fiqh councils of our times [2], believe that if
rental and sale are mixed in such a way that one
cannot distinguish at any point of time whether
the client is a tenant or a buyer, then such a contract
is invalid according to Islamic jurisprudence.
When pressed to clarify the nature
of the ijâra mortgage, staff in Islamic banking
departments frequently describe it as a 'lease ending
in a purchase'. Yet if this really is the case,
then the ijâra mortgage should display the
features of a lease throughout the entire time-span
of the contract (often as much as 25 years) until
it concludes with a purchase event. In other words,
the bank will rent the house for a period of time
with the promise that it will sell to the client
at the end of the tenancy. During the tenancy, the
bank will be the legal owner of the property. After
the tenancy the client will be the legal owner.
Although
many scholars do not allow this type of combined
contract, let us for the sake of argument consider
it to be valid according to the opinion of those
scholars who accept it. When we examine the available
ijâra schemes more closely, we find that the
theoretical structure outlined above does not exist
in practice. The ijâra contract as it stands
is neither a lease nor a purchase. Rather, it is
closer to a conventional loan where the bank lends
money to a client for a poperty
purchase, and requires that the client must repay
with a markup (under the guise of ‘rent’).
Consider
the following questions which illustrate the ambiguity
of the contract:
1. Why does the tenant need to pay
a large down payment? (Frequently an amount equal
to 10% of the price is required. A genuine tenant
does of course make some kind of down payment, relevant
to the period of the tenancy, but no credible tenancy
agreement can bind the tenant to place such a large
down payment.)
2. Who pays the insurance of the
house? Is it the bank or the tenant? (Technically,
the owner of an asset is the one who should pay
for its insurance.)
3. What will happen if there is
loss or damage to the property and the insurance
company refuses to cover the losses incurred? Who
will pay for this? (Once again, if the bank is the
actual owner, and such a loss or damage occurred
through no fault of the client, then the bank cannot
hold the client responsible for damages.)
4. If the tenant decides to stop
the tenancy agreement, the bank will sell the property.
If the price of the property has depreciated in
the meantime (which means the bank as the owner
of the property suffers a loss), why is the client
bound to compensate that entire loss while being
only a tenant?
The point of all these questions
is to address the central issue, namely, who is
considered the actual owner (and thus liable for
any damages or depreciation in value) for the duration
of the lease? Is it the bank (in which case all
of the above scenarios do not make sense), or is
it the client (in which case this contract is not
a lease contract in the first place, but rather
something else)?
A bank may give an answer to all
or some of these questions, supported by quotations
from jurists past or present. Some of these answers
may indeed prove to be acceptable when looked at
in isolation but, when taken as a whole, such practices
may invalidate the contract.
To illustrate our point, the bank
might state that, according to a particular school
of thought, the down-payment is not a part of the
price of the property since it is not a purchase
agreement. Rather, it is an assurance that the tenant
is serious in renting the property for a given period
of time (up to 25 years, perhaps). Such a condition
is acceptable according to some jurists. Furthermore,
the bank may state that the insurance is paid by
the tenant based on a mutual agreement, and there
is nothing wrong with such a condition, for the
Prophet, peace be upon him, said:
“Muslims
are bound to the conditions taken on by themselves.”
In the meantime, they might claim
that they are bound by English law to hold the title
of the property, and will only pass it to the client
upon the final payment. However, the contractual
agreements that are signed between the bank and
its client put all of the risks of ownership upon
the client, and these factors defeat the purpose
of ijâra, even if technically speaking the
bank claims to follow the letter of the English
law as the 'owner' of the property.
In the above we see arguments that
are each, on their own, widely considered to be
valid. However this should not lead us into the
grave error of assuming that three valid matters
when combined produce a valid outcome. Take, for
example, the plain riba transaction, but in the
following framework:
1. An interest-free loan, (which
is something recommended)
2. A gift, (which is again, something
recommended)
3. A promise.
Taken individually, these three
transactions are completely valid. However, if they
are combined in a single contract, the result is
pure riba. For example, I say, 'Grant me a loan
which I will repay you (a valid matter), and I promise
you (a second valid matter) a gift (a third valid
matter) in addition to the repayment when it becomes
due'. Is this contact valid or is it riba? The answer
is that it is manifest riba without any doubt, since
the one who gave the money was promised that same
amount back along with some profit.
So, we need to look at the end-to-end
process here and evaluate it as one transaction.
And we need to answer the critical question: who
is the real owner of the property during the whole
process? Is it the client while the bank is just
financing the deal as it does in a normal conventional
mortgage? Or is it the bank? If the owner is the
bank, then does a real owner free himself from any
responsibility towards his property? Why does the
bank avoid owning the property?
Here, we need to explain an enormously
incorrect methodology in deriving Islamic verdicts.
A verdict should be derived by looking at a matter
in its totality, in light of the aims behind it.
When we break the matter of discussion into sub-issues
and treat issues separately, without looking at
the overall picture, then we are contradicting the
right methodology in deriving verdicts. The reason
is very simple: verdicts based upon sub-issues might
not necessarily be the same as verdicts based upon
a consideration of the general situation.
A very good example is the previous
one. Each sub-contract taken individually is completely
valid, but taken as a whole the entire contract
becomes null since it is a clear riba transaction.
Based on this, many if not all jurists forbade contracts
which try to employ such deception.
As another example to further illustrate
our point, let us look at the transaction known
as 'iynah. This transaction is strictly prohibited
by the Prophet, peace be upon him, and its prevalence
is a sign that the Muslim ummah will decline. The
Prophet, peace be upon him, said:
"When
you trade with one another with 'iynah, and hold
on to the tails of oxen, and are content with farming,
and give up jihâd, Allâh will cause
humiliation to prevail over you, and He will not
withdraw it from you until you return to (your commitment)
to Islâm." [Narrated by Abû Dâwûd
and classed as sahîh. The intent of the hadîth
is that when Muslims are going to be content with
this world, and not care about how they acquire
wealth, Allâh will inflict upon them humiliations
and disgraces that will remain with them until they
repent and give up their ways]
This transaction, when broken down
into individual parts and examined solely upon these
parts, appears to be valid. However, when taken
as a whole, it is clearly a type of riba.
How exactly does 'iynah occur? One
of the means of practising 'iynah is that one party
sells a product to a second party on a deferred
payment. The second party then sells it back to
the seller at a lesser price, but in cash. If you
break this transaction into sub transactions you
can conclude that there are two acceptable sale
transactions. It is allowed for a person to sell
a product for a deferred payment, and it is also
allowed to buy a product for cash. However, the
ultimate aim of this transaction is to enact a pure
riba transaction. This is because the second party
receives an amount of cash from the first party
and is then required to pay back an amount of greater
value at a later time. As for the product itself,
since it changes hands twice, it returns to the
initial 'seller'. Therefore, the product is used
merely as a loop-hole to avoid the prohibition on
riba.
This clearly illustrates that we
cannot ignore the total aims of any transaction.
Jurists mention this rule as a principle (qâ’idah)
that is employed for all business transactions.
This principle states:
"The
consideration of a transaction is to be paid to
its intention rather than its format."
or, alternatively:
"Transactions
are judged according to intention."
Of the evidences for this principle
is the hadîth of the Prophet:
"Actions
are judged according to intentions."
It is true that some people might
say that scholars disagree with this concept, but
those scholars who disagree with this concept (like
Imâm ash-Shafi'i), agree with all other scholars
that the aim of the transaction should not be to
overcome a prohibited transaction. In other words,
all scholars are in agreement that it is sinful
for two parties to try to devise a scheme that appears
to make permissible something that the sharî'ah
declares impermissible.
I therefore conclude that there
is no significant difference between the ijâra
scheme outlined above and the conventional mortgage
which is a pure riba-based loan. Under the ijâra
scheme, the bank performs what is essentially a
money lending transaction, placing such conditions
upon its clients that guarantee, for all practical
purposes, that it will obtain the same amount of
money in return plus a profit disguised as 'rent'.
It might be true that many of the individual clauses
and conditions of the contract are permissible (or,
at best, subject to a difference of opinion among
scholars), but when put together and examined as
a whole, it is apparent that there is little that
separates this contract from a simple mortgage.
Of the many matters that clearly illustrate this
is that the risks and rewards of ownership of the
house are carried by the tenant, not the bank, regardless
of who is the 'paper-owner' under English law.
Allow me to provide a real Islamic
scenario for acquiring a house, and also mention
a philosophical and ideological approach in explaining
a very important principle in Islamic finance. If
two or more parties enter a business transaction,
then of course their ultimate aim is profit. Islâm,
being the religion of ultimate justice, does not
confer advantage to any party based on one’s
worldly and materialistic power. In other words,
in a permissible Islamic transaction, a powerful,
richer person will not have any guaranteed advantage
over a powerless, poor person. Both parties have
to share the same risk of loss, just as they want
to share the joy of profit. This is a very logical
and simple – yet powerful – principle,
which is an explanation of the Islamic rule:
'There shall be no profit without
(a risk) of loss.'
This principle is based on many
Prophetic traditions, such as:
"It
is not permissible to sell something on condition
that the purchaser lends you something. And it is
not permissible to have two conditions in one transaction.
And no profit is permissible unless possession has
been taken of the goods. And you cannot sell what
is not in your possession." [Narrated by Ahmad,
Abû Dâwûd, at-Tirmidhî and
Nîsa’î; classed as sahîh
by many scholars]
In another hadîth, the Prophet,
peace be upon him, forbade selling any item from
the same place where it was bought; a buyer must
first physically acquire these items (lit. "
... add them to his own luggage ... "), then
he may sell these goods. [Narrated by Ahmad and
Abû Dâwûd; classed as sahîh
by Ibn Hibbân and others]
The point of this rule is that whenever
an investment contract is structured such that one
party is guaranteed a profit, something is simply
not right. Only in a pure riba transaction will
there be guaranteed profit. Any permissible transaction
in the sharî'ah must have an element of risk
involved, no matter how small that element is.
Therefore, when looking at this
particular transaction, it is essential that the
bank (the stronger party) not take advantage of
the client (the weaker party) by exploiting the
financial power of the former and the desperate
need of the latter. If these banks enact their transactions
with this principle as an underlying morale framework,
I think such contracts that we now see will disappear.
Yet, the reality is far from this ideal. In light
of this principle, we should always ask the following
question: Do these banks share with their clients
the risk of loss, or are they are stipulating all
possible conditions to protect themselves against
any foreseeable loss? Additionally, do these so-called
Islamic banks own the properties they are renting
to people?
If we give sincere answers to the
questions in discussion, we will see that the current
ijâra schemes are almost identical to conventional
mortgages. They appear to be a ruse designed to
promote conventional interest-based practices using
Islamic terminologies and sharî'ah expressions.
Based on this, the ijâra scheme
as it is implemented here in the UK by major banks:
Ahli United Bank (formerly called the United Bank
of Kuwait), United National Bank and HSBC is totally
prohibited. In fact, it is a deception rooted in
riba. Until the Muslims in charge of these schemes
prove that the above argument is invalid and give
clear answers to the questions highlighted earlier,
I believe that such transactions are totally prohibited,
and I warn brothers and sisters not to get involved
with them. I would also like to emphasize that the
view of some Muslims, that this scheme is better
than the conventional riba-based mortgage alternative
and should therefore be used until a pure halâl
scheme is available, is incorrect. This is because
there is no significant difference between the two
schemes.
And Allâh knows best.
Written
by
Haitham Al-Haddad
Haitham01234@yahoo.co.uk
1st Dhul-Qa'dah 1425 - December
12th 2004
--------------------------------------------------------------------------------
1. This is based on the their respective
online documents available here, here and here [cited
Dec 09, 2004].
2.
See resolution no. 110 (4/12) of the Islamic Fiqh
Academy (IFA) which is a subsidiary body of the
Organization of the Islamic Conference (OIC).
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