Fatwa ID: 03080
Answered by: Maulana Tahsin Alam
Question:
Assalamu Alaikum Wa Rahmatullah
I am married and have 3 kids. Living at rent for 10 years but want to buy my own house through an Islamic alternative of a conventional mortgage.
But there are so many out there and not sure which one fully qualifies the criteria to be permissible.
Can you please advise if there is any Islamic alternative of conventional mortgage out in the market that is recommended by Darul Ifta or Sheikh Taqi Usmani.
Answer:
In The Name Of Allah, The Most-Merciful, The Most Kind
Shariah-compliant Islamic banks, which certainly does not represent all of them, use one of three forms of home financing: 1) Diminishing Musharakah (also called “declining partnership” or “declining balance”); 2) Ijarah; and, 3) Murabaha.
Very briefly, in a Diminishing Musharakah, the Islamic bank and the client purchase the property jointly. The client moves into the property and begins acquiring the bank’s equity in the property while paying rent in proportion to the bank’s remaining equity, with each successive rental payment “diminishing” to the extent of the bank’s reduction in its share of the property.
In an Ijarah, or Islamic lease, the bank, acting as lessor, acquires a property and rents it out to the lessee client. Much later, as part of a separate agreement, the bank offers to sell the property to the client.
In a Murabaha, or cost-plus financing, the client selects a property and the bank acquires it. The bank adds its profit and sells the asset to the client at an agreed-upon price on a deferred, usually instalment, basis.
No different from the shopkeeper who sells goods (not money) on credit. For the purposes of facilitating execution, it is permissible for the client to act as the bank’s agent, provided the risk of ownership resulting from this agency role devolves back to the bank.
The key difference between a conventional mortgage and an Islamic home financing is that a conventional mortgage involves the loan of cash on interest, whereas an Islamic home financing is strictly the exchange of an asset. Each of the above transactions involves an asset and actual ownership by the bank. Ultimately, the bank must own some (Diminishing Musharakah) or all (Ijarah and Murabaha) of the asset for it to be Islamically acceptable.
Exacting conditions related to timing, usufruct, and the proper allocation of potential penalty charges (to a designated charity), among other things, govern these Islamic products. When things go wrong, the fact of the Islamic bank having undertaken the liabilities associated with asset ownership makes all the difference.[1]
You may enquire from your local Islamic finance institution regarding the three methods listed above to finance the purchase of your home. We would then ask you to confirm your selected institution’s policies with your local trusted scholar or to send them into us.
Only Allah Ta’ala knows best
Written by Maulana Tahsin Alam
Checked and approved by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham
[1] “Riba and Mortgages: 21 Commonly Asked Questions,” Ethica Institute of Islamic Finance, pg. 6.
