Everyone loves having a pop at the Islamic mortgage, from the business-savvy uncle, the world-weary professional, to the ultra-religious brother down the Masjid. Some are concerned that it looks too much like a conventional mortgage, while others are upset that it is too different from a conventional mortgage. Some scholars love it, others froth at the mouth upon its mention and have to do wudu again. In short, Islamic mortgages, split opinion.
In this two-part blog I try and work out if they are ultimately halal. In this part I consider arguments put forward for Muslims to just take out conventional mortgages, and then turn to common problems people have with Islamic mortgages. [For Part Two, see here. And for an article on the permissibility of taking out conventional mortgages see here. See also our review of Al Rayan Bank’s mortgage here.]
In a sentence, Islamic mortgages are not loans, they are business partnerships.
But I imagine you were looking for more than just a sentence, right? Fine.
There are actually two kinds of Islamic mortgages: Murabaha (mark-up sale) and Musharakah (partnership). I’ll be focusing primarily on Musharakah for this blog, as it’s the one currently most popular in the UK. (I’ll touch on Murabaha in a later blog, but if you have a specific query about murabaha structures comment away below)
A Musharakah home mortgage is a business partnership between you and the bank. Let’s say you’re buying a £100k house and you buy a 20% stake in the house for £20k. The bank currently owns 80% and will charge you rent for the use of the 80%. Slowly over time you buy back more equity in the house and your rental payment decreases until eventually you own the house outright.
The absolutely essential thing that makes this approach Islamic and different from a conventional mortgage is that the bank is sharing the risk of ownership with you. In other words a bank is holding 80% of a property on its accounts, rather than an £80k debt. For the business-savvy amongst you, you’ll know that these two things are actually very different.
How people justify getting a conventional mortgage – and why they’re usually wrong
Unfortunately most Muslims with the mortgage in the UK have one with a conventional bank. People give a variety of reasons for how they justify their actions – and some of these are potentially valid, but many are not.
- It is a necessity to have a home
This is the most popular argument for this camp, and in fact there is some scholarly approval of this position as stated by a fatwa issued by the European Council for Fatwa & Research in 1999. The argument goes that people need a house to live in, and that in the absence of a viable Islamic solution, an individual who cannot afford a home otherwise can take out a mortgage.
However this argument is problematic on two counts. Firstly, it is no longer the case that there is no viable Islamic alternative, so the fatwa is not really applicable to our context. Furthermore, the argument from “necessity” goes too far I feel. Usually necessity in the Shariah is associated with dire need where threats to body, life, safety, and religion are at stake. For most people in the UK today it is perfectly possible to get a reasonably priced rented property without having to risk life or limb – most estate agents are not bloodthirsty pickaxe wielding maniacs.
The only possible application of necessity that seems relevant today are those people who are on a budget and are struggling to get good rental accommodation for their family (perhaps they have someone elderly living with them and they need to have a properly warm, safe, house) on that budget, who can’t afford to buy a house outright, but who can get access to an affordable mortgage that they can pay every month. However these cases are few and far between, and I would advise anyone who is in such a position to seek personal scholarly advice. (So don’t just go around quoting this paragraph as justification for taking out a mortgage from now on!)
- The interest being forbidden back then isn’t the same as it is now
This argument is the weakest argument put forward by this camp. This is because the scholars of Qur’an and hadith are near unanimous that the riba that was forbidden in the Qur’an and the Sunnah was exactly the kind of riba that we’re dealing with in today’s mortgages. I could go into a tedious academic discussion about why this is so, but I think it’s best I spare you. For those who are interested, refer to the textbook “Islamic Finance: What it is and what it could be”, or just read about it here.
- There is no oppression happening here, and that’s why interest is haram
If I were to say to you “drink a couple of glasses of wine mate, go on. You’re not going to get drunk off that, and that’s why alcohol is really forbidden,” what would you say? Something not very nice, I imagine.
There are many forms of riba, some which look overtly oppressive, others less so. But what many of us forget is that Islam didn’t forbid just individuals from dealing in riba, Islam forbade the entire institution of riba, from top to bottom. This is therefore a macroeconomic widescale issue we are talking about, so the oppression goes much further than meets the eye sometimes.
Did you know 97% of our money is directly linked to interest-based debt? Here is a Bank of England report explaining this for the more technically minded, but in brief, every time someone asks for a loan banks simply pop money into existence. The overwhelming majority of our money is created this way and so to create more money we need to create more debt. It also means that when we use our bank accounts, debit cards, notes and coins, we’re all indirectly supporting the institution of riba, even though we may not realise it. This same system led to the foreclosure of millions of homes, millions of unemployed, and tremendous suffering across the world in the past seven years – and we’re are all hard-wired into this system. Think about that next time you use your debit card.
In the case of money supply we don’t really have an alternative right now (I realise that this is a complicated area and might not make sense to those of you without an economics background, so bear with me, I will cover this properly in a later blog) but in the case of mortgages we do. We have an alternative to supporting the same mortgage lenders who landed us in this recession in the first place.
So while riba may not always seem to us to be oppressive in our particular case, we must remember we’re actually contributing to a wider industry which is deeply immoral and deeply harmful.
A viable alternative?
Okay, you might now be convinced that conventional mortgages are definitely not the way forward, but you may still be suspicious of Islamic banks providing a viable alternative.
The debate on Islamic banking is complex and confused. There are genuine concerns with the industry, don’t get me wrong, but they are not what we commonly think they are.
What we think is the problem with Islamic mortgages
- They’re too expensive
This is the most popular complaint about Islamic mortgages. What people don’t realise however is that they are comparing apples and oranges. You are comparing a multinational juggernaut that is the conventional mortgage industry, with a clientèle of around 60m in the UK, and a centuries long history, with an Islamic bank – a fledging company in a fledging industry, founded just about a decade ago, with a clientèle of about 2m. It’s just not comparable is it?
Any new company has startup costs associated with it, especially one that is one of the pioneers in a new industry that is still testing out different products and mechanisms. All that costs money.
Then you have the added problem that the current regulatory framework is entirely designed for an interest-based bank. Did you know that in the UK only one full bank license has been given out for 100 years? That is how instinctively suspicious regulators and veteran bankers are to new players joining their party, and so you can imagine how suspicious and confused they are when confronted by a completely different model of banking.
One of the major corollaries of this is that banks have to maintain certain liquid reserves in order to stay liquid and be able to pay back depositors when they ask for their money back. So for example they might need to maintain 10% reserves. However Islamic banks, with their asset-backed mortgages, are treated differently to conventional lenders with their debt mortgages. As assets are illiquid they don’t count as liquid reserves, while debt mortgages do. So in effect Islamic banks have to maintain higher reserve levels and can’t give out very many mortgages as they’re much more restricted than normal banks. Consequently it comes as no surprise that they charge a higher price on the few mortgages that they can give out.
- They have the documents which are worded in the same way
Some people have complained that Islamic bank contracts are nearly the same as a conventional mortgage contract, and just the word “interest” has been replaced with “profit-rate”.
However when you compare the legal structures against each other they are very different. In an Islamic mortgage the buyer enters into a partnership agreement with the bank and a rental agreement as well, along with a number of other supporting agreements. In a conventional mortgage the primary agreement is that of the secured loan, along with various supporting agreements.
The primary object involved in both approaches is to finance someone’s purchase of a house and to provide the bank with sufficient protection for their loan/investment. So it is unsurprising that there is some crossover.
I agree that it is a bit off-putting for the uninitiated that the same wording is being used, but it is actually standard practice in legal contract writing to work off templates and past contracts. This is done for a reason: if a past contract has been successful and perhaps been scrutinised in court and withstood that scrutiny, then it is a good idea to model off that. Given the centuries of perfecting that have gone into the conventional mortgage contract, one can understand why Islamic bank lawyers borrow phraseology from them.
This however is an area for Islamic banks to look to develop, if only to improve customer perceptions. This is why we need more of our educated, aspirational youth to be engaging in the Islamic Finance industry, be it from a legal, financial, Shariah, or accountancy perspective.
- They peg their mortgage to LIBOR and so they’re just disguising interest
Islamic banks are operating in a regulatory system that is designed for conventional banks. Part of this regulatory framework stipulates that banks must advertise their products in a way that makes them comparable to other products on the market. As all other banks use LIBOR and conventional interest rate terminology to explain their pricing, the regulatory authorities ask Islamic banks to do likewise. This does not mean that they are actually charging interest.
So if a juice shop sets up across the street from a pub and decides to price all of its juices in line with the price of beer across the road, is that juice permissible to buy? Of course. Just because the price of the juice is tracking the beer price does not make the product itself haram.
“Ah but they don’t just use LIBOR terminology,” I hear you say. “They actually price up the Islamic mortgage using LIBOR. So its not just price-tracking, but actual interest involved.”
But now I think we’re overthinking things. Islamic banks such as Al-Rayan assure us that they are not getting their money from haram sources such as borrowing it on interest themselves, and I think we should trust them as long as they have scholarly approval.
However, interestingly, even if they were borrowing on interest and then offering us a halal mortgage, that would be acceptable for us, though haram for them of course. This is as our transaction with them is separate from their other affairs. Just like we don’t have any qualms buying and selling halal stuff from someone we know also makes an income from haram sources so too there is no Shari’ problem here even were they borrowing off LIBOR. Of course that is not to say that they do, or that they should.
I’ve explained why arguments for getting out a conventional mortgage are problematic, and why most common objections to Islamic mortgages are unfounded.
That does not mean that Islamic mortgages are perfectly halal and do not have serious issues associated with them. That is what I turn to in Part Two of this blog next week [update: this article is now live]. The whole point of this article was to get some common misconceptions out of the way so we can have a sensible, informed discussion.
So make sure you subscribe to the blog to find out when the next blog comes out, and share this article with your friends and family so that we can get a wide and open discussion going on this topic.
Let me know your questions in the comments below!