{"id":7022,"date":"2022-05-31T19:43:59","date_gmt":"2022-05-31T19:43:59","guid":{"rendered":"https:\/\/ifg.local\/articles\/the-problems-with-islamic-mortgages-and-what-we-should-do-about-it\/"},"modified":"2023-09-21T10:04:56","modified_gmt":"2023-09-21T10:04:56","slug":"the-problems-with-islamic-mortgages-and-what-we-should-do-about-it","status":"publish","type":"post","link":"https:\/\/www.islamicfinanceguru.com\/articles\/the-problems-with-islamic-mortgages-and-what-we-should-do-about-it","title":{"rendered":"The Problem with Islamic Mortgages &#038; What We Should Do | IFG"},"content":{"rendered":"<div class=\"hs-responsive-embed-wrapper hs-responsive-embed\" style=\"width: 100%; height: auto; position: relative; overflow: hidden; padding: 0; max-width: 640px; max-height: 360px; min-width: 256px; margin: 0px auto; display: block;\">\n<div class=\"hs-responsive-embed-inner-wrapper\" style=\"position: relative; overflow: hidden; max-width: 100%; padding-bottom: 56.25%; margin: 0;\"><iframe loading=\"lazy\" class=\"hs-responsive-embed-iframe\" style=\"position: absolute; top: 0; left: 0; width: 100%; height: 100%; border: none;\" title=\"Are Islamic Mortgages Halal? Our View + Arguments For &amp; Against\" src=\"https:\/\/www.youtube.com\/embed\/V6-3NnYb0ng?feature=oembed\" width=\"640\" height=\"360\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\" data-service=\"youtube\"><\/iframe><\/div>\n<\/div>\n<p><!--more--><\/p>\n<p>In <a href=\"https:\/\/islamicfinance.guru\/articles\/personal-finance\/islamic-mortgages-explained\" target=\"_blank\" rel=\"noopener noreferrer\">Part One<\/a> of this blog I went through why there is very little justification for a conventional mortgage and why so many of the attacks on Islamic mortgages are baseless. Judging from the comments the article instigated, some of you understood that this line of argument was giving my unequivocal support for Islamic mortgages!<\/p>\n<p>In this part I get down to the real crunchy stuff. I go through the major fiqhi issues with currently available Islamic mortgages, and then give some general reflections on what that means for us practically as Muslims living in the 21<sup>st<\/sup> Century, and whether we should or should not be taking out Islamic mortgages.<\/p>\n<p>I will be referring to Shaykh Haitham\u2019s <a href=\"http:\/\/www.islam21c.com\/finance\/213-the-islamic-mortgage-paradigm-shift-or-trojan-horse\/\">excellent article<\/a> on this topic whenever I feel he has already covered a point adequately \u2013 no point reinventing the wheel! Also for the technical buffs in the readership, I\u2019ll be focusing in on the musharakah model. Also for those of you who want a good introductory reading list on the subject, see this <a href=\"\/articles\/islamic-finance\/islamic-finance-book-list\" target=\"_blank\" rel=\"noopener noreferrer\">previous blog<\/a>.<\/p>\n<p>UPDATE: Check out our detailed review of Al Rayan <a href=\"https:\/\/www.islamicfinanceguru.com\/personal-finance\/al-rayan-mortgage-review-guide\/\">here<\/a>, as well as our completely free \u201c<a href=\"https:\/\/www.islamicfinanceguru.com\/calculator\/\">Should I Buy or Rent<\/a>\u201d calculator and our <a href=\"https:\/\/www.islamicfinanceguru.com\/islamicmortgages\/\">Islamic mortgage comparison page<\/a>.<\/p>\n<p style=\"text-align: center;\"><strong><u>Problems with Islamic Mortgages:<\/u><\/strong><\/p>\n<ol>\n<li><strong>They don\u2019t share in ownership risk adequately<\/strong><\/li>\n<\/ol>\n<p>Islamic banking is supposed to be a fundamental paradigm shift from lending to an individual where he is exposed to all the risk of the venture and where the bank simply takes its fixed return, to a setup where the bank is seen as much more of a partner in the venture and consequently shares in the risk associated with the house.<\/p>\n<p>Unfortunately four things seem to contradict this.<\/p>\n<p>Firstly Islamic mortgages \u2013 at least those that are available in the UK \u2013 ask the buyer to take out house insurance on the house so that everyone is covered in the case an alien spaceship decides to land on the house.<\/p>\n<p>Secondly, the Islamic bank also asks the customer to maintain the house and make sure its general upkeep is done. Have a read of <a href=\"https:\/\/www.alrayanbank.co.uk\/sites\/default\/files\/media\/file-uploads\/2023-01\/hpp_process_guide_lft_hpppg_arbv9_0722.pdf\">this Al Rayan brochure<\/a> which goes through their whole process. On Page 24 it lays out the 5 different agreements that the customer has to sign up to. The one I\u2019m banging on about right now is the \u201cService agreement\u201d.<\/p>\n<p>Now if the Islamic bank owned 80% of the house say, then a common sense understanding of house ownership and partnership in a business would suggest that costs are split 80-20 when it comes to home insurance and upkeep. But that currently doesn\u2019t happen with Al Rayan. (It does however happen with some other Islamic banks in other countries)<\/p>\n<p>Thirdly, banks ask the customer to pay the stamp duty upon the purchase of the house. Again this does look like the bank isn\u2019t adequately taking on ownership costs of the house. However I don\u2019t think this is actually a major issue as ultimately the customer does buy back the entire house and should have to pay some stamp duty at some point. Perhaps, rather than getting the customer to pay the stamp duty entirely, the bank should contribute a minority sum towards it, say 20%, as they will after all own a significant part of the house for over 15-20 years sometimes.<\/p>\n<p>Fourthly, Islamic banks do not fully expose themselves to the vagaries of the open market. When you become a partner in a taxi for example, and you both invest \u00a350 each, let\u2019s say your partner gets you to promise you will buy his share off him at \u00a350 in a year\u2019s time, regardless of the then value of the taxi. Given this locked-in price your partner is in effect not risking very much \u2013 he certainly isn\u2019t risking loss.<\/p>\n<p>In Islamic mortgage this locked-in pricing happens in the quarterly or six monthly or annual buy-back of a stake in the house. The Islamic bank agrees with you from the start that the house will be sold to you bit by bit at the same price it as bought at by you right at the start of your mortgage. This in effect helps you out, as house prices mostly rise, so if the bank was to work out the market price for its 80% share it would likely be more than what you bought it for.<\/p>\n<p>But of course sometimes it can go in the bank\u2019s favour. Let\u2019s say you want to sell and the house price has actually fallen below what you bought it for. So let\u2019s say you bought for \u00a3200,000 and owe the bank \u00a3160k. Unfortunately the house is now worth only \u00a3150k. In this situation Al Rayan say that they can refuse the sale, but if you really want to sell then you must pay them back entirely. While this is acceptable in the letter of the Islamic law again this doesn\u2019t seem to me to partake properly and fully in the risk-sharing of the venture. In fact all the scholars of all the madahib are unanimous that loss-sharing must be shared, even if profits can be distributed in an unequal manner.<\/p>\n<ol start=\"2\">\n<li><strong>The contract does not use local rent values<\/strong><\/li>\n<\/ol>\n<p>The Islamic mortgage uses LIBOR pegged values to work out rent, instead of working out what the local rent would be for the property. This is not ideal however two important things have to be said in defence of this: (a) the Islamic banks usually charge less in rent right now than they would if they charged the local rental value. So in effect the customer is quids in with this practice. (b) It would be quite a task to quarterly or biannually work out new local rent rates for each of the thousands of mortgage properties that the banks will have on its books. So from a practicality perspective this would be difficult.<\/p>\n<ol start=\"3\">\n<li><strong>Fractional reserve banking and money creation<\/strong><\/li>\n<\/ol>\n<p>This issue I feel is often one that slips under the carpet as most people discussing Islamic finance often do not have an economics background. Unfortunately the reality today is that 97% of our money supply is created by private interest-dealing banks who simply pop money into existence. You can find out more about how all this works <a href=\"http:\/\/positivemoney.org\/how-money-works\/how-banks-create-money\/\">here<\/a>. Islamic banks too unfortunately operate on this system from the basic research I\u2019ve been able to come across on this subject <a href=\"http:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=2071164\">here<\/a> and <a href=\"https:\/\/www.emerald.com\/insight\/content\/doi\/10.1108\/08288660910964175\/full\/html\">here<\/a>. What this means is that banks are essentially creating money out of nothing. This goes against the well-established Islamic principle \u201cdo not sell that which you do not have\u201d, and raises all sorts of major macroeconomic problems that I won\u2019t go into here. Suffice to say that fractional reserve banking screws up the economy, causes inflation, and puts money supply in the hands of an unelected elite group of bankers.<\/p>\n<p>So if UK Islamic banks also operate according to these practices, and it is highly likely they do, then this is another serious problem with Islamic banking.<\/p>\n<p style=\"text-align: center;\"><span style=\"text-decoration: underline;\"><strong>So Islamic mortgages have issues with them \u2013 now what?<\/strong><\/span><\/p>\n<p>I\u2019ll put down some general thoughts on each of the 3 problems:<\/p>\n<p><strong>Problem 1: \u00a0<\/strong><\/p>\n<ul>\n<li>Islamic banks do not exactly take on full ownership risk, but it is not the case that each time they are passing it over to the customer in a way that it is harmful to them. In fact in many cases the bank actually passes the profit to the customer. So in the case of a sale of the property with a profit, the bank foregoes the profit, or in the case of rent, the bank actually takes less rent using LIBOR-pegged amounts than if it worked out the local rent. We usually accuse banks of just milking us dry \u2013 but that\u2019s not the case. It is true banks are not taking on a bunch of things that a proper house-owner would, but it\u2019s not true that this is always to the detriment of the customer. This means that the Islamic bank, if it genuinely cannot provide the Islamic mortgage without having to resort to this quasi-home-owner setup, then it can make a much better argument from necessity. \u201cIf we didn\u2019t do this, there would be no Islamic mortgage \u2013 and it\u2019s not like we\u2019re ripping people off doing this either,\u201d sounds much better than \u201cIf we didn\u2019t do this, there would be no Islamic mortgage \u2013 and sorry for ripping you guys off.\u201d<\/li>\n<li>They do however stack the cards in such a way that makes them mimic conventional finance a tad too much for my liking. Surely the minor things like stamp duty, home insurance, and house up keep could at least be sorted out quite easily? But, as we covered in the <a href=\"\/articles\/islamic-finance\/can-islamic-finance-make-me-a-better-muslim\" rel=\"noopener\">last blog<\/a> this is a young industry that should be supported if it is to progress.<\/li>\n<li>Islamic banks genuinely cannot cost-effectively price up houses every quarter and adjust rent every year \u2013or can they? Yes a full house price-up would be difficult as would a rent price up, but perhaps rule of thumb\/insight from local estate agent might well be possible acceptable alternative. This would also be a lot cheaper to do than having to send in a surveyor every 6 months or so.<\/li>\n<li>Bay\u2019 salam and Bay\u2019 Istisna\u2019 are two kinds of contracts that do lock in prices at a predetermined rate. They were allowable exceptions because the people of Madinah needed it to run their agricultural businesses properly in the Prophetic time. So a similar argument of necessity may be made for the pre-determined house price in an Islamic mortgage.<\/li>\n<\/ul>\n<p><strong>Problem 2:<\/strong><\/p>\n<ul>\n<li>Similar reasoning would apply here. If the Islamic bank cannot genuinely provide an Islamic mortgage if it were to spend money pricing up local rent values, then they could be justified in what they do.<\/li>\n<li>Secondly, as the bank is generally making a loss here even though they are the more powerful party, that plays in their favour for justifying this. This is because foregoing profit is acceptable.<\/li>\n<\/ul>\n<p><strong>Problem 3:<\/strong><\/p>\n<ul>\n<li>We as a Muslim community are missing the wood for the trees. We\u2019re going after tiny details in an Islamic mortgage not realising that every time we spend any money, bank any money, or make a transaction, we are directly supporting interest-based banking. Every pound that you spend has been created by some interest-based loan somewhere in the background. (check out the Positive Money website for more details).<\/li>\n<li>Islamic Banking is pretty much impossible in the current system we have. That doesn\u2019t mean Islamic banks can\u2019t get more Islamic and try and be Islamic as possible in the current system though. But we can\u2019t blame Islamic banks for systemic issues. We can only blame ourselves for that \u2013 we vote in the politicians!<\/li>\n<\/ul>\n<p><strong>So is that a yay or a nay for Islamic mortgages?<\/strong><\/p>\n<p>Ultimately the decision is yours, and one you should do in consultation with your Islamic scholar, but from where I stand, it seems that in this interconnected and global financial system that we live with today, Muslims need to have a foothold \u2013 and Islamic banks are that first foothold. This means that we must support them by actually using them.<\/p>\n<p>However if we\u2019re genuine about our concern to stay away from riba and live in a fairer society, then we need to:<\/p>\n<ol>\n<li>Campaign and lobby Islamic banks to sort out the issues discussed above, and pointed out by a plethora of scholars far more qualified than me. The legally possible fixes should be fixed at least.<\/li>\n<li>Campaign to stop money creation by private banks, move towards a full (or at least fuller) reserve banking system, and empower politicians to do this. Educate the Muslim community on these areas and get more Muslims in the industry to bring positive change. Only once we have such a system in place can Islamic banks really come to the table in the successful way they would like. Right now they\u2019re like a bullet train trying to work on a steam engine track \u2013 a track designed for interest-based banks. (And we do need to do this in the UK \u2013 we can\u2019t just immigrate to the Middle East or Malaysia \u2013 as the financial system there is completely interconnected with ours and operates on identical grounds.)<\/li>\n<li>Come up with our own financial institutions \u2013 particularly for halal business loans \u2013 that truly are as Islamic as possible given our current financial system. We need to be giving solutions, not just pointing out problems.<\/li>\n<\/ol>\n<p>Please so comment your thoughts below, subscribe to the blog, and share with friends and family.<\/p>\n<p>PS: I would like to point out that I am not a world-renowned scholar like Mufti Taqi Usmani, Sh. Haitham Haddad etc. What I have presented today are the reasonably informed reflections of someone who has a working knowledge of sharia, economics, Islamic finance, and financial fiqh. These reflections are designed to provoke reflection, debate, and conversation. They\u2019re not a diktat, an edict, or a fatwa.<\/p>\n<p>PPS: Here is <a href=\"\/articles\/islamic-finance\/are-conventional-mortgages-okay-if-you-cant-afford-an-islamic-one\" rel=\"noopener\">another article<\/a> on Islamic mortgages that I\u2019ve written pertaining the taking out of conventional mortgages by some people.<\/p>\n<p>PPPS: For those who are still uncomfortable on the sharia side we recommend checking out an alternative to a mortgage such as the one provided by <a href=\"https:\/\/search.wayhome.co.uk\/islamic-finance-guru\/\">Wayhome<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"","protected":false},"author":24,"featured_media":7023,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","wds_primary_category":0},"categories":[6,7],"tags":[33],"acf":[],"_links":{"self":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts\/7022"}],"collection":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/users\/24"}],"replies":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/comments?post=7022"}],"version-history":[{"count":0,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/posts\/7022\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/media\/7023"}],"wp:attachment":[{"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/media?parent=7022"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/categories?post=7022"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.islamicfinanceguru.com\/wp-json\/wp\/v2\/tags?post=7022"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}