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The Islamic mortgage

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The Islamic Mortgage (hereafter IM) enables a client to purchase or refinance a home in a manner that complies with Islamic Sharia law.  The main differences between the IM and a conventional mortgage is that transactions do not involve charging interest (riba) or excessive risk(gharar), which are major sins prohibited under Sharia.  Different types of contracts fulfill these requirements. Lariba and Guidance Residential, the two biggest providers of Islamic financial services in America, base their offerings on the Declining Musharaka(‘partnership’) model.  In this model, customer and financier become co-owners of a property, and both profit and loss are shared. The parties acquire a share of the property and agree on a monthly payment, based on a competitive market value for similar properties.[1]

 

Through these monthly payments, the customer acquires additional shares of the property that the financier owns. This is why the Musharaka is declining: the owner’s share of the property decreases over time. The financier works with the customer when they are unable to make payments.  Risk is assumed by the financier and investors, not by the client, whose other assets are protected. [2] The customer can choose to sell the house, recovering the funds from their share of the property.  Any surplus on the sale is used to compensate investors, and the rest is kept by the customer. [3]   

 

 

The Islamic Mortgage (hereafter IM) enables a client to purchase or refinance a home in a manner that complies with Islamic Sharia law.  The main differences between the IM and a conventional mortgage is that transactions do not involve charging interest (riba) or excessive risk(gharar), which are major sins prohibited under Sharia.  Different types of contracts fulfill these requirements. Lariba and Guidance Residential, the two biggest providers of Islamic financial services in America, base their offerings on the Declining Musharaka(‘partnership’) model.  In this model, customer and financier become co-owners of a property, and both profit and loss are shared. The parties acquire a share of the property and agree on a monthly payment, based on a competitive market value for similar properties.[1]

 

Through these monthly payments, the customer acquires additional shares of the property that the financier owns. This is why the Musharaka is declining: the owner’s share of the property decreases over time. The financier works with the customer when they are unable to make payments.  Risk is assumed by the financier and investors, not by the client, whose other assets are protected. [2] The customer can choose to sell the house, recovering the funds from their share of the property.  Any surplus on the sale is used to compensate investors, and the rest is kept by the customer. [3]   

 

Key to the legitimacy of this mortgage is the backing by a Sharia board, a group of Muslim academics and experts that approve the company’s financial instruments as permissible under the laws of Islam.  This approval is issued in a fatwa, a legal opinion included in the financier’s documents.

The IM is a form of money linked to personal property.   McLuhan’s statements on housing as media apply here:  the IM is a ‘media of communication’, as it ‘shapes and rearranges the patterns of human association and community’ of Muslims in the West. [4]  It provides an ethically responsible way for Westerners, Muslims and non-Muslims to use money and live the American Dream.

 

Figure 1.  A comparison between Guidance’s Declining Co-ownership (based on the Musharaka model) and a conventional mortgage. [33]

 

 

 

 

 

Figure 2: Difference between a Shariah-compliant mortgage and a Conventional Loan, when a mortgaged home is sold at a loss. [34] 

 

 

Usury in Islam.

 

Unlike other religious texts which make explicit when God speaks (‘and God said...’), in the Qur’an every word is the literal word of God. This makes interpretation of the text very strict compared to the Bible or Torah.  Allah encourages followers to ‘wage war’ on usurers. [5].  The Sunnah and the Hadith are secondary texts of Islam, that also record Prophet denouncing the practice: "There are seventy degrees of usury, the least of which is equivalent to a man having intercourse with his mother." [6] Sharia, the canon law of Islam, derives laws from these three sources.  These works leave the details of what actually constitutes usury in 21st century living, especially in the West, open to interpretation. In addition, there is no central authority in Islam, no figure like the Catholic Pope, that can issue a definite ruling.  Therefore, beyond this common body of work, the application of Sharia law diverges by country and Islamic denomination.

 

The Fiqh (‘jurisprudence’) is written by legal experts who interpret modern laws from the previous sources, followed by the Fatwas.   These are requested by judges or individuals to resolve an issue where the fiqh is unclear, or to address new developments in technology, the economy or society. [7]  For example, Fatwas can address whether cloning, in-vitro fertilization, or mortgages are permissible under Sharia.  These opinions guide Western Muslims in understanding a changing world. This body of laws and practices framed Muslims’ conception of home, and how to work towards acquiring one in the West.  Many of these teachings were incompatible with an economy built on interest.

 

The West as a Muslim abode

 

Until a few decades ago, attitudes of Muslims towards the West, including America, were cautious and distant (see Table 1).  Immigrant Muslims that came to America saw it as a space they inhabited due to necessity (‘darura’). Under the auspices of necessity, Muslims can commit a sin if doing so is the only way to survive. America was a place that was ‘technologically superior but morally bankrupt , [9] a ‘temporary way station.’ [10]   Bilici notes that 'the ethics of darura are negative.  It demands avoidance, minimal involvement and unsettlement’. [11]  Muslim Americans in the early and mid twentieth century lived with this conception of their environment. The communities were close-knit and worked to observe Islam the best way they could in America, even if they committed a few mistakes, and sins, while doing so. [12] Most important for the establishment of a community at this time was the construction of a mosque for the community. Shryock describes the ‘development arc of mosque creation’, which begins with obtaining a prayer space, then a house or apartment, followed by establishing a mosque and finally a mosque-school-cultural center. [13]

 

 

 

Darura(Necessity)

(exception / negative)

Law

(rule / positive)

Abode of War

(Dar al Harb)

Abode of Mission

(Dar al Dawah)

Abode of Accord

(Dar al Ahd)

Abode of Islam

(Dar al Islam)

War/chaos

Mission/visit

Peace/accord

Home/Islamic

External

Frontier

Neighbor

Home

1970s

1980s

1990s

2000s

Visitor

Newcomer

Resident

Citizen

Diasporic

Settled

 

 

Table 1.“Stages and juridical tools of Muslim cultural settlement in the US,” Source: Bilici 2012, 103 [8]

 

 

 

 

 

Early Muslim Americans would pool their funds together for these projects. Under the guise of necessity, however, the communities would need to make sacrifices such as getting a mortgage loan.[14]  Muslims in America had to perform such negotiations: to live in sin to obtain a home or to live in squalor.  Rahman laments on the difficulties of ‘Muslim puritans’ before the IM.  These Muslims would ‘prefer living in small, crowded, shabby apartments’, renting an apartment for a fixed rate,  rather than commit the major sin of participating in usury. [15]  Islamic credit unions became the site for experimentation for Sharia-compliant finance in the West, with home financing being a primary driver of legitimacy and stability in the eyes of Western institutions.  The conception of America also changed as Muslim immigrants became long term residents, more Americans converted to Islam and new generations of Muslims were born. Living in America wasn’t only for material necessity any longer. From an abode of war, new Muslim generations consider America as an abode of mission (dawah, a conversion site for Islam), or an abode of accord (a neighbor to Islam and a space of negotiation). [16] The IM is a concrete example of this shift, reimagining the West as a home for all Muslims.  

 

Living ethics beyond the ritual

 

The IM connects Muslim ethics to American daily life.  The reality is that Many Muslims simply do not know how Islam applies to their daily life, outside of the religious rituals. [17]  Particularly in the United States, the average Muslim may not be aware that saving and paying for a conventional thirty year- mortgage goes against Sharia, or that other alternatives exist.

 

The IM makes ethical living for Muslims more accessible.  Acquiring a home remains an increasingly difficult undertaking in any Americans’ lives, with mortgages lasting at most thirty years.  Saving, making payments, and working towards this goal in an ethical manner solidifies a Muslim’s position in America.  The suburban home, the more desirable kind of home for American families, becomes more attainable in the eyes of American Muslims.

 

The IM also standardizes these ethics beyond the regional level and into the cultural space.  While still in its early stages, the IM and Islamic Finance in general obsolesce the informal business transactions of the close-knit Muslim communities of the 1970’s and 80’s [18].  Maurer notes that Muslim Americans prefer the detached, formal process of IM application over the warmth and overly-trusting of  Muslim communal transactions.  Islamic mortgage providers promote their products and publish their fatwas online, in what Maurer notes ‘translates into professionalism,’ even if the products do not change much from conventional financing .  [19] The IM is using the technologies and rationality to promote a larger agenda: The IM as dawah, spreading the message of Islam through real-world action. [20]

 

Islamic mortgage, and Islamic finance more generally, represent an alternative for Western citizens of all faiths, and a vantage point with which to view Western society.  Johnson argues that, by abiding by both Western law and Islamic law, the connection between local laws and institutions is less important for Islamic finance . [21] in particular troubles the connection between mortgage debt and acquiring a home.

 

The vantage point allows Westerners to identify the ideological bias of modern capitalism from a perspective that is not Christian or socialist, but sympathizes with the aims of both.  IM proponents can utilize Islam to distinguish the religion-like ideology that drives Western finance.   Benjamin calls capitalism ‘the most extreme religious cult there ever was,’ and outlines other characteristics in his ‘Capitalism as Religion’ piece:  its permanent duration and  its engendering of blame result in the ‘obliteration of being’ itself [22].  Indeed, the global depression of 2008 and the subsequent weak recovery have obliterated the livelihood of millions in the middle class.  Booms and busts are a permanent part of the business cycle, with its participants having their credit affected. The guilt of debt persists over the Western youth, a guilt which makes the guilt of sin in Islam much lighter and temporary by comparison.

 

Now in his later years, Abdul-Rahman, one of the pioneers of IM, recognizes this as well.  He calls for a more moral and just society, and leaves behind the IM as a practical instrument to carry out this work.  No longer tied to Islam, he hopes the IM is a starting point for an interest-free lifestyle that can be shared by a Judeo-Christian-Islamic community. [23]

 

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Glossary

 

Riba= the act of charging rent for the use of money.  Literally means ‘increment’ or ‘addition’.

Referred to as usury by the Catholic Church in its early days. [24]

 

Qu’ran= The speech of Allah (God)  that was revealed to Prophet Muhammad. From the Arabic ‘recitation’. Muslims consider it their primary document in matters of Education, Law, Theology and History.  [25]

 

Hadith= A report, story or tradition about what Muhammad said or did,  attributed to his companions. From the Arabic ‘report, recitation’ . Along with the Sunnah, it is the second primary source of Islamic doctrine. [26]

 

Sunnah= A set of practices that Muhammad taught Muslims to follow. Unlike the Hadith, they are not attributed to any one of the Prophet’s companions, but are derived from a consensus of generations.  Along with the Hadith, it is the second primary source of Islamic doctrine.  From the Arabic ‘path, method, way.’  [27]

 

Sharia= the law of Islam based on God’s teachings in the Qur’an, the Sunnah and the Hadith. From the Arabic

‘path to a source of water.’ [28]

 

Fiqh= Islamic law as it is interpreted and implemented by legal experts. The Muslim form of  jurisprudence. Fiqh

is used to create laws not found in the Shariah.  From the Arabic ‘understanding.’ [29]

 

Fatwa= A legal opinion issued by an expert in Islamic religious law. Commonly issued as an informed response to a question of concern, or at the request of an individual or judge. Used to resolve an issue where the Fiqh is unclear. [30]

 

Darura= Necessity.  A situation in which one has fear of losing his or her life. It is also extended to situations where ‘dignity, religion, offspring and property would be endangered.’  In Islam, hardship or necessity is a legitimate justification for breaching Islamic law.  [31]

 

Dawah= ‘Religious outreach for purposes of conversion’ or bringing back into Islamic faith [32]. From the Arabic ‘invitation, summons’.

 

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Notes

 

  1. Guidance Residential 2012, 4.

  2. Ibid., 5.

  3. see American Finance House Lariba.

  4. see McLuhan, Ch. 13, Kindle Loc. 1812-1814.

  5. Quran 2:278-280

  6. Hadith Vol. 3, Book 12, 2274

  7. Campo 2009, 233.

  8. Bilici 2012, 103.

  9. Ibid., 104.

  10. Ibid., 53-54.

  11. Ibid., 97.

  12. see Ibid., 44.

  13. Shryock 2007, 7.

  14. For example, the Arab American Banner Society of Quincy, MA had to take out a bank loan in 1961 to cover the construction of their mosque.  From Curtis IV, 67.

  15. Abdul-Rahman 2014, xix, 81.

  16. Bilici 2012, 97.

  17. Usman 2014, Ep. 1, 7:00  ,   Ep. 22, 17:00,  and Maurer 2006, 80-81.

  18. Maurer 2006, p. 82.

  19. Maurer 2006, p. 83.

  20. see presentation ‘Lariba Islamic Banking Guide’, https://www.lariba.com/site/pdf/islamic-banking-guide.pdf

  21. Johnson 2013, 10.

  22. Benjamin 1996, 259-260.

  23. Abdul-Rahman 2014, 189-190.

  24. Ibid., 9.

  25. Campo 2009, 573.

  26. Ibid., 278.

  27. see understanding-islam.com

  28. Campo 2009, 620.

  29. Campo 2009,  328, 233, and islamicsupremecouncil.org

  30. Zakariyah 2012, 8, 14.

  31. Zakariyah 2012, 42.

  32. Campo 2009, 177.
  33. Source: Guidance Residential LLC. https://www.guidanceresidential.com/how-it-works  
  34. Source: screen capture from application 'How the Program Works'. Halal inc. http://halalinc.com/shariah_compliant_home_ownership.shtml  

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References

 

Abdul-Rahman, Yahia. The Art of RF (Riba-Free) Islamic Banking and Finance: Tools and Techniques for Community-Based Banking. John Wiley & Sons, 2014.

 

Benjamin, Walter. “Capitalism as Religion” in Selected Writings. Vol. 1, 1913–1926. Edited by Marcus Bullock and Michael W. Jennings. (1996).

 

Bilici, Mucahit. Finding Mecca in America: How Islam is Becoming an American Religion. University of Chicago Press, 2012.

 

Campo, Juan Eduardo. Encyclopedia of Islam. Infobase Publishing, 2009.

 

Curtis IV, Edward E. Muslims in America: A short history. Oxford University Press, 2009.

 

Dodd, Nigel. "Nietzsche’s money." Journal of Classical Sociology (2012): 1468795X12461412.

 

Guidance Residential LLC.  The Declining Balance Co-ownership Program: An Overview. Reston, VA, 2012.

 

Johnson, Katherine. "The role of Islamic banking in economic growth." (2013).  CMC Senior Theses. Paper 642.

http://scholarship.claremont.edu/cmc_theses/642 

 

American Finance House Lariba. “FAQ.” Lariba.com. https://www.lariba.com/site/faq.html

 

McLuhan, Marshall. Understanding Media: The Extensions of Man. Gingko Press, 2013. Kindle Edition.

 

Shryock, Andrew. "Finding Islam in Detroit: The Multiple Histories, Identities, and Locations of a City and Its Muslims." In Paper available at http://stanford. edu/dept/frenital/institute/Conferences/Papers/Shryock. pdf. 2007

 

Usman, Omar. “Episode 22-Navaid Aziz, Homes, Student Loans and Cars.” Podcast audio. Debt-Free Muslims podcast. MP3. March 16, 2015. http://debtfreemuslims.com/podcast-episode-22-navaid-aziz-islamic-mortgage-student-loans-and-halal-car-purchases/

 

Usman, Omar. “Episode 7-Yusuf Delorenzo and Islamic Finance in the West.” Podcast audio. Debt-Free Muslims podcast. MP3. April 7, 2014.

http://debtfreemuslims.com/episode7/

 

Usman, Omar. “Episode 1-Fiqh of Home Financing With Mufti Ikram-ul-Haq.” Podcast audio. Debt-Free Muslims podcast. MP3. February 21, 2014.

http://debtfreemuslims.com/episode1/


Zakariyah, Luqman. "Necessity as a pretext for violation of Islamic Commercial Law: A Scenario of Mortgage Contract in the UK." Journal of Islamic Economics, Banking, and Finance 8, no. 1 (2012).

 

 

 

 

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