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Refutation of 'ijara' house purchasing system

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#1 [Permalink] Posted on 15th December 2004 20:01
Assalamu alaikum wa rahmatullah,

I recieved this article from one brother via email. It was written by shiekh haitham al haddad of al muntadar al islami (palmers green, west london).



Quote:
Fatwa on the imperissibility of the HSBC and other "Halal" mortgages
by Shaykh Haitham al-Haddd


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The ruling on the permissibility of financing properties using Islamic
ijara mortgages as currently implemented by HSBC and other banks
Many people have enquired about the permissibility under Sharee’ah of the so-called Islamic ijara 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 Quran 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 Sharee’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 and blessings of Allah 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 (peace and blessings of Allah be upon him) forbade sales that involve uncertainty or ambiguity (gharar)[2].

Many scholars, including the foremost Fiqh councils of our times[3],
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 ijara 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 ijara 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 ijara schemes more closely, we find that the theoretical structure outlined above does not exist in practice. The ijara 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 property 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 and
blessings of Allah 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 ijara, 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 (SAW), and its prevalence is a sign that the Muslim ummah will decline. The Prophet (SAW) 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 jihad, Allah will cause humiliation to prevail over you, and He will not withdraw it from you until you return to (your commitment) to Islam.”[4]


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 (qa’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 hadeeth 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 Imam 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 Sharee’ah declares impermissible.

I therefore conclude that there is no significant difference between
the ijara scheme outlined above and the conventional mortgage which is a
pure riba-based loan. Under the ijara 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.
Islam, 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.” [5]In another hadeeth, the Prophet (peace and blessings of Allah 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.[6]

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 Sharee’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 ijara schemes are almost identical to conventional
mortgages. They appear to be a ruse designed to promote conventional
interest-based practices using Islamic terminologies and Sharee’ah expressions.

Based on this, the ijara 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 halal scheme is available, is incorrect. This is because there is no significant difference between the two schemes. And Allah knows best.

Written By Haitham al-Haddad
Haitham01234@yahoo.co.uk
1 Thulqadah 1425 – Dec 12th 2004




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Footnotes:

1. This is based on the their respective online documents available at:
www.amanahfinance.hsbc.com/amanah/h...anahHomeFinance,
www.iibu.com/buy_home/ijarahow.htm and
www.unbankltd.com/pdf/UNB_IslamicMo...ge_Brochure.pdf . [cited
Dec 09,
2004].

2. Narrated by Muslim.

3. 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).

4. Narrated by Abu Dawood and classed as saheeh. The intent of the
hadeeth
is that when Muslims are going to be content with this world, and not
care
about how they acquire wealth, Allah will inflict upon them
humiliations and
disgraces that will remain with them until they repent and give up
their
ways.

5. Narrated by Ahmad, Abu Dawood, Termthi and Nasa’ee; classed as
saheeh by
many scholars.

6. Narrated by Ahmad and Abu Dawood; classed as saheeh by Ibn Hibbaan
and
others.[/quote]
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#2 [Permalink] Posted on 17th December 2004 23:59
Assalamu alaykum
This is the answer from a honourable Mufti of Leicester
for this refutation
This answer was posted on fisabilillah

As-salaamu Alaykum

Mufti Taqi is not alone in giving permission to this system. And Sheikh Haitham is also not the only one to refute it.

The jist of the original issue is this that a loan is something that interest (regardless of whatever it may be called) cannot be collected upon.

Thus there are two aspects upon which the debate rages. One is whether or not charging 150,000 for a 100,000 house is permitted, and the second is whether or not rent is allowed to be taken. Within these issues there are also other questions which rise, (they will be discussed in place).

1. Charging more than the value of the house. This arguement is rearly taken up as it has been more or less acknowledged that these are two seperate transactions, akin to a trader buying something for one price and selling it on for a higher one. Although some have said that allowing installments does not justify the rise in price, those who are for this have side-stepped the issue with the same above arguement.

The only question within this that is noteworthy is that a person cannot be then forced to buy it and if when paying in installments decides to not buy should be entitled to a full refund.

Scholars on this issue have said that more stringent rulings can be applied if either (a.) a promise/contract is made (b.) if the purchase is such that would considerably damage the trader's trade if refusal is easy.

Regarding the no refund stance, this is something that is a Haram act on behalf on the purportrator, but would not make Haram a fully enacted transaction. (This is the view of those who allow this type of transaction, those who do not argue this point).

2. Can rent be taken?
This is much more debated.

Those who say yes, say that the posession/property only changes ownership upon complete payment, thus as long as the buyer uses what is in the sellers posession he may be charged rent for it.

Those who are against this, say that completion of payment is not necessarily when ownership changes, ownership can change uppon the transaction and the remaining payment is classified as debt. Rent then cannot be paid on what one owns.

Those who are for, say that the last payment can be constituted as the point of change in ownership, as if payment is not made then the seller (bank in this case) has the full right of revoking the sale and giving back the money.

This is accepted by both parties as true, but those who are against (in the arguement) say that true ownership is not retained by the seller either, who thus cannot get rent out of this. As in the case of the buyer not living in that house at that time allows someone else to rent the place the rent would be given to the buyer not the seller.

Those who are for, counter this by saying if it is agreed upon in contract then there is scope for the seller to charge rent.

This is conceded by all as a weak arguement, but what is a stronger arguement is that, if rent is being charged then that action may be disliked/not permitted, but doesn't necessitate that the entire transaction be haram. As it is not classified as interest, but (on a technicality) as a wrong method of benefiting from the loan.

Again this is answered by those against the notion in the words that it is interest disguised by another name (i.e. of rent). This is again argued and argued and argued...

In short, the debate is long (much longer than what I've wrote) and very complex. In this there is a Ijtihad and Evidences on all sides and aspects.

My opinion is more towards Mufti Taqi's, as there is scope for it's legitimacy, and also that at times the ruling of a Shar'i necessity lessening a ruling can also be made applicable, as there is leeway for it.

If a person can do without this then I will not hesitate in saying he must do without it. But if there is no alternative then too I will not hesitate to recommend this as a legitimate last resort.
_________________
Allah knows best.

Was-salaam

Mufti Ebrahim Moosa

"Allah does not show mercy to those who show no mercy to others"
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