Purchasing Property and Generating Wealth Islamically?
September 29, 2007 at 3:44 pm | In Future, Islam, Learning, Muslims, Society | 17 CommentsWe’re all aware that interest (riba) is unlawful and strictly forbidden within Islam.
But I’m wondering if that is the case, how does one go about purchasing a property in the West? One cannot save money to buy a property outright, unless you’ve been saving since you were in your nappies. Or your parents are wealthy and help with the transaction.
Therefore people resort to taking out mortgages, whether they are interest-based, fixed-rate or one that fluctuates according to the rate of interest. Mortgages at any level obviously involve interest.
Islamically there seem to be two options:
- The Murabaha (Deferred sale finance) Mortgage
- The Ijara (Lease to own) Mortgage
The Murabaha Mortgage:
This is only really an option for individuals/families who have a fair amount of capital behind them, because it is a condition of this Mortgage package that you are expected to pay (circa.) 20% of your home’s value, on the day of purchase. However from that day the house will be registered as your own. You may pay off any debt that is outstanding on your home at any point. This package offers a fixed repayment period that is agreed between you and your lender, any a monthly repayment amount that is fixed for the term of your mortgage.
So how does the Murabaha Mortgage work?; When you find the house that you wish to buy, you arrange a sale price with the vendor as normal, however the bank pays the purchase price, then immediately sells the house to you at a higher price (the higher price is determined by the original price of the property, and the repayment period that you will have agreed with the lender), minus the percentage you pay as deposit.
The Ijara Mortgage:
This is a slightly more popular choice of mortgage, as you do not need a large amount of capital behind you to set up this mortgage, it is also slightly more flexible than its counterpart. An extra benefit to this type of mortgage is that it can even be taken out to replace an existing interest mortgage. The amount you pay each month is usually fixed yearly. The outstanding balance can be paid off at any time (usually) without incurring any penalties.
So how does the Ijara Mortgage work?; As with the Murabaha mortgage, you find a property that you wish to buy, and agree a purchase price with the vendor, the difference is that; your lender will then purchase, and gain ownership of the property. You will enter into a lease agreement with the lender. Each month you will be expected to pay rent to your lender and a contribution towards the purchase of your property.
Above taken from here
I personally dont know of any Muslims in the West who have took out any of the above mortgages, they often resort to “normal” mortgages. Why? Not entirely sure, but I can only assume. And shall do so. Perhaps because:
- They dont trust these banks/companies due to them being in their infancy, and so dont trust these kind of transactions or the services they offer
- They are unfamiliar with how these mortgages work
- They have come across “bogus” Islamic mortgage lenders who dress up interest into “service charges” and “admin fee’s” which, no surprise, fluctuate annually and involve other “hidden” charges (much like banks do if you dont read the small print!)
- The repayments involved are estimated according to what the lender proposes your property will be worth at the end of the 25 year period. So just because you purchase a 200K house initially, it doesnt mean your re-payments over the 25 year period will amount to 200K. Most probably you’ll be paying for a house that after 25 years comes to around 400-500K. Your re-payments will be based on that latter figure of 400-500K. If you sell the house before the date of maturity, its treated the same as conventional mortgages (exit penalty charges etc), if there is any profit at the end of all the charges, you keep that profit.
- With the Ijara mortgage, you not only pay a monthly amount towards the loan but also pay RENT to the lender for the property, and so one essentially ends up paying MORE than they would, even with a conventional mortgage (which they do)
- These mortgages are more expensive compared to conventional mortgages regardless of which one you opt for.
- Some Ulema state these types of mortgages are still out of bounds within a Shariah context and dont adhere to it properly
You can read into this case study for more info
Anyone know of people who have took out Islamic mortgages? If so, how are they finding it? How does one go about purchasing a property according to Shariah in the West with all these issues? It seems near impossible which is why a few people I know end up living in council owned flats or rent for their entire lives.
The issue surrounding outright avoidance of interest leads some to ask and question:
How does one generate wealth Islamically? Is it only by trade, or is investment allowed? If investments are permissible (which they are) what types and kinds are allowed? Invest in stock, shares, private equity?
Im not entirely sure how one generates wealth if they don’t involve themselves in trading goods and/or services.
Anyone have any insight into this?
17 Comments »
RSS feed for comments on this post. TrackBack URI
Leave a comment
-
Verily in the remembrance of God do hearts find rest (13:28)
My Other Half-
Chinwag
Shahrazad on Germany and EU to legalise… Shahrazad on About 'liya on Germany and EU to legalise… Tazeen on Germany and EU to legalise… Sumera on Germany and EU to legalise…
Blog at WordPress.com. | Theme: Pool by Borja Fernandez.
Entries and comments feeds.
Very informative post, it will come in handy one day. I do not personally know any person who has taken out Islamic mortgages but it seems that there are a lot of people out there who have done so if one is to believe the stats.
P.S: I would recommend checking out the ‘Islam and Economics’ blog also.
http://elgamal.blogspot.com/
Comment by Aliana — September 29, 2007 #
This is one thing that I don’t actually understand, why what so called Islamic mortgages seems to be in favor of bankers!
Note also that some scholars like Dr. Yusuf Karadawy said that Muslims can actually buy houses by normal mortgages in the west countries. I would go for that.
One more thing, I think that Islamic financing and investment is a growing field and it I hope it will evolve to the a better sate.
Youssef
Comment by Youssef — September 29, 2007 #
I am currently living this dilemma and so far no bright ideas have popped by!
I would recommend this book, I have been reading;
http://www.theproblemwithinterest.com/pwi_articles_islamic.htm
Comment by Tia — September 29, 2007 #
Shaykh Haitham al-Haddad’s view on Ijarah product offered by hsbc and others:
http://www.islaam.net/main/display_article_printview.php?id=1232
Comment by Tia — September 29, 2007 #
Here in the United States we have Guidance and La Riba
I know a few people who have financed through these companies and had no problem at all. As a matter of fact, a few saved money on their mortgage.
Comment by Organic Muslimah — September 30, 2007 #
We have normal western mortgage which is expensive but it is hassle-free. Banks in the ME offer Islamic mortgages but I don’t know anything about them.
Comment by Achelois — September 30, 2007 #
AA- Sumera,
Faraz Rabbani has an interesting post you may be interested in. In addition to a link to Sunni Sister’s post on riba-free living, there are some very nice links arguing for renting over buying a house and how that’s a fiscally wiser decision.
Personally, I know one brother whose dealt with Guidance in the US and I haven’t heard any negative complaints.
From what I’ve heard and read, many Islamic mortgage firms end up charging quite a bit more than standard banks and that turns off many Muslims, who feel the Halal firms are taking advantage of Muslims trying to stay away from Riba…
Allah knows best.
Comment by brnaeem — September 30, 2007 #
Its a serious problem for those who want to purchase property but avoid interest.
Renting a property is akin to flushing your money down the drain since at the end of the day you dont “own” it and the payments being made are just for lending and use of the property.
A friend of mine and her family have rented their entire lives and they’ve moved so many times I’ve lost count, but thats not through choice, they simply can’t afford to take out a mortgage due to their financial problems. They dont feel like they have a place they can call their own and feel displaced.
I dont know of any viable alternatives to “normal” mortgages in the UK – and to be honest it worries me greatly :-/
Comment by Sumera — September 30, 2007 #
Very nice post Sumera!.
Islamic Mortgages : I feel the same way as brnaeem has said ..many Islamic mortgage firms end up charging quite a bit more than standard banks and that turns off many Muslims, who feel the Halal firms are taking advantage of Muslims trying to stay away from Riba…. I have heard of HSBC doing better job in UK and Gulf. In US too there are some companies. In Canada we have couple of them but again, personally I don’t feel comfortable with those till now.
Normal Mortgages : I think everyone is responsible for his/her own deeds. On the day of judgement none of the Ulema who allow it willbe able to stand for me.
Renting vs Buying : I personally tend to think renting might be a better alternative to buying, specially in the west. If you don’t go into selling and buying your house again and again, you will not notice any change in equity.And if you do that, then you are moving anyways, only difference is you move at your choice of time and willfully.
We can try to cover our insecurities of old age by buying house in cash in some muslim countries where one can afford though life might be a bit difficult.
Generating Wealth : We can try by all Halal means available out there as you have pointed out. Think of other alternatives.
End Result : I feel good when I help my landlord paying his mortgage
.
Once on a same topic in a muslim forum a brother said which meant” …we find it very difficult to have easily available wealth, mortgages, food, marriages..we always have to check our limits… …but who says Jannah is easy”
Allah bless us all with guidance, inshAllah.
Comment by zios — September 30, 2007 #
Own nothing, and you are owned by nothing
– Zen saying
Comment by Irving — October 1, 2007 #
my understanidng is that a “mortgage” is Islamic as long as the work interest doesn not appear in the contract, because as Muslims we are concerned with the word interest or “riba”.
i know a few people who have the HSBC ammanah and are happy with it although the payments are expensive. i can’t see a single person or one income family being able to avoid it.
Tyring to save enough for a deposit is hard work!
Comment by hema — October 2, 2007 #
You may find the following of interest.
http://islamiclawetc.wordpress.com/2006/07/10/cobm-as-predatory-lending/
Comment by jahandost — October 2, 2007 #
None of these links actually answer the query of how one goes about purchasing property without going down the mortgage route, they simply discuss why its disallowed.
Which is really frustrating!
Comment by Sumera — October 2, 2007 #
First, as for renting cheaper than buying, what if you buy a house and sublet? Many people in the Greater Toronto Area buy a house, live it in but rent out their basement. The rent they get covers the difference in what you pay rent vs mortgage.
Second, I plan to go through a ‘normal’ mortgage because I had read somewhere that as long as you exhaust all interest-free options, what is left is makruh but ok as long as you don’t go beyond what is necessary. Now have I exhausted all non-interest options?
I don’t know, frankly I can’t trust these “Islamic” options because they mostly seem just interested in re-wording the word “interest”.
Comment by Haleem — October 3, 2007 #
Sumera there are many options. I guess, it requires for young Muslims to be very smart about it along with patience and some initial hardship. Which should really be bread and butter for us Muslims since our life really is a test. Also imo exhausing all means actually means not just theoretically exploring all options but to live them. I am currently staying with a friend in London borough of Tower Hamlets, its not the best of areas, its a town of tower blocks and literally everyone lives in towerblocks on flats. ITs also a hevily populated Muslim area. My friend and her husband initially rented for a while and since they were both students at the time they recieved contributions towards their rent. After a few years they were offered a council property with the option to buy with some 40% dicount. They are both keyworkers and entitled to free contributions towards property and together they managed 100k and rest came from family and friends and some loan which they have all cleared up. They are now thinking of selling their flat which is worth 250k for a house elsewhere. Initialy they suffered, they lived in bedsits, hostels and so on but they were both young and students and not ideal situaiton for mature married couples.
It may not answer the question as everyone lives differnt reality, different circumstances, standards, but it was an example to illustrate there are ways. Also you can buy very cheap properties thru auctions which require alot of work which people do slowly over time whilst living in there. (i hope made sense posting my mobile device).
Comment by Tia — October 4, 2007 #
Thats just it though, there seems to be little or no option for those who want to avoid a mortgage. The only thing I can see is all one can do is a)rent until they’ve saved up enough to buy (which would seem like a never-ending task since house prices rise steeply whereas income doesnt), or b) borrow money off family/friends. And for purposes of purchasing, the loan isn’t exactly small.
Any other option seems like a long winded way (lets face it, council estates are like a deathzone – I’ve seen Tower Hamlets, wouldnt want to end up there! No offence
) to have a home, which IMO everyone should be entitled to, its like a basic “right”.
Hopping from bedsits to hostels and living in rented accomodation may be fine when you’re young with no or little responsibilities, but if you’re older and have children – theres no stability – its certainly not ideal and not something I’d recommend to anyone.
Comment by Sumera — October 5, 2007 #
Really Really interesting post…
I am so stuck, as a single female on a low wage I will never be able to buy my own place outright….At 34 I have done my times in bedsits, hostels and friends sofas, I now rent my own council flat in London…but am seriously considering buying land in Spain or Morocco as a way to build on later on and avoid ribaa….
While I favour “halal finance” to traditional loans I have serious doubts about its halalness due to overcharging. It may be a good option if you have two or a good income, but if you are poor it is not. I do feel that they are taking advantage of good muslims trying to keep to shariah, but in a non muslim country it is very hard.
As I get older the search for stability becomes stronger than ever, I need my comforts and security… being old, single and renting is not a pleasing thought.
Comment by Biella — October 21, 2007 #