Mortgage discussion with David Loundy -- Part I

AA David:

Thank you for taking your responses, and our debate, public. I appreciate your recognition that my challenge is legitimate:

On Aug 20, 2005, at 12:40 PM, David Loundy wrote:

So, I invite either your convincing replies, or your new murabaha application…

I have to admit that so far, your arguments are the most convincing. However, as the challenge is posed, the onus of the proof is on you/others to prove that my conventional mortgage is indeed riba, since the default in transactions is permissibility. So, all I need to do is to prove that your arguments are not convincing.

Mahmoud:

To carry on our discussion we had before I left for time away from the office with children (not to be confused with vacation), to recap for those on the list, and to pick up some of the new points:

First, I have a threshold question which you have not answered, and to which I do not know the answer, not being a Muslim jurist: If you sign a contract that contains a prohibited provision-- such as a default interest rate or other "inappropriate" penalty which penalizes you for hardship, is that prohibited even if you never incur the hardship that makes the penalty apply in your particular case? If it is prohibited, than your mortgage is riba, end of discussion.

I view the late payment provisions, if I make them, to be definitely riba. This condition becomes a riba contract only at the time the debt matures (each payment is due). So, if I make my payments before their due date (which I do automatically through direct electronic transfers), I can argue that the ribawi contract (more time for more money) never took place.

Now, I admit that there is a condition in my otherwise valid contract, financing my home purchase, which says that this riba contract would take place if I do not make my payment on time. I have taken precautions to never make that condition effective, and I have other options, such as selling the house, etc. to ensure that it never does.

The issue you raise is an important one: does that penalty clause render the entire contract ribawi?

You say that you are not a Muslim jurist, and neither am I. The discussion below reports from the section on "Invalid or nugatory conditions" attached to an otherwise valid contract - see that section on pp. 128-131 vol.1 of my translation of Dr. Wahba al-Zuhayly's jurisprudence encyclopedia (would be delighted to send you a complimentary copy if I hadn't already done that). The original thought on the issue raised a difference in opinion between Abu Hanifa and his two students Abu Yusuf and Muhammad Al-Shaybani. While Abu Hanifa deemed an otherwise valid contract with a defective condition defective, Muhammad and Abu Yusuf deemed the contract still valid, and the invalid condition nugatory. The latter is the opinion widely accepted by the Hanafis, as reported by ibn `Abidin.

I think the nugatory nature of the condition is strengthened by the precautions and plans I have taken never to make those late payments. Note that this is also the solution I have chosen when I rented an apartment, to make sure that I do not pay late payment interest on my rent, which is also a requirement of all rent contracts that I have seen. I treat my utility company contracts, credit card contracts, etc. the same way: negating the invalid ribawi conditions.

Notice that even if you accept the stricter opinion that the entire contract is defective, then you have to make it something else. There are many cases in Saudi Arabia, for instance, where debtors went to Shari`a courts, and had the ribawi components of contracts they had written revoked (to the chagrin of the bankers with whom they had signed contracts, as you might imagine). A number of lawsuits involving western companies have been taken global, with experts such as Wael Hallaq and Frank Vogel making the arguments regarding Islamic law before western courts.

In summary, I have strong authority backing the view that this condition is invalid from an Islamic point of view, but the contract itself remains valid and not ribawi.

(This posting is already getting long, ... I'll address the other issues you raised, in sha'a Allah, in separate posting[s]).