Wednesday, August 17, 2005

Exchange on conventional and "Islamic" mortgages

The following exchange took place today on IBFnet. My interlocutor's remarks are indented and in red, mine are in black.

Salaamu Alaikum


After asking around here is one answer that i got:
"There are two problems with the mortgage as Dr. El-gamal explains it.
1. The ownership of the house is transferred directly from the first owner to the customer. The bank never owns the house at any stage during the process. This means that the bank is making money just for money. It is making profit without assuming liability of the asset ربح ما لم يضمن) which is riba from the lender's side.

This is not a convincing argument. The bank, Islamic or otherwise, makes profit based on the differential between its cost of funds and the interest rate it charges the customer, even if the latter is characterized falsely as profit in a credit sale. The guaranty (ضمان) ostensibly existing in a murabaha financing transaction is comical: it lasts for all of 30 seconds, and even then, there are sufficient insurance and other provisions to make sure that this risk is never carried by the bank. Characterizing the total interest payment (which could be as high as 200% of the original price) as profit and justifying it by that theoretical guaranty is a symptom of the irrationality characterizing Islamic finance.

Let's call things what they are: the bank makes a profit on the differential between the interest it pays for its funds (directly or indirectly) and the interest it collects from its financed party. The justification for that profit is the usual battery of risks to which conventional banks are exposed (credit risk, which included an implicit guaranty of the borrower, especially if the bank issues a mortgage backed security, liquidity risk, interest rate risk, etc.).

The fact that the customer never receives cash denies riba from the borrower's side. But riba does arise from the lender's side
as it is money for money without ownership in between. To describe a transaction as "riba-free", BOTH sides must avoid money-for-money.

Well, that is not that mode of operation in Islamic banking! The HSBC FAQ issued a few years back regarding their auto financing in UAE said that all the customer should care about is his relationship with the bank. The bank's source of funds, dealings in riba, benchmarking of the "profit rate" to ribawi rates, etc. are all irrelevant. That was the declared opinion of their Shari`a board.

Let's also recognize that banks are not in the business of buying and selling houses: it is still money for money regardless of putting a piece of property in between... As the Arabic proverb says: ذهب بذهب و بينهما حريرة
If you accept this paradigm of a degree of separation, the bank still never has a money-now for money-later with any one party... which is the narrow demarcation of riba. It is a triangle transaction, money now to seller, money later from buyer... where is the riba?

2. The contract allows the borrower to refinance and reschedule etc. This is riba al-jahiliyyah, for both sides: the lender and the borrower."

Well, if you make what the contract allows for to determine what constitutes riba al-jahiliyyah, then you should condemn all apartment rents, utility company contracts, etc., for they all include provisions for late payment penalties which would constitute riba al-jahiliyyah. A much easier makhraj would be to say that I have no intention of making such late payments, and would sooner sell the property or declare bankruptcy than get involved in that riba al-jahiliyyah, which would result in a war from Allah and his messenger.

Thus, the conditions for refinancing and rescheduling, etc. are defective conditions appended to the contract, and following a famous rule, consider those defective conditions nugatory, but keep the contract as I plan to follow it valid.

Obviously the issue of whether the mechanics of the "Islamic" home financing and those of a conventional mortgage are one in the same is a different issue, but as quoted above can the the main difference be mere liability assumption? or must the "Islamic" contract differ in more than this?

And if there is no difference, how can you justify charging the Muslim customer more for selling what is essentially an "indulgence" (a note from a jurist certifying that you and they have done your best)?

I would also like to hear, preferably from someone in an institution dealing in such contracts, about the contract stipulations that are a matter of venue and are not present to make the contract particulary "Islamic" in other words if you didnt havent to hurdle the regulatory systems of many countries would these contracts be one and the same? or would stipulations and conditions be left out?


Interestingly, many of those provisions, such as documenting the debt as a loan, listing the annual percentage rate being charged, etc. are means of protecting the Muslim consumer. I would loathe to think that it would be more "Islamic" to have less transparency and no "truth in lending" provisions, when the nature of the contract is clearly one of finance and not trade.


Blogger heraish said...

The implication of this is that if the jurist has declared "islamic" mortgage halal, he should have no qualms about allowing the conventional mortgage. If however he deems the conventional mortgage haram, then so he should declare the "Islamic" one haram.

During Omar Bin Khattab's time there were some christian arab tribes that did not like to pay "jizya" as they felt it demeaning but said they would have no problem paying it if it was called "zakat'. Omar accepted based on the principle of funtion over form.

wallahu alem

2:55 AM  
Blogger heraish said...


The following article shows the nature of the traditional riba based mortgage. People whose lives have been destroyed are being billed for mortgage payments. The poorer people being asked to pay earlier.

In one of the Islamic mortgages in the market the company would share the loss with the customer because they are co-owners.

God Knows Best

9:13 PM  
Blogger heraish said...

1:46 PM  
Blogger heraish said...

This is the correct url:


1:48 PM  
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4:48 PM  
Blogger Muhammad Saeed Babar said...

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit."

The “unique attribute” discovered by the goldsmiths was that they could issue and lend paper receipts for the same gold many times over, so long as they kept enough gold in “reserve” for any depositors who might come for their money. This was the sleight of hand later dignified as “fractional reserve” banking . (Excerpt from the book [WEB OF DEBT - The Shocking Truth About Our Money System and How We Can Break Free] by ELLEN HODGSON BROWN, J.D.

What about money created by book keeping entries and used to lend for mortgage purposes?

6:19 AM  
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8:34 PM  

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