In Islamic finance, an Islamic mortgage is a financial arrangement that allows individuals to purchase a home while adhering to Islamic principles, prohibiting the payment or receipt of interest (riba) and promoting ethical and fair business practices. Commonly used structures for Islamic mortgages include:
Islamic Mortgage structures
Murabaha: Murabaha is Sharia compliance way when you sell something to someone for the price you bought it, plus an agreed-upon profit. Murabaha (Islamic Mortgage) is derived from the Arabic word Ribh, which means profit or gain. The extra money added can be a percentage of what you’re selling, or it can be a fixed amount.
And when we think about all the different kinds of agreements people have made as societies developed, the essential buying and selling agreement stands out as the most important. This is remarkable, especially when we look at classical Islamic law.
In simple terms, in Islamic Banking and Finance, there are two kinds of Murabaha transactions: one where there’s no agreement to buy beforehand (just a regular sale), and the other where the buyer expresses interest first. The buyer places an order through the institution, and this type of deal is based on trust because the seller openly tells the buyer the cost and profit margin.
Prophet Muhammad hadith on Islamic Mortgage
Malik b. Aus b. al-Hadathan reported: A person came seeking to exchange dirhams for my gold. Talha bin Ubaidullah, while sitting with Umar bin Khattab, suggested, “Show us your gold now, and later, when our servant comes, we will give you the silver (dirhams) owed to you.”
Umar bin al-Khattab disagreed, saying, “Either give him the silver now or return his gold. The Messenger of Allah (peace be upon him) said: Exchanging silver for gold involves interest unless it’s done on the spot. The same applies to exchanging wheat for wheat, barley for barley, and dates for dates.” Source: Sunnah
Key points from the hadith:
Avoidance of Interest: The hadith underscores the prohibition of transactions involving elements of interest.
Immediate Exchange: Prophet Muhammad (PBUH) preferred transactions where items are exchanged immediately to eliminate any ambiguity or uncertainty.
Relevance to Murabaha Financing: Murabaha financing, as used in halal mortgages, embodies the principle of immediate and transparent transactions. In a Murabaha transaction, the bank buys the property and sells it to the buyer at a mutually agreed-upon price, ensuring clarity and avoiding interest.
If someone wants to buy a house through Murabaha financing, the bank buys the house and sells it to the buyer at a fair price, ensuring an immediate exchange without involving interest. This aligns with the spirit of the hadith, emphasizing fair and straightforward transactions in financial dealings.
Conventional Bank Mortgage:
In a conventional bank mortgage, you borrow money from the bank to buy a house and pay it back with interest over time. The bank charges interest as a fee for lending you the money.
- Widespread Acceptance: Conventional mortgages are widely available and accepted in most places.
- Various Loan Products: Banks offer a variety of mortgage options, allowing borrowers to choose based on their needs.
Islamic Bank Murabaha:
In an Islamic bank using Murabaha, the bank buys the house and sells it to you at a profit over time. The profit is agreed upon upfront, and there is no interest involved, adhering to Islamic principles.
- Interest-Free: Murabaha (Islamic Mortgage) transactions are free from interest, complying with Islamic finance principles.
- Transparency: The cost breakdown is transparent, so you know the actual price and profit margin.
- Ownership from the Start: You own the property from the beginning, even though you pay in installments.
- Conventional Bank Mortgage: Involves interest, offers widespread options.
- Islamic Bank Murabaha: Interest-free, transparent, and emphasizes ownership.
- Prophet Muhammad hadith on Islamic Mortgage
- Key takeaways.
- A set of steps for home finance in Islamic way.
- Pros and Cons of conventional and Islamic mortgage.
- Overview of Islamic Morgage (Murabaha) Principles
- Leading Islamic Banks for Islamic mortgage.
- Guiding principles for just and fair transactions in Islam
- Is Islamic mortgage cheaper?
- Are Muslims allowed to have mortgage?
- Does UK banks offer Islamic mortgage?
- Why is mortgage forbidden in Islam?
- What is the halal (Islamic) way to buy a house?
- Similar read:
A set of steps for home finance in Islamic way.
- Someone who wants to buy a house goes to the Islamic Bank and applies for a loan using a Murabaha (Mark-up Sale) transaction.
- The bank checks if the person can afford the loan and approves it. The bank makes a profit from the price difference in the contracts.
- The bank asks the person to agree to buy the house from the bank once the bank purchases it. The agreement includes details like the bank’s profit.
- If the bank doesn’t approve the full loan amount, the person pays a certain amount as a down payment called Hamish Jiddiyyah.
- The bank buys the house from the property owner at a fair price and pays according to the agreed terms.
- After getting the house, the bank sells it to the person through a Murabaha (Islamic Mortgage) Sale Contract, adding its profit to the cost.
- The Murabaha Sale Contract clearly states the total price, including the purchase cost and the bank’s profit, along with the payment terms.
- The bank gives the house to the person.
- The person pays the agreed-upon Murabaha (Islamic Mortgage) Sale Price to the bank.
- The person can pay off the loan early by paying the full amount. The bank may, at its discretion, decide to give a discount on the price at the time of early settlement, following Shariah rules.
|Cost of the House||USD 2,000,000|
|Down Payment from customer||USD 0|
|Amount Financed (100%)||USD 2,000,000|
|Profit Margin (Fixed Rate per annum)||5%|
|Term of Financing||Months 60|
|Total Profit Amount||USD 250,000|
|Total Murabaha Sale Price||USD 1,250,000|
|Monthly Installment||USD 20,833|
|Cost portion of Installment||USD 16,667|
|Profit portion of Installment||USD 4,167|
Let’s consider a simple example of Murabaha (Islamic Mortgage) Home Finance:
Pros and Cons of conventional and Islamic mortgage.
|Islamic Mortgage (Murabaha)||Conventional Mortgage|
|1. No Interest.||1. Widespread Acceptance.|
|2. Ownership from the Start.||2. Access to Various Loan Products.|
|3. Transparent Transactions.||3. Easier Eligibility Criteria for Some.|
|4. No Penalties for Early Payment.||4. Predictable Interest Rates.|
|5. Flexibility in Profit Rate.|
|1. Limited Availability in Some Markets.||1. Interest Payments.|
|2. Potential for Higher Initial Costs.||2. Less Transparent Cost Structure.|
|3. Stringent Ethical and Sharia Compliance.||3. Strict Loan Approval Process.|
|4. Complexity in Profit Calculation.||4. Risks of Variable Interest Rates.|
Overview of Islamic Morgage (Murabaha) Principles
a. Procedures before the Contract:
- The buyer must express the desire to purchase an item before the contract.
- The buyer’s expression is only a commitment if formally stated.
- The seller can buy items for themselves according to the buyer’s wish.
- A promise to buy is not integral but can provide assurance. Bilateral promises are allowed with an option to cancel.
- The seller can take a security deposit in case of a binding promise. If breached, the seller is entitled to an amount equal to the actual loss.
b. Contracting Parties:
- The parties involved are the seller (financier) and the buyer (customer).
c. Subject Matter:
- It involves the asset and selling price.
- The asset must be clearly defined and permissible.
- The seller assumes ownership risk and must possess the asset before the contract.
- The selling price, cost, and profit margin must be disclosed clearly.
- Price and profit are fixed at contract signing.
- Payment can be short or long-term. There are no extra fees for the credit period.
d. Conclusion of a Islamic Mortgage (Murabaha):
- Consists of an offer and acceptance.
- This can be concluded through various communication forms.
- It cannot be forced; refusal by the buyer prevents the contract.
- Seller is compensated for damages in case of buyer breach.
e. Guarantees and Treatments:
- Seller may request lawful security against payment failure.
- Ownership transfer cannot be withheld until full payment.
- Seller may discount the selling price for early payment but cannot extend the payment date for an extra charge.
Leading Islamic Banks for Islamic mortgage.
some regions may not have standalone Islamic banks, but conventional banks may offer Islamic finance services.
- Bank of Montreal (BMO) – Islamic Banking Services. (Click here)
- Scotiabank Islamic Banking Services. (Click here)
- Devon Bank. (Click here)
- University Islamic Financial (UIF). (Click here)
- Guidance Residential. (Click here)
- Bank of London and the Middle East (BLME) (Click here)
- QIB (UK). (Click here)
- Al Rayan Bank. (Click here)
- Islamic Co-operative Finance Australia (ICFA). (Click here)
- Muslim Community Cooperative Australia (MCCA). (Click here)
- Kuveyt Turk Participation Bank. (Click here)
- Bank of London and the Middle East (BLME). (Click here)
- Qatar Islamic Bank (QIB) – European Branches. (Click here)
Guiding principles for just and fair transactions in Islam
Prohibition of Riba (Interest):
Riba is like charging extra money when you lend someone some money. In Islam, this is a big no-no. The Quran and Ahadith strictly say it’s not allowed.
Prohibition of Gharar (Uncertainty):
Gharar means not being sure about something. Prophet Muhammad (Peace be upon him) said we shouldn’t do any business where things are uncertain.
Prohibition of Maysir (Gambling):
Maysir is like gambling or speculating, which means trying to win without creating anything useful. The Quran and Ahadith say we can’t do this.
Unlawful Goods and Services:
Some things are directly not allowed by the Quran, like pork and intoxicating drinks. We shouldn’t deal with these.
Justice and Equity:
It’s not just about keeping money matters clean. The main goal is to make sure things are fair and right in society by saying no to interest, uncertainty, and certain goods and services.
I’m glad you enjoyed the post on Islamic mortgages! There are different ways to finance a house or car that align with Islamic principles. One popular method is the Murabaha (Islamic Mortgage) principle, where the bank buys the property or vehicle and sells it at a slightly higher price, allowing you to pay in installments.
There are other Islamic mortgage principles like Ijarah, which is like renting with the option to buy, and Musharaka, a partnership where you and the bank jointly own the property. According to Islamic finance, these principles ensure that the financing is done in a halal (permissible) way.
Some more Islamic mortgage principles like Ijarah and Murabaha (Islamic Mortgage) are:
- Diminishing Musharaka.
- Bai Bithaman Ajil (BBA).
Each principle has features, and choosing the one that best suits your needs is essential. If you have any questions, feel free to ask!
Is Islamic mortgage cheaper?
The cost of an Islamic mortgage can vary, and whether it is cheaper depends on specific terms and conditions. Islamic mortgages may have different structures, and factors such as profit rates, fees, and market conditions contribute to the overall cost. It’s essential to compare specific offerings to determine whether an Islamic mortgage is cheaper for an individual’s circumstances.
Are Muslims allowed to have mortgage?
Yes, Muslims are allowed to have a mortgage, but it should adhere to Islamic finance principles. Conventional interest-based mortgages are not permitted, but Sharia-compliant alternatives (Islamic mortgage), such as Murabaha or Ijarah, can be used for financing homes in a manner consistent with Islamic law.
Does UK banks offer Islamic mortgage?
Yes, many banks in the UK offer Islamic mortgages. These mortgages comply with Sharia principles, providing an alternative for individuals seeking financing that aligns with Islamic law.
Why is mortgage forbidden in Islam?
A mortgage is considered impermissible in Islam due to its involvement in riba, which is the payment of interest. In a conventional mortgage, the lender provides a loan with interest, and the borrower uses the property as collateral until the debt, including the interest, is fully repaid. If the borrower falls behind on payments, the lender has the right to sell the property to recover the money lent.
What is the halal (Islamic) way to buy a house?
To buy a house the halal way in Islamic finance, you can use principles like Murabaha, Ijarah, or Musharaka. In Murabaha, the bank buys the house and sells it to you at a higher price, so you can pay in parts. Ijarah means leasing the house with an option to buy, and Musharaka is a partnership where you and the bank share ownership, responsibilities, and profits.
The Quran says it’s important to have fair and clear transactions. In Surah Al-Baqarah (2:282), it talks about documenting financial deals in a written contract for fairness.
By following these Islamic finance principles, you can buy a house in a way that fits with Sharia. This means staying away from deals with interest and promoting shared responsibility in owning the property. It’s a good idea to talk to Islamic finance experts or scholars to make sure your plan aligns with Islamic values.