Answered by Shaykh Muhammad ibn Adam al-Kawthari
Islamic alternatives for an interest-based mortgage: interest-based transactions in disguise.
This question is based on your posts on Islamic alternatives for an interest-based mortgage and my own research about what is available in the market.
I came across one Islamic lender ‘guidance financials’ and their model for house lending is based on The Declining Balance Co-ownership Program (Diminishing Musharaka) but in one of their white paper, I could see the following statement:
“Would [company] share in any gain or loss that may result from a sale of the property?
The Declining Balance Co-ownership Program is designed to create a co-ownership for the purpose of providing the customer with financing to acquire a home.
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However, it is often the case that the customer decides to move out of the property earlier than the scheduled term of the financing. The Program provides customers with the flexibility to do so by first acquiring Guidance’s remaining ownership share and then, in a second step, turning around and selling the property in the market. The second step normally takes place immediately after the first step during a single settlement, allowing the customer to use the proceeds of the sale to pay the amount owed to Guidance for its remaining share. In this case, the customer is 100% owner of the property at the time
of the sale and, therefore, has the right to the full gain (or loss) resulting from this sale.
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“
In other words, IT IS NOT SHARING THE RISK and they are faking it by calling Diminishing Musharaka. Is that not the case?
Answer: In the name of Allah, Most Compassionate, Most Merciful,
If the client in a Diminishing Musharaka house-financing arrangement first purchases the remaining shares of the property owned by the financing company and becomes the sole owner, and thereafter sells the property, then he would be exclusively entitled to any profit or loss made on the sale. In other words, in order that the financier does not share any profit or loss, the entire property must first come into the full ownership of the client. In this case, the client will be entitled to all the profit that is made on the sale of the property and likewise he will solely be responsible for any loss suffered.
It is important to determine, however, that the client first purchases all the remaining shares of the property from the financier and thus becomes the 100% owner of the property at the time of selling it in the market. As such, the first transaction would be the client purchasing all the remaining shares from the financier, even if the payment is deferred. The client and the financier must enter into a transaction with offer and acceptance to transfer the remaining shares of the property from the financier’s ownership into the ownership of the client. Paying the financier is not a pre-requisite in order for the transaction to be valid, for it can be a credit-sale. Thereafter, the client may go ahead, sell his property and pay off the debt that he owes to the financier.
Normally, the objection raised against diminishing Musharaka contracts is that it entails combining two transactions into one, which is not allowed in Shariah. Shaykh Taqi Usmani (may Allah preserve him) and other scholars have clarified this issue in their respective works stating that the contract of diminishing Musharaka will be allowed if the client makes a one sided promise. The client will first make a promise to take the financier’s share on lease and pay the agreed rent, and secondly, to purchase different units of the financier’s share at different stages. Such promises, according to a number of jurists, are enforceable, and the court of law can compel the one promising to fulfil his promise, especially in the context of commercial activities. Even if the promise has been made before effecting the first sale, after which the sale has been effected without a condition, it is also permitted by certain Hanafi jurists. There is a big difference between putting a condition in the sale and making a separate promise without making it a condition. If the condition is explicitly mentioned at the time of sale, it means that the sale will be valid only if the condition is fulfilled, meaning thereby that if the condition is not fulfilled in the future; the present sale will become void. This makes the transaction of sale contingent on a future event which may or may not occur. It leads to uncertainty (gharar) in the transaction which is totally prohibited in Shariah.
Conversely, if the sale is without any condition, but one of the two parties has promised to do something separately, then the sale cannot be held to be contingent or conditional with the fulfilling of the promise. It will take effect irrespective of whether or not the promise is fulfilled. Even if the one promising backs out of his promise, the sale will remain effective. The most the one promised can do is to compel him through court of law to fulfil his promise and if he is unable to fulfil the promise, the one promised can claim actual damages suffered because of the default. This makes it clear that a separate and independent promise to purchase does not render the original contract conditional or contingent. Therefore, it can be enforced. (Mufti Taqi Usmani, An Introduction to Islamic Finance, p: 87-89)
Thus, in conclusion, if the client made a promise to purchase the remaining shares from the financier, then he will be obliged to do so. At the time of purchasing these shares, sale must be effected by the exchange of offer and acceptance at that particular date. Hence, once the client purchases all the relevant units of the financier’s share in the property, the property will fully come into his ownership, after which he may sell it off and keep the profit or suffer the loss if any.
And Allah knows best
Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK
www.daruliftaa.com