I would like to verify the Islamic Financing product available in Canada name as “AYA Financial” (http://www.ayafinancial.com/modus-operandi/faq). This financial institution providing interest-free product called as Musharakah Mutanaqisah. Please kindly let us know about the legitimacy of this product as far sharia is concern.
Jazāk Allāhu Khayran.
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Before commenting on AYA Financial in reference, we present three considerations to determine Shariah Compliancy of any product claiming to be Shariah Compliant.
- 1. THE PROSPECTUS.
When a product is marketed as Shariah Compliant, the general concept of the product is referred to in the prospectus. A prospectus is generally used as a marketing instrument and is designed to attract potential investors. A broad concept of the product is presented with much focus on promising returns. While we understand the need for an attractive prospectus, the more important aspect is to determine the claim of Shariah Compliancy which leads to the second point.
- 2. THE CONTRACT.
When a product is marketed as Shariah Compliant in the prospectus, the actual terms and conditions of the Islamically claimed concept must be reflected in the contract. It is very easy to market a product with an Islamic concept, for example Musharakah Mutanaqisa (Diminishing Musharakah). However, this in an engineered product of few concepts, partnership(Musharakah), hiring (Ijarah) and purchasing(Bay). This product involves three concepts which must be reflected in the contracts and with the correct sequence of each step. If the three concepts are not reflected in the contracts and if the sequence is not adhered to, the product will not be Shariah Compliant. Furthermore, assuming the prospectus and the contracts reflect the correct spirit of the product, that is not sufficient. That leads us to the third point.
- 3. IMPLEMENATION.
The core of Islamic Finance is implementing the product claimed as Shariah Compliant according to the terms and conditions reflected in the contract. It is one thing to have a Shariah Compliant contract and it is another to enact the product according to the contract. If the product is not enacted according to the terms and conditions of the contract, the transaction cannot be claimed as Shariah Compliant.
It is unfortunate that we have observed many products claimed and marketed as Shariah Compliant falling short in the Shariah Compliancy of the contract or its implementation.
In the enquired product of AYA Financial, you may forward us the actual contract for our observations and comments. You may email us on [email protected]
We also wish to point out that we support the concept of Islamic Finance and would engage with relevant parties in a constructive way. We believe promoting Islamic Finance and Economics and conducting all our dealings according to Shariah is an important part of Deen.
And Allah Ta’āla Knows Best
Student Darul Iftaa
Checked and Approved by,
Mufti Ebrahim Desai.
Difference between a conventional mortgage and AYA Home Financing agreement
The fundamental difference between a conventional mortgage and AYA Home Financing agreement is the underlying product structure. The conventional mortgage is an interest-bearing loan agreement while the AYA Home Financing agreement is a trade based product developed on the concept of Musharakah Mutanaqisah (Declining Balance).
How do the monthly instalments work?
The customer pays the financier monthly instalments which consist of two portions;
• Profit portion – The financier grants the customer exclusive use of the property. In exchange for this consideration, the customer pays occupancy user fee/profit to the Financier.
• Equity portion – This portion of the instalment will be used in acquiring shares from the financier so that the customer’s equity increases in the property over time.
How is the user fee / profit calculated?
There are several factors that determine the profit; such as the length of the contract, amortization period and the rate of return expected by the financiers. Profit rates are calculated to keep them competitive with the rates prevalent in the market. AYA Financial and its institutional partners make every effort to make the AYA Home Financing product competitive to the conventional mortgage products offered by banks and other financial institutions.
Is the profit just another word to substitute the word interest in a conventional transaction?
AYA Financial’s products establish a trade-based relationship between the customer and the financier. The products are designed in a way where the structure defines the relationship of the transaction. In the AYA Home Financing agreement, profit is being earned versus in a loan transaction interest is being charged.
Who is our advisory board?
AYA Financial consults the Islamic Finance Advisory Board (IFAB) which is an independent body that oversees the development of Shariah Compliant products and services in Canada. It comprises of leading Canadian scholars in Islamic Transactional Jurisprudence (Fiqh-al-muamalaat). For more information on IFAB visit: www.islamicfinanceboard.com
Who has Title of the property?
From the inception of the contract, the Title of property is registered in the name of the customer. The financier has a charge over the property which is registered at the time of financing the property. Once 100% of the financed amount is paid off, the charge is removed.
Can improvements be made to the property?
As the owner-occupant of the property, a customer is entitled to make home improvements and add value to the property.
Does the Financier share in capital gains if the house is sold by the customer?
All capital gains from the sale of the property will go towards the customer. The financier will only take the portion of the proceeds to cover the initial contribution of the financed amount.
However, AYA Financial offers a separate program where both parties can benefit from the gains/losses of the asset value.
What happens if a monthly instalment is missed?
If a payment is missed, a fixed fee may be charged which is used towards administration costs associated with recovering the late payment.
Who pays for property taxes and insurance?
In most cases, municipal government levies property taxes to pay for services that are used by the public, for example, police, fire services, schools, waste management, recreation, libraries, etc. Although the financier is part-owner of the house, it does not use utilities or benefit from municipal services funded by taxation. As the owner-occupant gets the benefit and utility of the space, the customer is required to pay all charges associated with that benefit like property tax, insurance, utility bills etc.
This can also be determined by mutual consent of the parties involved.
Can a customer transfer an existing financing agreement if he wishes to purchase a new property?
Yes, when moving to a new property the customer has the option of transferring the existing financing agreement (mortgage).
Can a transaction be considered Shariah compliant if the investor’s funds are not?
Yes, as long as the transaction between the parties involved is structured in a Shariah compliant manner. AYA Financial specializes in structuring financial contracts according to Shariah. Our products are further vetted by a qualified and experienced advisory board which is manned by leading scholars in Islamic Transactional Jurisprudence (Fiqh-al-muamalaat). For more information visit: www.islamicfinanceboard.com