Home » Hanafi Fiqh » Askimam.org » Investing in building a house

Investing in building a house

Answered as per Hanafi Fiqh by Askimam.org

Assalamu Alaikum,

Brother, I require an answer badly. My question is as follows.

Last year we 14 person started a financial association which sole purpose was to purchase a land and build a building combinedly. Monthly we took subscription from the members and within one year we already have substantial amount of money. Currently we are thinking to invest this money for short period to earn something in Permissible way.

Among the members one have a land in his own. To build a one storied building there he needs total 1.2 Million (12 Lakh BDT) money. He has only 6 Lakh and asking to our association to give him 6 lakh as an investment for association. After completion of the building he will pay the money to association within 2 years. Beside that he will give rent the house to tenant and will share 2/5 portion of money from the rent with association due to its invest. Here amount will not be specific. If in any month there remains no tenant he will not share any money with association.

Now the question is, the way association is giving money to him-is this can be said as investment? Besides repaying money to association he’ll share 2/5 portion money from the rent of his house- is it permissible for the association in Islam in taking money this way? Does Islam allow this kind of transaction?

May Allah (SWT) give you reward for this good deed.

 

Answer

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh

Brother in Islam Sharifuddin Bablu

You state the Association will contribute 6 lakhs to build the building. The 6 lakhs will be paid back to the Association in 2 years. The Association will also receive 2/5 rental of the building. The contribution of the Association will be a loan. In principle, it is not permissible to receive any excess over the loaned amount. That will be interest. Accordingly, it is not permissible for the Association to receive 2/5 rental from the building. [1]

The alternative for the Association is to enter into a diminishing partnership with the landowner. A diminishing partnership is a partnership where the investor enters into a partnership with its partner in an asset. Thereafter the investors rents out his share to the partner. The investors’ shares are then divided into smaller units, which the partner promises to buy off over a certain period of time. Each time the partner purchases a share, the percentage he owns increases and the percentage owned by the investors decrease. The rental will then be adjusted according to the amount owned by the investors.

The steps to set up a diminishing partnership are as follows:

 Step 1: The investment amounts of both, the Association and land owner will be pooled together. The value of the land will be added to the investment amount of the landowner. Each party will own a share in the completed building in ratio to the amount invested.[2]

Example:

The Association will invest 6 lakhs.

The landowner will invest 6 lakhs plus the land valued at 3 lakhs. His total investment will therefore be 9 lakhs.

The total value of the partnership will be 15 lakhs, of which the Association will have a 40% share in the property due to their 6-lakh investment.

Step 2: The Association will give its share of the property(40%) on rent to the landowner.

Step 3: The land-owner has to sign an agreement promising to buy back the unit shares of the Association over a specified time period.

Example: The Association’s 40% can be split into 8 units. Every 3 months the land-owner may purchase one unit. After the first payment, the ownership will be adjusted, the landowner will own 65% and the Association will own 35%. The rental will also be adjusted accordingly.

After a 24-month period the land-owner will own the entire property whilst the Association will have obtained their capital investment in addition to collecting rent over the two years.[3]

And Allah Ta’āla Knows Best

Abu ‘Umar Muhammad bin Zayn Patel

Student Darul Iftaa
South Africa

Checked and Approved by,
Mufti Ebrahim Desai.


[1]

النتف في الفتاوى للسغدي – دار الفرقان / مؤسسة الرسالة  1404 – 1984

 (1/ 484)

الرِّبَا فِي القروض : فاما فِي القروض فَهُوَ على وَجْهَيْن : احدها ان يقْرض عشرَة دَرَاهِم باحد عشر درهما اَوْ بِاثْنَيْ عشر وَنَحْوهَ وَالْآخر ان يجر الى نَفسه مَنْفَعَة بذلك الْقَرْض اَوْ تجر اليه وَهُوَ ان يَبِيعهُ الْمُسْتَقْرض شَيْئا بارخص مِمَّا يُبَاع اَوْ يؤجره اَوْ يَهبهُ اَوْ يضيفه اَوْ يتَصَدَّق عَلَيْهِ بِصَدقَة اَوْ يعْمل لَهُ عملا يُعينهُ على اموره اَوْ يعيره عَارِية أَو يَشْتَرِي مِنْهُ شَيْئا بأغلى مِمَّا يَشْتَرِي اَوْ يسْتَأْجر اجارة باكثر مِمَّا يسْتَأْجر وَنَحْوهَا وَلَو لم يكن سَبَب ذَلِك هَذَا الْقَرْض لما كَانَ ذَلِك الْفِعْل فان ذَلِك رَبًّا وعَلى ذَلِك قَول ابراهيم النَّخعِيّ كل دين جر مَنْفَعَة لَا خير فِيهِ

 

 

 

[2] Fatawa Darul Ulum Zakariyya ( 5/790 ) (Zam Zam 2012)

[3] An Introduction to Islamic Finance, Mufti Muhammad Taqi Usmani (pg 82)

This answer was collected from Askimam.org, which is operated under the supervision of Mufti Ebrahim Desai from South Africa.

Read answers with similar topics: