Can you please advice whether the following product for house financing is in accordance with Shariah or otherwise? (Details given).
In the name of Allah, Most Compassionate, Most Merciful,
The proposed house financing scheme is based on the Murabaha plan. The following is the correct procedure for using Murabaha as a mode for financing, taken from Shaykh Taqi Usmani’s ‘Introduction to Islamic Finance’:
Firstly: The client and the institution sign an over-all agreement whereby the institution promises to sell and the client promises to buy the commodities from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up to which the facility may be availed.
Secondly: When a specific commodity is required by the customer, the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both the parties.
Thirdly: The client purchases the commodity on behalf of the institution and takes its possession as an agent of the institution.
Fourthly: The client informs the institution that he has purchased the commodity on its behalf, and at the same time, makes an offer to purchase it from the institution.
Fifthly: The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client.
All these five stages are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier (which is preferable) it does not need any agency agreement. In this case, the second phase will be dropped and at the third stage the institution itself will purchase the commodity from the supplier, and the fourth phase will be restricted to making an offer by the client. THE MOST ESSENTIAL ELEMENT OF THE TRANSACTION IS THAT THE COMMODITY MUST REMAIN IN THE RISK OF THE INSTITUTION DURING THE PERIOD BETWEEN THE THIRD AND THE FIFTH STAGE. This is the only feature of murabahah which can distinguish it from an interest-based transaction. Therefore, it must be observed with due diligence at all costs, otherwise the murabaha transaction becomes invalid according to Shariah.
It is also a necessary condition for the validity of murabaha that the commodity is purchased from a third party. The purchase of the commodity from the client himself on ‘buy back’ agreement is not allowed in Shariah. Thus murabaha based on ‘buy back’ agreement is nothing more than an interest based transaction.
The above mentioned procedure of the murabaha financing is a complex transaction where the parties involved have different capacities at different stages.
(a) At the first stage, the institution and the client promise to sell and purchase a commodity in future. This is not an actual sale. It is just a promise to effect a sale in future on murabaha basis. Thus at this stage the relation between the institution and the client is that of a promisor and a promise.
(b) At the second stage, the relation between the parties is that of a principal and an agent.
(c) At the third stage, the relation between the institution and the supplier is that of a buyer and seller.
(d) At the fourth and fifth stage, the relation of buyer and seller comes into operation between the institution and the client, and since the sale is effected on deferred payment basis, the relation of a debtor and creditor also emerges between them simultaneously.
All these capacities must be kept in mind and must come into operation with all their consequential effects, each at its relevant stage, and these different capacities should never be mixed up or confused with each other.
The institution may ask the client to furnish a security to its satisfaction for the prompt payment of the deferred price. He may also ask him to sign a promissory note or a bill of exchange, but it must be after the actual sale takes place, i.e. at the fifth stage mentioned above. The reason is that the promissory note is signed by a debtor in favour of his creditor, but the relation of debtor and creditor between the institution and the client begins only at the fifth stage, whereupon the actual sale takes place between them.
In the case of default by the buyer in the payment of price at the due date, the price cannot be increased. However, if he has undertaken, in the agreement to pay an amount for a charitable purpose, as mentioned in para 7 of the rules of Bai’ al-Mu’ajjal, he shall be liable to pay the amount undertaken by him. But the amount so recovered from the buyer shall not form part of the income of the seller / financier. He is bound to spend it for a charitable purpose on behalf of the buyer. (See: An Introduction to Islamic Finance, P. 107-108).
If the proposed house financing scheme offered by al-Baraka Bank meets the above-mentioned criteria, then it would be permissible to undertake the scheme in buying a house. It would be wise to consult a local scholar in South Africa before entering into an agreement. Mufti Ibrahim Desai of South Africa has been in contact with al-Baraka Bank, examined their products and generally considers them to be in compliance with Shariah guidelines.
And Allah Knows Best
[Mufti] Muhammad ibn Adam
Leicester , UK