You are on page 1of 9

Housing Financing in Islamic Law A Study of some products for Housing Financing and applicable to Islamic Law

Dr. Salah Fahd Al-Shalhoob Assistant Professor Department of Islamic and Arabic Studies King Fahd University of Petroleum and Minerals Saudi Arabia P.O.Box: 704 Dhahran: 31261 Saudi Arabia E-mail: sshalhoob@hotmail.com Phone: +966502111126 Fax: +96638602793

Table of content Abstract 1. Introduction. 2. Housing financing by mark-up sales (bay almurabaha). 3. Diminution partnership (al-musharaka al-mutanaqisa). 4. Commission to manufacturing (istisna). 5. Leasing ending with ownership (ijara muntahiya bi al-tamlik). Bibliography. Tables: Table 1.1 Comparison of ordinary, forward and deferred sales. Figures: Figure 1.1 Ordinary sales. Figure 1.2 Forward sales. Figure 1.3 Deferred sales. Figure 1.4 sales of a debt for debt. Figure: 3.1 diminution partnership. Figure: 4.1 istisna. Figure: 4.2 al-istisna wa al-istisna al-muwazi. 3 4 7 8 10 12 13 5 5 5 6 6 9 10 11

Abstract Housing finance is considered as contracts provided by the financial institutions for the purpose of personal finance to buy properties. There are many contracts have been discussed under the concepts of Islamic finance, such as mark up (al-murabaha), partnership (al-musharaka), al-istisna and leasing (al-ijara). And we can derive from the contracts some products to finance people to get properties under the concept of Islamic law. Murabaha is a sale contract; the seller offers a commodity to the client for the cost of the commodity with extra sum as a profit. And the payment of the price is, normally, deferred. And Musharaka is a sharing between at least two people, and they may share a property or investment or so on. Ijara means lease or hire, and istisna means a contract on something before it comes, namely, an agreement between the seller and the buyer to produce a commodity and the buyer may pay the price before or after the delivery of the product. The above contracts are the most common contracts offered by Islamic finance, and the studies aims to explain how these contracts can be applied for housing finance to offer contracts with accordance to Islamic law. The study will discuss these contracts as part from the traditional Islamic jurisprudence in brief, and then it will explain some examples which commonly practiced in some financial institutions for the purpose of housing finance. The study will show the concept housing finance by mark up as part of murabaha, and domination partnership under the concept of musharaka, then hire purchase which is considered as a part of ijara, and the last but not least al-istisna wa al-istisna al-muwazi under the concept of al-istisna. 1. Introduction In fact, there is no doubt that the place to live is necessary for human being, therefore it has the priority after the need pf food and drink. Then, Islam considers the importance of housing for, so the Quran indicate in the several verses that it is one of the lord blessing to his slaves; Allah says: ( ]47 : ) [ The interpretation of the verse is, And remember when he made you successors after Ad (people), and gave you habitations in the land, you build for yourselves palaces in plains and carve out home in the mountains. So remember the graces (bestowed upon you) from Allah, and do not go about making mischief on the earth. [Al-Araf: 74] 1 . ) ... ( : That means: (The happiness of a man in three a broad house), reported by Ibn Hibban. Before we are focusing in the financial instruments which suits housing financing, we should mention deferred sales in Islamic law, because that housing financing aims the transfer the ownership of the houses at the end to the clients. Deferred sales (al-bay al-muajjal) are a type of sale contract in Islamic jurisprudence. Sales, in terms of the time of payment, are divided into three categories: A- Ordinary sale (bay taqlidi) Ordinary sales (bay taqlidi) are hal al-badalayn which means that both delivery of the subject matter (al-mabi) and payment of the price (al-thaman) are at the time of the contract; or in other words, there is immediate payment.2
1

See al-Mubarakfuri, Tuhfat al-ahwadhi, v. 8, p. 92.

B- Forward sales (bay al-salam) Forward sales (bay al-salam) are when the price is immediate (hal al-thaman) and the subject matter is deferred (muajjal al-mabi) which means that delivery of the subject matter will come after a specific period of time.3 C- Deferred sales (al-bay al-mujjal) Deferred sales are when the delivery is immediate and the price is deferred (mu'ajjal al-thaman) which means that payment of the price is after a specific period.4 Ordinary sales Forward sale Deferred sale Price Now Now deferred Subject matter Now Deferred Now Table 1.1 Comparison of ordinary, forward and deferred sales.
Payment now

Subject matter
Delivery now

Price

Figure 1.1 Ordinary sales


Payment now

Subject matter
Delivery later

Price

Figure 1.2 Forward sales


Payment later

Subject matter
Delivery now

Price

Figure 1.3 Deferred sales


Payment later

Subject matter
Delivery later

Price

Figure 1.4 sales of a debt for debt

2 3 4

See Ibn Rushd, Bidayat al-Mujtahid, 1986, v. 2, p. 125. See Ibn Rushd, Bidayat al-Mujtahid, 1986, v. 2, pp. 201-202; Ibn Qudama, al-Mughni, v. 6, p. 384. See Kamali, Islamic Commercial Law, pp. 131-132.

Deferred sales, as a general concept, are lawful according to Islamic law. Not only had that, but even the Prophet himself practiced this type of transaction.5 However, the scholars do not agree on whether increasing the price because of deferment is permissible as well. Some of them say that it is permissible and some others argue that it is prohibited to increase the price just because of deferment. The majority of the jurists, including the Hanafis,6 the Malikis,7 the Shafiis,8 the Hanbalis,9 and many other jurists,10 state that increasing the price due to deferment is permissible in Islamic law, and the vendor can offer more than one price to the client whether for immediate payment or deferred payment, as long as the negotiation on the way of payment has been discussed before engaging in the actual contract, but when they plan to engage in the actual contract, they have to take a decision on one of these prices and agree on the time of payment accurately. Otherwise, the contract is null and void according to Islamic law. So according to this opinion the contracting parties have the freedom to discuss the price and the time of payment, but when they want to engage in the contract, they have to choose only one price. This view appreciates that the time or deferment can affect the price of the product, because, according to this view, paying the price now is better than paying the money in the future, and traders, in general, prefer to have the money now rather than later on, as long as the price is the same. 2. Housing financing by mark-up sales (bay almurabaha) Mark-up sales are a particular kind of sale where the seller expressly mentions the cost he has incurred in obtaining the sold commodity, and sells it to another person by adding some money thereon.11 Mark-up sales, as a traditional fiqh term, means that the seller declares the capital of an item, which he has bought, to a buyer and he stipulates an additional sum as profit.12 For example, the seller says that the product cost him 1000 and he would like 200 extra to the capital, as profit. Consequently, the end price of the goods is 1,200. It can be seen that the seller declares the capital and the amount of the profit which he wants to make. This kind of sale therefore involves extra information compared to ordinary sales in Islamic law.13 As these examples show, bay al-murabaha li al-amir bi al-shira which is a sale at a mutually agreed profit margin for the orderer of the purchase, which is very common in Islamic financial institutions today, was mentioned in the traditional fiqh and it has been discussed by the four madhhabs.

5 6 7 8 9

Al-Bukhari, al-Jami al-Sahih, v. 3, p. 1068. See al-Zaylai, Tabyin al-Haqaiq, v. 4, p. 78. See al-Nafrawi, al-Fawakih al-Dawani, v. 2, p. 99. See al-Nawawi, Sharh Muslim, v. 10, p. 158. See Ibn Taymiyya, Fatawa, v. 29, p. 499. See al-Mubarakfuri, Tuhfat al-Ahwadhi, v. 4, pp. 357-359; Al-Shawkani, Nayl al-Awtar, v. 5, pp. 249-250. See Usmani, an introduction to Islamic Finance, p. 41. See Ibn Rushd, Bidayat al-Mujtahid, 2003, v. 2, p. 256; Ibn Qudama, al-Mughni, v. 6, p. 266. Al-Zuhayli, Financial Transactions, v. 1, p. 353.

10

11 12 13

Financing by mark-up sales, from a modern perspective, consists of two stages of sale and the financial institution is involved in both contracts. Essentially, the contract is between three parties. A (the client) orders a specific product, such as property or a car, from B (the Islamic financial institution) then B (the Islamic financial institution) buys it for him from C (the trader or the market). Then B (the Islamic financial institution) resells it to A (the client) on an instalment basis, with an extra sum or profit depending on the period.14 Next, how can we practice mark-up sales. It is simply, the same procedure of the above contract, that the client finds out a house which he wants then the financial institution starts the procedure to buy the house by cash. Then the financial offer the house to the client by instalment payments for the same price with margin profit depend on the period of payments. There is an important point, that the financial institution does not sell the house before the ownership, as well as, does not charge the client anything if he changes his mind. 3. Housing financing by diminution partnership (al-musharaka al-mutanaqisa) Before discussing diminution partnership, we will mention in brief the definition of partnership in Islamic law. We can divided the partnerships (al-musha>raka) in two types, the first type is business partnership which is a contract between two or more parties with the intention of making a business and sharing the profit.15 The second type is the partnership of the ownership, and this type may not include the intention business. Diminution partnership is where a financer (financial institution) and his client participate either in the joint ownership of a property or equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of share of the financier one by one periodically, thus increasing his own till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.16

Bank + Client

Bank %90

Client %10

Bank %0

Client %100

Figure: 3.1 diminution partnership


14 15 16

See Vogel and Hayes, Islamic Law, pp. 140-141; Usmani, an Introduction to Islamic Finance, pp. 41-42. See al-Zuhayli, Financial Transactions, p. 447; Usmani, an Introduction to Islamic Finance, p. 5. Usmani, an Introduction to Islamic Finance, p. 30.

4. Housing financing by commission to manufacturing (istisna) The Arabic term istisna lexically means requesting a sanah, where the latter Arabic term refers to the work of a small or large scale manufacturing worker. Jurists use this term to refer to the request of manufacturing a specific item in a specific form.17

Pay by delivery

manufacturer Figure: 4.1 istisna

client
Deliver later

Some financial institutions today make use this kind of contract to produce a new product for housing finance, the call of the contract is al-istisna wa al-istisna al-muwazi. The contract means is that the financial institution involves in the middle between the client and he contractor (al-sani), so the client and the financial institution make an agreement that the financial responsible to prepare a house to the client within a period of time, and the client may choose one of the designs, which are offered by the financial institution, for a specific price, to be paid as an instalment payments. Then the financial institution makes another agreement with the contractor to build the house according to the first agreement between the client and the financial institution. So, when the contractor build the house according to the contract, then he delivers the house to the financial institution, then the financial institution delivers it to the client. the financial institution pay the price to the contractor during the period of building, but the financial institution offer the house to the client with instalment payments, and the price increases due to the increase of the period of payment.
pays by delivery Deferred payment

Figure: 4.2 al-istisna wa al-istisna Del. when finish al-muwazi

contractor

Bank
Del. When rec.

Client

5. Housing financing by leasing ending with ownership (ijara muntahiya bi al-tamlik) Leasing ending with ownership is of three kinds. The first kind is leasing ending with ownership by way of gift (hiba), which means the transfer of title at the end of the lease for a token consideration or price. The second kind is leasing ending with ownership through transfer of title at the end of the lease for a token consideration or at a nominal price. The third kind is leasing ending with the ownership through sale prior the end of the lease term for a price that is equivalent to the remaining leasing (al-ijara) instalment.18

17

Al-Zuhayli, Financial Transactions, p. 268.

18

Rosly, Critical Issues on Islamic Banking, p. 104; see also Ahmad, Development and Problems, pp. 20-21; Usmani, Islamic Banking, pp. 87-163.

There is a discrimination upon the title of the contract, the reason is that some scholar 19 consider that the leasing ending with the ownership is against the hadith that the Prophet peace be upon him- prohibits two transactions in one because that the contract include selling and leasing in the same agreement, and in addition this type of contract may cause a dispute between the financial institution and the client when one of them can not fulfil the contract during the period of leasing. So these scholars prefer to call the contract leasing with a promise to be end with ownership. It seems today that there is no significant different between the two title, in terms of the practice of the contract. However, there a notice different when the contracting parties dispute during the contract, so in the first title the client may have the right to request a refund if the financial institution does not fulfil the contract. But according to the second title the client does not have that right, because that he is just a leaser. Some financial institutions offer this kind of contract as an Islamic product for housing finance. So the procedure of the contract is a client finds out a house which he wants, then the financial institutions buy the house, and pays the price by cash. Then the financial institution offer the house to be hired for normally a long time period, to be owned at the end of the contract and it may with a little sum or to be owned at the end of the period of lease by way of gift. The combination of the contract between the contract of sale and leasing may cause more disputes between the contracting parties during the time of leasing. Because simply the financial institution can, according to the contract, change his mind and prefers to do not sell the house to the client, especially when the price of the houses increase while the aim of the client is to own the house at the end of contract. So this contract needs more consideration to find out a way to be applicable to Islamic law.

19

Such as Ibn Muni, and al-Mutlaq.

Bibliography Holy Quran M. Khan & K. Al-Hilali. 1996. Interpretation of the meaning of the Noble Quran in the English language. Riyadh: Darussalam. Arabic Sources Abdullah Ibn Ahmad Ibn Qudama. 1999. Al-Mughni. ed. Abdullah Al-Turki and Abd al-Fattah al-Hilu. Riyadh: Dar Alam al-Kutub. Ahmad Ibn Ghunaym al-Nafrawi. 1415 H. Al-Fawakih al-Dawani. Beirut: Dar al-Fikr. Ahmad Ibn Taymiyya. 1392H. Majmu Fatawa Shaikh al-Islam Ibn Taymiyya. Riyadh: Dar Alam al-Kutub. Muhammad Ibn Ali al-Shawkani. 1973. Nayl al-Awt}ar Sharh Muntaqa al-Akhbar. Beirut: Dar alJil. Muhammad Ibn Ismail al-Bukhari. 1987. Al-Jami al-Sahih, ed. Mustafa Dib al-Bagha. Beirut: Dar Ibn Kathir and al-Yamama,. Muhammad Ibn Hibban. 1993. Al-Sahih. ed. Shuayb al-Arnaut. Beirut: Muassasat al-Risala. Muhammad Ibn Ahmad Ibn Rushd. 1986. Bidayat al-Mujtahid wa Nihayat al-Muqtasid. Beirut: Dar al-Marifa. Muhammad Abd al-Rahman al-Mubarakfuri. n. d. Tuhfat al-Ahwadhi Sharh Ja>mi al-Tirmidhi. Beirut: Dar al-Kutub al-Ilmiyya. Nazih Hammad. 2002. al-Musharaka al-Mutanaqisa fi daw al-uqud al-Mustajidda. Majallat alMajma al-Fiqhi al-Islami. V. 15. Pp. 191-219. Uthman Ibn Ali al-Zaylai. 1313H. Tabyin al-Haqaq Sharh Kanz al-Daqaiq. Cairo: Dar al-Kitab al-Islami. Yahya Ibn Sharaf al-Nawawi. 1392H. Sharh Sahih Muslim, Beirut: Dar Ihya al-Turath al-Arabi. English Sources A. L. Udovitch. 1970. Partnership and Profit in Medieval Islam. Princeton: Princeton University Press. Frank E. Vogel and Samuel L. Hayes. 1998. Islamic Law and Finance Religion, Risk and Return. The Netherlands: Kluwer Law International. I. Warde. 2000. Islamic Finance in the Global Economy. Edinburgh: Edinburgh University Press. Muh}ammad Ibn Ah}mad Ibn Rushd. 2003. Bidayat al-Mujtahid wa Nihayat al-Muqtasid. Tr. by Imran Ahsan Khan Nyazee and Reviewed by Mohammad Abdul Rauf. London: Garnet Publishing Limited. Mohammad Hashim Kamali. 2003. Islamic Commercial Law, Cambridge: Islamic Texts Society M. Siddiqi. 1985. Partnership and Profit-Sharing in Islamic Law. Leicester: the Islamic Foundation. M. Imran Usmani. 2002. Meezanbanks Guide to Islamic Banking. Karachi: Darul Ishat. Muhammad Taqi Usmani. 2002. An Introduction to Islamic Finance. Hague: Kluwer Law International. Nabil A Saleh. 1986. Unlawful Gain and Legitimate Profit in Islamic Law Riba Gharar and Islamic Banking. Cambridge: Cambridge University Press. Rodney Wilson. 1997. Economics, Ethics and Religion: Jewish, Christian and Muslim. Economic Thought, New York: New York University Press. Saiful Azhar Rosly. 2005. Critical Issues on Islamic Banking and Financial Market. Indiana: Author House. Wahbah al-Zuhayli. 2003. Financial Transactions in Islamic Jurisprudence. Tr. by Mahmoud ElGamal and Revised by Muhammad Elssa. Beirut: Dar al-Fikr al-Muaser and Damascus: Dar al-Fikr. Yusuf al-Qaradawi. 2003. The Lawful and the Prohibited in Islam, London: Al-Birr Foundation. Z. Ahmad. 1994. Islamic Banking State of Art. Jeddah: Islamic Research and Training Institute in Islamic Development Bank.

You might also like