Many Muslims have started using Islamic mortgages in the UK. But as we all know, many Muslims continue to use conventional mortgages despite the prohibition on interest in Islam. Some of these Muslims argue that in fact conventional mortgages are halal.
They use two arguments.
Camp A argues that, while a conventional mortgage is usually haram, taking out a conventional mortgage is a necessity today (and that halal mortgages are not really halal). So, by default, a conventional mortgage is allowed.
Camp B argues that, actually, conventional mortgages are halal because they’re not truly “riba” or a “debt” in Islamic law.
We disagree with both Camp A and Camp B. Here’s our reasons why.
Camp A: taking out a mortgage is a necessity
In summary, one of the key reasons why Camp A thinks taking a conventional mortgage is permissible is because they think that halal mortgages are not really Islamic. So the only basis to buy a mortgage is if there’s a need, and finding whichever one is cheapest.
We of course think Islamic mortgages are Islamic and share our reasons here. If you agree with us then obviously going for a halal mortgage over a conventional mortgage makes complete sense.
The second key reason used by Camp A is that there is a necessity to own a home. We disagree as the threshold for “necessity” in Islam is really high (think – destitute and homeless kind-of-necessity) and given that most people can quite effectively rent, this is not an argument that works.
We are not alone in our view that using the argument of “necessity” only works for the direst of cases – not for everyone.
Camp B: Those who say conventional mortgages are halal
There are considerably fewer scholars in this camp. The most prominent among them in recent years from the UK is Sheikh Atabek Shukurov. He argues here and here that conventional mortgages should not be understood as the classic riba-based debt in Islamic law.
We respectfully disagree.
Sheikh Atabek’s argument in a nutshell is:
- Forget the terminology being used (e.g. “interest” and “bank”) and focus just on the actual steps that take place.
- The bank isn’t just giving you money for you to spend as you wish. It is paying you money for you to only buy a particular property.
- What is actually taking place is that the bank is appointing you as its agent to buy the property on its behalf, which it is then selling to you at a marked-up price over the course of the next 2 decades.
- This is permissible as its just a murabaha (a murabaha contract is explained in detail here).
But this argument doesn’t work for the following reasons:
- The conventional bank isn’t ever looking to buy the property: Even if we focus on the actual steps being taken, the bank isn’t appointing the debtor to buy a house for it. The bank doesn’t particularly care about the house itself. It only cares that the house has enough value to act as good security for the loan it is about to give out.To put it another way: there’s a big difference between ordering a valuation report and undertaking a full survey and in-person visit with a view to buying it to actually use.
- Misunderstanding the banking world: The analysis also completely mis-characterises the banking world – which is really big on securing a debt with an asset and/or guarantee. You see, a secured loan is pretty appealing and can easily be repackaged up and sold to other banks. But no one in this transaction really cares about the asset securing the loan – other than that it exists. (And it is precisely because of this lack of care into the asset that we had the credit crunch). So the banking world is not in the business of buying assets. It is in the business of financing projects and assets and making sure the loan is backed up by some form of safety for itself in case of default. That usually means either foreclosing on the valuable security that it has been granted or going after the debtor for the money (or both).
- The implications are untenable: Taken to the extreme, this argument becomes completely untenable, as it would entail that only unsecured borrowing would really be impermissible. So all a bank has to do to make its finance sharia-compliant is to specify what the debt can be used for and get security. But here’s the thing – many bank loans already do this! Banks don’t like to give someone a large amount of money without having at least some control or visibility over what its money is being spent on.Under this line of analysis then, any leveraged buyout or purchase would suddenly become halal. So car finance is fine on a specific car. A leveraged private equity buyout of a company is fine too. Credit card debt isn’t though.
- There is no agency agreement. While Sheikh Atabek argues that we should look at the substance of the transaction, it must be noted that there is no agency agreement in place between the bank and the debtor at any point. That is because the relationship is one of creditor-debtor.
- Whose name is actually on the property? In the Al Rayan Islamic mortgage for example, the freehold of the property is in the name of Al Rayan. In the conventional mortgage the freehold is in the name of the debtor from start to finish. At no point does the conventional bank take ownership over the asset and sell onwards.
- How does the accountant treat the mortgage? Well, the accountant treats the mortgage as a debt. At no point does the property itself come onto the balance sheet of the bank.
- Common sense analysis: The biggest reason for us is that simply on a common-sense analysis basis, everyone would conclude that a conventional mortgage is an interest-bearing loan. The banks think it is interest, the consumers think it is interest, and it is treated as interest by the accountants, HMRC and regulators. Sometimes its best to take things at face value.
Conclusions: Conventional mortgages are haram
So there you have it folks. Conventional mortgages are haram.
You can’t justify getting a conventional mortgage by saying “it is a necessity for me to buy a house and the only way I can do that cheaply is a conventional mortgage”. You can’ do that for two reasons: (1) because its not really a necessity; and (2) you can always go for an Islamic mortgage instead.
Secondly, you can’t justify getting a conventional mortgage by arguing that it is essentially just like a murabaha transaction. This mis-characterises conventional finance and would open the floodgates to basically rendering large swathes of conventional finance as halal.
So Islamic mortgages are the way to go in our view – and we’ve created a really helpful comparison tool – the first of its kind in the UK – to help you compare between Islamic mortgages available today. Find out more by checking out our website at the Islamic Finance Guru.