If an Islamic Mortgage Costs too Much, Can I Take a Conventional Mortgage?

Recently, certain Muslims have been raising their concerns and doubts with regards to the Murabaha and Ijara Shariah-compliant alternatives for conventional mortgages. Their basic argument has been the fact that these house-financing schemes are nothing but interest-based transactions in disguise. It is merely another way of involving one’s self into a usurious transaction, they say, and it makes no difference whether one holds one’s ear from the front side or from behind. Thus, these so called “Islamic” mortgages, according to their understanding, are nothing but conventional mortgages under a new name and a new banner.

The above understanding is not correct, as will be explained later. However, before answering the above-mentioned objection, it should always be remembered that the ideal mode of financing according to Shariah is partnership (shirka or musharaka). According to Islamic principles, before advancing a loan, a financier must decide whether he is advancing a loan to assist a fellow human-being on humanitarian grounds or he wishes to share his profits? If the intention is to aid the debtor, one should not demand or claim any excess on the principle amount forwarded as loan, as the aim and objective was to assist another person in need. Thus, seeking and giving any excess on the principle amount is considered to be interest hence unlawful. However, if the intention is to share the profits earned by the debtor, then it will be necessary that one shares the losses suffered by him also. Thus, the returns of the financier, according to Shariah, will be tied up with the actual profits made by the debtor. One cannot seek profit not considering whether the debtor earned any profit or otherwise, for the intention was to share the profits and likewise losses.

The above is the basic philosophy of Islam with regards to financing. One will either be forwarding an interest-free loan (iqradh) or being a partner in the business of the debtor (shirka); hence there is no place according to Shariah for a fixed return on money given to another. Thus, Iqradh (interest-free loan) and Shirka (partnership, also known as musharaka) are ideal modes of financing in Islam, and real alternatives for the conventional interest-based financing schemes.

However, using Musharaka/Shirka as a mode of financing can be difficult in the current economic setup. The whole economic setup needs to be changed in order for financing to be based on Musharaka. It would be very difficult for a private financial institution to introduce Musharaka as a mode of financing, unless it has the support of the state bank. Thus, due to the fact that there are practical difficulties in implementing Musharaka as a mode of financing in the current economic climate, contemporary scholars have permitted the use of Murabaha (sale on deferred payment basis) and Ijara (leasing) as modes of financing.

Therefore, it should always be remembered that, originally, Murabaha and Ijara are not ideal modes of financing in Shariah. They are merely devices to escape from being involved in interest, and not ideal instruments to carryout the real economic objectives of Islam. Hence, they should only be used due to need and as a transitory step taken towards the Islamization of the whole economy.

Having said that, it does not mean these alternatives are interest-based schemes in disguise, rather, the opposite. They may indeed be temporary devices, but they are still permitted and lawful. They do not come into existence by replacing the word “interest” or “mortgage” with “Murabaha” or “Islamic mortgage”. Rather, I personally dislike the idea of calling these schemes “Islamic mortgages” for that gives the wrong impression. Mortgage, as understood in the conventional economic setup, has its own meaning and is clearly interest-based and unlawful, whilst these schemes are not interest-based and permitted. Thus, it would be better to term them “Islamic alternatives for an interest-based mortgage”.

This is the reason why contemporary Ulama have laid down many conditions for the permissibility of these schemes. Failure to comply with these strict conditions would render the whole contract invalid and unlawful. In fact, it is the observance of these conditions that draw a clear and distinctive line between an interest-based loan and a transaction of Murabaha or Ijara. Therefore, calling these schemes to be “interest in disguise” is completely of the mark and not in accordance with the reality, as it will become clear for those who study the various conditions and explanation given by the scholars.

Indeed, the objective and purpose of Shariah will not be achieved in using Murabaha or Ijara as house-financing schemes. The real alternative is partnership (musharaka), which is a basis for equal distribution of wealth in the society. However, these schemes are not interest-based, hence lawful. The Arabs have a proverb which states “That which cannot be gained fully is not to be left out completely” (ma la yudraku kullah la yutraku kullah) thus the fact that one is not able to implement Musharaka does not mean one should engage one’s self in interest.

The most important aspect one needs to remember is that these schemes are not interest-based. They are permissible alternatives, but do not really serve as ideal Islamic modes of finance. The ruling of Shariah is always based on the legal reasoning (illa) and not the wisdom (hikma). If a transaction avoids unlawful usurious elements, it will be lawful, regardless of whether the objective is achieved or otherwise. The basic structures of these Murabaha and Ijara plans are free from any unlawful or usurious elements, thus they are permitted. However, they are not ideal modes of financing according to Shariah.

A very good example of this once given by Shaykh Taqi Usmani (Allah preserve him) was that of many vehicles queuing up at a traffic signal. It was signalling red and the backlog of cars numbered many. An individual, in order to avoid the long queue, saw a gas/fuel station on the side of the road which had an opening to the other road where he intended to proceed. Thus, he headed towards the gas station and emerged from the other side into the next road avoiding the long queue of vehicles. Nobody can say that he violated the law by driving through a red signal, for he drove his vehicle into the gas station and came out from the other side, although without having the intention of filling his car with fuel. However, upon seeing him, if all the other drivers began doing the same, we know what chaos that would bring about.

The example of these devices is similar, in that they are legitimate ways of avoiding interest, but they are not real modes of finance. They are not ideal alternatives for people to avail off at all times; rather, they should only be used at times of need. A person taking up a Murabaha or Ijara plan would not be breaking any rules just as the driver who took his vehicle into the gas station did not violate any rules. However, just as it is not ideal for all the cars to drive through the gas station, it would not be correct to think that these plans are ideal modes of finance, for that will be defeating the objective.

In light of the above explanation, it would be wrong to think that it is permitted to purchase a property with a conventional mortgage by committing a lesser harm. The simple reason is that there is no clash here of “two harms” in order for one to take the lesser of the two. Rather, one has a choice between an unlawful interest-based conventional mortgage and a lawful Islamic alternative, even though it may not be the ideal alternative. Indeed, one will have to pay more in a Murabaha or Ijara agreement, but that does not make the transaction unlawful or invalid, for the ruling of Shariah is not based on the legal wisdom as explained earlier. If one is unable to purchase a property through a Murabaha or Ijara agreement, then one will have no choice but to seek an interest-free loan from family and friends.

Even if we were to apply the principle of “taking the lesser of two evils” purchasing a property through a Murabaha or Ijara plan would be the lesser of the two evils, for they are devices in saving one from being involved in interest, whilst a conventional mortgage is purely interest-based and unlawful. Thus, the greater evil from the two (if we may consider the Islamic alternatives to be evils, looking at the fact that they are not ideal modes of finance) would be the purchasing of a property through a conventional interest-based mortgage.

In conclusion, purchasing a house or property with a conventional mortgage will remain unlawful. It was not permitted by the scholars even before the various alternative schemes came into existence, neither do they permit it after their emergence.

And Allah knows best