HomeFinancing_Adnan-Sep 11 2015-

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Adherence to Islamic Sharia while

Financing Home in the United States of

America

by

Adnan Jumani

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Table of Contents

Chapter 1: Introduction ................................................................................................................. 5

Background: ............................................................................................................................5

Focus of this study ..................................................................................................................6

Significance of the study ........................................................................................................7

Research Goal .........................................................................................................................7

Objectives of the Research .....................................................................................................7

Research questions and/or hypothesis ..................................................................................8

Definitions of the terms used .................................................................................................8

Chapter 2: Trade is Allowed and Riba is Prohibited ................................................................. 9

Prohibition of Riba ..................................................................................................................9

Interest Based Loans as Riba ............................................................................................... 10

Commercial Financing in Islamic Sharia .............................................................................. 12

Chapter 3: Home Financing in Islamic Sharia ......................................................................... 15

‘Iwad: Taking Risks Purifies the Profits ................................................................................ 15

Halal Profit from Islamic Home Finance .............................................................................. 16

Chapter 4: Islamic Home Financing in USA ............................................................................ 18

Common Islamic Home Finance Types in USA .................................................................... 18

Murabaha as Home Financing:............................................................................................ 18

Ijara Mutahia bittamleek as Home Financing: .................................................................... 20

Musharaka Mutanaqisa as Home Financing: ...................................................................... 20

Chapter 5: Analysis of Current Solutions in USA .................................................................... 22

Current Islamic Home Financing Solutions ......................................................................... 22

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The Declining Balance Co-ownership Program (Guidance) ................................................. 22

Freddie Mac being Funding Source ..................................................................................... 24

Missing ‘Iwad: No Liability for Guidance Residential .......................................................... 24

No Co-ownership on Title ................................................................................................... 25

No Equity for Guidance Residential ......................................................................................26

Foreclosure: The Criterion for Adherence to Islamic Sharia ............................................... 28

Current Solutions Not Adhering to Islamic Sharia ............................................................... 29

Chapter 6: Supporting Cases .................................................................................................... 31

AMJA Fatwa on the Islamic Home Finance in USA .............................................................. 31

Dubai Financial Crisis: A Case Study .................................................................................... 32

Chapter 7: Solutions for Islamic Home Financing in USA ..................................................... 35

Funding Islamic Bank without Riba ..................................................................................... 35

Islamic Bank Taking Risk and Having Liability ...................................................................... 36

Mudaraba as a Solution ........................................................................................................ 37

Multiple Option Strategy ...................................................................................................... 37

Conclusion: Avoiding Riba while Financing Home in USA .................................................... 38

Local Solutions ..................................................................................................................... 38

Client Oriented Solutions .................................................................................................... 38

Final Advice to Muslims Living in USA ................................................................................. 39

References.................................................................................................................................... 41

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In the name of Allah, the Entirely Merciful, the Especially Merciful

Chapter 1: Introduction

"And whatever you lay out as Riba, so that it may increase in the property

of men, it shall not increase with Allah; and whatever you give in charity,

desiring Allah's pleasure-- it is these (persons) that shall get manifold."

(Quran 30:39)

"...they say, "Trade is [just] like interest." But Allah has permitted trade and

has forbidden interest..." (Quran 2:275)

Background:

It is an American dream to buy a home, and part of that dream is to be able

to purchase the home, even if it means financing part of it, since it is not easy to

pay for homes in cash for most people. Since 1960s, immigration from Muslim

countries has become significant, and population of Muslims in United States has

been increasingly steadily. As the Muslims started to settle in USA, and lay down

their roots. They also wanted to purchase homes and own properties, but

migrating to USA has been a mixed blessing for Muslims, because the capitalist

and secular foundation of the American culture does not leave room for religious

ideals. So, when Muslims tried to own a home, they were faced with some hard

choices. Also, there have been a lot of misinformation and conflicting facts about

whether Islam permits Home Finance, and it has become really difficult to know

what is correct.

Although there are several “Islamic” financing options available in USA,

some are just interest based financing repackaged in Arabic terms, and others

are Islamic Sharia based products that do not comply with Islamic Sharia

completely. Moreover, it is safe to say that there is no solution for home financing

in USA that adheres to Islamic principle in its entirety, which is available for the

country as a whole, and It has become critically important to provide a definite

and clear solution for Muslims in America that can be available in all the states.

This research will focus on the Islamic financing options available in USA for the

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Muslim population, and will try to determine the ideal formula of Islamic principles

and American financing structure, and American customs without compromising

the basic principles of Islamic Sharia.

Furthermore, Muslims in the United States of America, who are practicing

Islam, face a challenge in determining the Islamic way of financing their homes.

Sometimes, they are not sure if it is even possible to commercially finance home

without indulging into Riba, meaning, if Islam allows purchasing home by

partnering with a financier, who expects profit from the transaction. Sometimes

they are confused by criticism of Islamic Financial Institutions of each other, and

criticism from cynics about similarities of Islamic Finance with conventional

financing. Also, the solutions imported from overseas do not seem compatible

with USA rules and regulations, or at least don't fit as it is, and require some

customization. So, in this paper, we will be covering all of the above challenges,

and providing some details that can help a practicing Muslim in USA make the

correct choice.

Focus of this study

There is a lot of literature in the field of “Islamic Home Financing”, but we

will be focusing on Quranic verses and prophetic ahadith to establish the

fundamentals of Islamic financing. Moreover, books written by Mufti Taqi Usmani

will be used for explaining current Islamic financial contracts in general. In

addition, the white papers and other information published by the Islamic

financial institutions will be the key source to establish the facts on current

solutions available and their strength and weaknesses. Additionally, in order for

us to understand where these current contracts fall short of complying with local

laws, some USA government sources will be used. Besides all that, there may be

other unconventional sources, which will be explored, like a recent Islamic

Conference in Houston (Assembly of Muslims Jurists of America, 2014).

Facts gathered from the above sources will be compared against the claims

presented in the research to confirm or deny the existence of cultural disconnect

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between USA laws and opinions of leading scholars. Most important part will be

to break down the contract details published by the Islamic financial institutions,

and analyze them in the light of fundamentals of Islamic Sharia.

Significance of the study

So far, there has not been any comprehensive study or research to come

up with native solutions in USA for Islamic home financing that completely

adheres to Islamic Sharia. So, any contribution in that direction will be a huge

benefit to the practicing Muslims in USA. Furthermore, the solutions and fatawa

we currently have are from the scholars from outside the United States of

America, who may not understand, for example, the impact of not including the

Islamic Bank name on the title while co-owning a property.

Research Goal

Primary goal of this research will be to determine the financing structure

suitable for Muslim Americans to finance their homes, and whether it can be

achieved through commercial financing, but there will be several secondary

goals. One of the secondary goals will be to apply Islamic Financing principle

developed in Europe and Asia to United States financial system, and smooth out

any conflicts. Another important sub-goal will be to evaluate legal verdicts of well-

known and respected Islamic Scholars from outside USA to see if they are

appropriate for USA. Also, it will be important to evaluate the existing Islamic

financing products to determine their adherence to Islamic Sharia, and what

changes can be made to bring these products in conformation with Islam.

Objectives of the Research

Help fellow Muslims in USA with the process of purchasing home without

using methods that involve Riba

Determine and share information about the components of Islamic home

financing in the USA that violates Islamic Sharia

Find the best financial structure for Islamic home financing

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Clarify the misconceptions about commercial Islamic financing in general

Research questions and/or hypothesis

How can a practicing Muslim in USA purchase a home using Islamic

Commercial Home Financing without participating in Riba transaction?

Assumption is that Islamic products offered today are not complying 100% with

Islamic Sharia, and it will require some changes to properly adhere to Islamic

Sharia.

Definitions of the terms used

Definitions are the crucial part of Islamic financing.

Riba: Any increase on a financial loan over time (Usmani, 1999).

Murabaha: Cost plus markup for deferring payment.

Mudaraba: Investment with profit sharing

Musharaka Mutanaqisa: Declining Balance Partnership.

Ijara bittamleek: Lease to Own Agreement

Ijara Wa Iqtina’a: Lease to Purchase Agreement

‘Iwad: Equivalent Counter-value (Rosly S. A., 2001)

Usufruct: Ability to use something for benefit

Commercial Financing: Funding a business transaction

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Chapter 2: Trade is Allowed and Riba is Prohibited

Prohibition of Riba

Before we look at the different types of Trade contracts that are allowed in

Islam, we need to look at Riba that is prohibited in Islam, so we can understand

what to avoid. Riba is not just merely prohibited, but it is one of the greatest sins

in Islam, and its prohibition is clearly stated in Quranic verses and prophetic

traditions numerous times along with severe punishments.

“O you, who have believed, do not consume Riba, doubled and multiplied,

but fear Allah that you may be successful.” (Quran 3:130)

“O you, who have believed, fear Allah and give up what remains [due to

you] of Riba, if you should be believers. And if you do not, then be

informed of a war [against you] from Allah and His Messenger. But if you

repent, you may have your principal - [thus] you do no wrong, nor are you

wronged.” (Quran 278-279)

The above verses are some of the clear verses that prohibit Riba to the

extent that if a believer does not let go, Allah (subhana wa ta’ala) declares war

against them. This is one of the highest levels of sin when Allah (subhana wa

ta’ala) guarantees punishment or a direct conflict with himself, because without

the mercy of Allah (subhana wa ta’ala), we will not succeed in this life or

hereafter. Beside Quranic verses, there are numerous ahadith on the prohibition

of Riba, and the punishment for dealing with Riba in any manner. For example, in

the following narration, the Prophet (may peace be upon him) has admonished

all parties that are involved in a Riba transaction, which shows the severity of the

act.

“Jabir said that Allah’s Messenger (may peace be upon him) cursed the

accepter of Riba and its prayer, and one who records it, and the two

witnesses, and he said: They are all equal.” (Muslim, 2006, 10:3881)

Although Quran prohibits Riba, but there are no explicit definitions of Riba

present in the Quran. So, in order for us to understand the details of prohibited

transactions, we would need to look at some examples from the life of the

Prophet (may peace be upon him). In fact, we will be dealing with different

aspects and variations of Riba in this paper, because Islamic home financing tries

to provide alternatives to the prohibited loan on interest, but it still tries to follow

the model of conventional loans, to make the client feel comfortable in choosing

those alternatives, which may leave some variation of Riba in the Islamic options.

However, some have even challenged the notion of interest being Riba, and they

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claim that Riba that is prohibited in Quran and Sunnah is not the simple interest

on loan that is common in the world economy today, but usurious form of interest

that compounds interest exponentially. For example, Dr. Mohammad Omar

Farooq’s paper claims that Abu Bakr Al-Jassas was the first one to suggest the

stipulated excess (interest based loan) being Riba was not considered by the

early generation as Riba(Farooq, 2007). This is a very serious claim, which, if left

unchecked, can potentially permit Interest based loan for the Muslims, and we

should not ignore it. So, before we look at Islamic home financing, we need to

address this issue briefly, without diving too deep into the debate of interest being

same as Riba. Let us look at how Riba was defined during the time of the

Prophet (may peace be upon him), because Islamic Sharia is based on the

understanding of the Quran and Sunnah by the early generations.

Interest Based Loans as Riba

Many scholars and experts have chosen to explain why interest is Riba, in

different ways, but we will take a simpler approach. Prophet (may peace be upon

him) famously explained Riba in the following manner.

Abu Sa’id al-Khudri (Allah be pleased with him) reported Allah’s

Messenger (may peace be upon him) as saying: “Gold is to be paid for by

gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt

by salt, like by like, payment being made hand to hand. He who made an

addition to it, or asked for an addition, in fact dealt in Riba. The receiver

and the giver are equally guilty.” (Muslim, 2006, 10:3854)

In the above narration, Prophet (may peace be upon him) has provided

enough information to identify Riba in its different forms, and any transaction that

break the above conditions, should be considered Riba, by definition. According

to many scholars, there are two types of Riba (Razi, 2008).

1. Riba an-nasiya (increase with delayed return)

2. Riba al-Fadl (increase in exchange of commodity on the spot)

Although this narration is usually considered as an evidence only for Riba al-

Fadl, this narration actually is much more comprehensive. Instead of looking at

types of Riba, let us look at the above hadith as a set of rules that need to be

satisfied in any financial transaction, for it to be permitted in Islam. If we read it

carefully, there are three conditions set by the Prophet (may peace be upon him)

here to avoid Riba.

1. Exchange has to be of same type and same quality.

2. Exchange has to be completed on the spot.

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3. Exchange has to be equal value.

Now, the first thing we should notice is that if someone exchanges the same

amount of same thing at the spot, what will be the purpose of that type of

transaction. In fact, there is no benefit in making that kind of transaction, and it is

the opposite of barter or trade. In other words, trade usually involves exchange of

different items of different quantity, or delaying payment to receive profit or

mutual benefit for both parties, and restricting the trade to only the same type of

same quantity will inherently prohibit all trade, but we know that trade is allowed

by Allah (subhana wa ta’ala), and that is clearly not the purpose of this hadith.

So, we need to look at this hadith as another example of clear and concise

speech of the Prophet (may peace be upon him), and the real purpose of this

statement is to enumerate the conditions, which if broken, can lead to Riba

(Siddiqi, 2004).

Another thing to notice is that all the types of commodity mentioned in this

hadith were used as currency during that time, which supports the interpretation

that this hadith is more than just a description of Riba in barter commodities. For

example, if a person gives someone 10 coins of gold, with the stipulation that

after a period, it will be returned along with 2 more coins of gold, that transaction

will be prohibited in Islam according to the above narration, because it will break

the condition #2 and the condition #3. In fact, if we consider gold as money, it is

the very definition of interest based loan of today, as the money is lent over time

to be returned with an excess of more money. In essence, it is not necessary to

look for any other evidences, beside the hadith above, because there is no way

to implement an interest based loan without contradicting this order of the

Prophet (may peace be upon him), if we interpret gold, silver, wheat, barley,

dates, and salt as money.

Hence, we will use the term “Interest” interchangeably with “Riba” in this

paper, because they are one in the same. Also, all transactions involving loan

with deferred payment in return of excess amount stipulated are forms of Riba,

and we cannot use them to finance homes. Muslims in America are faced with

this challenge of avoiding interest, and it becomes really difficult, because

interest based loan is the very fabric of American economy. So, when it comes to

purchasing homes, halal options are very limited, and many Muslims give in to

the conventional loan or badly formulated financing contracts that are nothing but

disguised interest based loans, and it is due to lack of knowledge, mostly, and

not due to weakness of faith.

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Commercial Financing in Islamic Sharia

“Those who consume interest cannot stand [on the Day of Resurrection]

except as one stands who is being beaten by Satan into insanity. That is

because they say, "Trade is [just] like interest." But Allah has permitted

trade and has forbidden interest. So whoever has received an

admonition from his Lord and desists may have what is past, and his affair

rests with Allah. But whoever returns to [dealing in interest or usury] - those

are the companions of the Fire; they will abide eternally therein.” (Quran

2:275)

Allah (subhana wa ta’ala) has prohibited Riba (Interest), but he has not

prohibited all forms of commercial transactions. In fact, the above verse of the

Quran makes it clear that all trade or business, other than which involves Riba,

are permitted in Islam. So the question remains whether it is really possible to

finance a home while adhering to Islamic Sharia, or is the very concept of

commercial financing prohibited in Islam? In order for us to answer this question,

we would need to look at the sources of Islamic Sharia, because trade was an

integral part of society in the time of the Prophet (may peace be upon him) in

various forms, and we should be able to learn from them. For example, the

following verse of the Quran makes it clear that Islam does not prohibit deferring

obligations to the future rather it formalizes it and provides rules of governance

for it.

“O ye who believe! When ye deal with each other, in transactions involving

future obligations in a fixed period of time, reduce them to writing Let a

scribe write down faithfully as between the parties: let not the scribe refuse

to write:...” (Quran 2:282)

Following authentic narration of the Prophet (may peace be upon him)

establishes the permissibility of payment in advance for a commercial

transaction, and getting benefitted from it in the future.

Narrated Ibn Abbas:

Allah's Apostle came to Medina and the people used to pay in advance

the price of fruits to be delivered within one or two years. (The sub-

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narrator is in doubt whether it was one to two years or two to three years.)

The Prophet said, “Whoever pays money in advance for dates (to be

delivered later) should pay it for known specified weight and measure (of

the dates).” (Bukhari, 2006, 3:35:441)

Narrated Abdullah:

The Prophet had a golden ring made for himself... The Prophet then

ascended the pulpit, and after glorifying and praising Allah, he said, "I had

it made for me, but now I will never wear it again." He threw it away, and

then the people threw away their rings too. (Bukhari, 2006, 7:72:765)

So, it is clear that financing a business transaction, and delaying the

delivery or payment is allowed in Islam, but what is not allowed is an exchange of

money for money in different value. In other words, the trade usually involve a

commodity exchange with another commodity, or a commodity exchange for

money, and this type of trade was practiced by the Muslims during the lifetime of

the Prophet (may peace be upon him), and he did not prohibit it. So, Ijara

(Renting), Musharaka (Partnership), Mudaraba (Investment) and Murabaha

(Price plus credit cost) are some of the trade contracts that were common, but

these are trade contracts in nature, and not built originally for financing contracts.

However, interest based transactions has become a norm in the world, and

investment of money on interest is considered a type of trade, by the mainstream

secular economy experts, and the international banks expects profit on money

lending. That is why it has become really difficult for Muslims to trade and live

without being pulled into Riba in some forms, and home financing is not an

exception. In order to provide an alternative to interest based financing, Islamic

scholars had to come up with a way to allow financing business, and home

purchases by using existing economic models.

One of the first methods devised was Murabaha financing, where the

Islamic Bank buys the product or invests in the trade on the behalf of the buyer,

and then turn around and resell it to the buyer with deferred payment in the

future. It is allowed, because price can be increased or decreased by the seller,

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according to the supply and demand of the product, and also price can be

different for immediate payment or deferred payment, but the transaction has to

be a sale, and not a loan. Moreover, this type of financing can only be accepted

in Islam, if it follows the basic condition of the sale. Although this has been a

popular type of transaction in Islamic finance, it has a drawback that the sell is

final, and cannot be renegotiated, so there is very little room to modify the

contract down the line if need arises.

Besides Murabaha transactions, other types of transactions like Ijara, and

Musharaka have been also used to finance transactions when buyer doesn’t

have funds to buy on their own, and each of these types have their own set of

conditions. Also, Mudaraba (profit sharing or sleeping partnership) is used for

commercial businesses, where there is periodical profits coming in like a store or

restaurant, but has not been used for home financing. In short, commercial

financing is possible and accepted in Islam, if it is based on tangible assets and

profit and loss sharing, and not based on lending money. Of course there are

conditions and rules that govern commercial financing in Islam to keep them

away from becoming interest based financing, and they will be discussed in

details in the rest of the paper.

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Chapter 3: Home Financing in Islamic Sharia

‘Iwad: Taking Risks Purifies the Profits

One of the driving rules of Islamic Sharia in business is that no one should

benefit from something without taking risk in it, and we will use this rule as an

arbitrator and overarching principle to determine whether an Islamic financial

contract or product adheres to Islamic Sharia. Also, this rule differentiate the

Islamic nature of the financial transaction from the conventional interest based

loans, and without the risk taken by the Islamic Bank, the Islamic contract and

conventional contracts are identical and hence both become prohibited.

Following is one of the hadith establishing the principle.

Narrated Aisha, Ummul Mu’minin:

A man bought a slave and he (the slave) remained with him as long as

Allah wished him to remain. He then found defect in him. He brought his

dispute with him to the Prophet (peace be upon him) and he returned him

(the slave) to him (the previous owner). The man said: Apostle of Allah, my

salve earned some wages. The Apostle of Allah (peace be upon him) then

said: Profit follows responsibility [for attendant expenses and

possible loss and defects] (Dawud, 2006, 23:3503)

Following are other variations of the same principle.

“Profits are accompanied by liabilities” (Kamdar, 2015)

“Gain accompanies the risk of loss” (Kamdar, 2015)

"The justification of profits is either based on effort, or through property

invested or liability assumed” (Al-Nadawi, 2000, Vol.1 p.332)

This principle has also been explained as ‘Iwad (equivalent counter-value)

in a financial transaction, by some, which is just a formal way of stating what is

already present implicitly in Islamic Sharia (Rosly S. A., 2001). Basically, if a profit

is gained from a transaction in Islam, a counter value must be paid, which make

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the transaction just and fair, and if the ‘Iwad is not present, then one of the party

will take advantage of the other. When this principle is applied to Islamic home

finance, it requires an ‘Iwad must be present in every contract to counter balance

the profit that the Islamic Bank is earning from their investment; otherwise the

profit will be considered Riba. 'Iwad has been explained in details by Saiful Azhar

in one of his papers, and he breaks it down into three components “(a) Market

Risk (b) Effort or Value Added (c) Liability" (Rosly, 2001). In home financing,

market risk is the risk of home value dipping below cost price, efforts is in the

maintenance, and the liability is in officially owning the property and taking liability

in case of law suits, or damage. So, one or more of these must be present in an

Islamic home financing contract.

In fact, there are two ways profit can be earned from a home financing

without incurring Riba. First, the Islamic Bank can share the equity of the home,

as it builds over time, and once the client sells the home, if there is any profit, it

will be shared among the Islamic Bank and the client, according to their

ownership share. Of course, this requires the Islamic Bank to wait for a very long

time to earn profit, and there may not be any profit at the end of the contract,

because the home value could have decreased, and the home could be sold in

loss. Islamic Banks like other banks strive to reduce their risk, and prefer early

profits, so this method will not be very attractive to them. Another way for the

Islamic Bank to earn profit is to charge rent from the client for the usufruct, and

this is the most common, and practical way for Islamic Banks to earn profit from

their investment in home financing.

Halal Profit from Islamic Home Finance

If we pay close attention on how the profit is earned in all of the Islamic

home financing transactions in the USA or even around the world, it is from the

rental income that comes from the client, for their use of the property. So, the

basic right of the Islamic Bank, to extract profit in Islamic home finance, comes

from their role of being a land lord of the home, and all precautions must be

taken to have ‘Iwadh (equivalent counter-value) present from the Islamic Bank

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within this role, which, in this case, will be the liability of a landlord to own a

home. Islamic Bank must fulfil the duty of a landlord according to the Urf

(custom) of the locality, and must have liability of the property, so the profit

earned is in good faith.

Furthermore, if we look at all the rules in Islamic Sharia that govern financial

transactions, the main objective seems to be to avoid the extremes of profit and

loss. For example, Maysir (Gambling) is prohibited, since the profits are acquired

with extreme ease. On the other hand, Gharar (Speculation) is prohibited, since

the risk of loss is very high, and it can lead to deceit. Moreover, Islam prohibits

profit or increase on lending money without taking any risk, which forces all

transaction to be based on real commodities, because all real commodities bear

risk. So, profit and loss sharing is the required component for any Islamic

financial transaction, and possibility of loss or liability cannot be eliminated

completely. In fact, maintaining proper balance between profit and loss is the

biggest challenge in the home finance industry in USA at least, if not around the

world.

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Chapter 4: Islamic Home Financing in USA

Common Islamic Home Finance Types in USA

On the basis of the above asset based financing models, and the opinions

of the Islamic scholars, many Islamic home financing institutions have been

established in USA now, but they are not all following the same method of home

financing, and because of these different financial methods or contracts, the

choice for Muslim home buyers has become complicated. In Addition, these

institutions are criticized for validity of their adherence to Islamic principles within

the Islamic commercial financing that they provide. On the whole, there are three

different methods of financing that have developed in USA such as Murabaha

Bai' Mu'ajjal (Sale with differed payments), Ijara Mutahia bittamleek (Rent to

purchase), and Musharaka Mutanaqisa (Declining Partnership. Let’s look at each

of these contracts briefly.

Recently, Islamic Financing has become popular, and it has grown to a

multi-billion dollar industry, so there has been a lot of research in the last decade

or so. Islamic scholars like Mufti Taqi Usmani, Dr. Abdul Sattar Abu Ghuddah,

and others have guided several products in USA, and they have approved the

documents, contracts, and procedures used in Islamic home finance in the USA

(Guidance Residential, LLC, 2004). Most common product used for home

financing in USA is Musharaka Mutanaqisa (Declining Partnership), in which, the

Islamic Bank and the client are partners in the ownership of the home, and the

client pays rent for using the home, and also buys the financier 's share on a

monthly basis (Usmani, 1999).

Murabaha as Home Financing:

We are using the term “Islamic Bank” in this paper to represent an Islamic

financial institution of any type, to ease the communication. So, Murabaha is

used as a mode of home financing in the USA, but it is not an ideal mode of

financing, because it represent a simple sale of a commodity where the price is

increased if the full payment is deferred over time. It is not a very flexible method,

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because the sale is finalized at the beginning, and no changes can be made to

the contract, even if both parties agree. This is due to the fact that the item is sold

and the buyer takes full ownership of the product, but cannot sell it, until the debt

is paid. Also, the only way a financing can be Murabaha, and not interest based,

is if the Islamic Bank buys the home, take owner ship and possess the home for

a period, before selling it to the buyer. This transfer of ownership to Islamic Bank

in full and official sense is the only way to avoid Riba, so the Islamic Bank must

take that risk (Usmani, 1999).

However, Islamic Banks do not want to hold title, take liability of the home,

and are not even setup to be the owners of the properties, so when they do take

ownership, it increases the cost of the transaction compare to other home

financing contracts. In addition, if the homeowner like to pay off the balance early,

it becomes very complicated, if not impossible, because the house is already

sold and price is settled, and the price cannot be renegotiated, nor the house be

resold to the same party. Similarly, in the case of default, no further charges can

be assessed, as the sale has been finalized, and the balance is a debt, which

cannot be deferred with further increase, as that is Riba. Majority of the scholars

do not allow modifying the Murabaha transaction once it has been executed

(Usmani, An Introduction to Islamic Finance, 1999).

In USA, Devon Bank offers a Murabaha based home financing (Bank,

2015), but there is no legal fatwa from any scholar regarding their products. In

fact, they openly advertise the fact that their products are developed internally by

non-scholar officers (Bank, Religious Approval, 2015). Regardless of the issues

mentioned, Murabaha can be used for short term financing, where implementing

other methods becomes difficult, if the final contract is developed under the

supervision of an Islamic Scholar. In short, Murabaha is not seen as the solution

for Islamic Home Financing, and remains very controversial if used in that

manner. So, we will not be studying it in details as a possible solution for Islamic

Home Financing in USA.

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Ijara Mutahia bittamleek as Home Financing:

This method of Islamic financing is also known as Ijara Wa Iqtina'a. In this

financing method, an Islamic Bank buys the property and then lease to the

customer on the condition of transferring ownership at the end of the contract.

So, basically the Islamic Bank owns the property at the beginning, and allow the

client to occupy the property as a tenant and pay rent. Besides renting the

property the tenant agrees to buy ownership shares from the Islamic Bank in the

property. Furthermore, the client will pay monthly a portion in buying back the

Bank's investment, and another portion as monthly rent. This type of rental

contract is completely halal, as long as the conditions are fulfilled by the landlord

(the Islamic Bank) and the tenant (the client).

Ijara USA Inc. offers this type of home financing in USA, and the Islamic

concept behind the transaction is very solid, and perfectly acceptable. However,

the Ijara USA Inc. funds these transactions with an interest based loan from the

conventional bank, and require the client to be party in that loan. In parallel, a

trust is created with the Islamic Bank and the client as the full trustees, and this

trust will in turn act as the landlord of the property. The client also sign a

mortgage guarantee with a conventional bank directly as a borrower, so the only

difference between conventional loan and this transaction from Ijara USA is the

trust that is created. However, the trust does not protect the client from exposure

to the interest, because the conventional bank transaction exist in the

background and the interest is paid every month. Hence, funding the transaction

with interest based loan invalidates this Islamic home financing contract.

Besides these issues, if we look at Ijara as a mode of home financing, it is

the perfect solution for Islamic Home financing in USA if established properly, and

provides benefit for both the Islamic Bank and the Client and maintains Iwadh.

Musharaka Mutanaqisa as Home Financing:

In theory, Musharaka Mutanaqisa is a type of partnership where the minor

partner buys the ownership shares from the major partner, periodically. In Islamic

home financing based on Musharaka Mutanaqisa, the Islamic Bank is the major

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partner, and the client is the minor partner. Also, Islamic Bank allows the client to

occupy the property and pay rent to the other partner according to the share. This

is completely halal, and it is the most common transaction used for Islamic Home

financing in USA. After Murabaha, and Ijara, it seems like a third option for home

financing, but, in practice, it is exactly the same as Ijara Wa Iqtina'a, because the

profit is earned through rent, and the client can buy back the portion of ownership

share from the Islamic Bank every month. So, the only difference between Ijara

and Musharaka Mutanaqisa models is that Ijara doesn't require a significant

down payment from the client, but Musharaka requires a significant partnership,

and this difference goes away very quickly once the contract is established and

home is purchased.

Guidance Residential offers this type of home financing, and is the industry

leader in USA for home financing. In their contract, the client buys the home with

Guidance, as partners, and Guidance allows the client to occupy home and pay

them rent along with a portion of ownership buy back. Guidance Residential gets

their funding directly from Freddie Mac, a government backed bank, which

provides funding for other conventional banks. So, Guidance Residential has

removed the conventional bank from the equation, and has established a

Mudaraba like contract with Freddie Mac, but details of the contract are not

available publicly, and we can only speculate on the true nature of the contract. It

is difficult to imagine that Freddie Mac will sign up for an investment where they

don’t hold an ability to foreclose and recover their investment without sharing loss

with Guidance or the client, which is the required condition of Mudaraba

contracts (Usmani, An Introduction to Islamic Finance, 1999).

In essence, Ijara Wa Iqtina'a and Musharaka Mutanaqisa are the same

transactions, as far as the home financing is concerned. We will be studying

them in details as single solution, and we will be using Guidance Residential as

the primary model.

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Chapter 5: Analysis of Current Solutions in USA

Current Islamic Home Financing Solutions

After we have laid the ground work, and introduce all the concepts

necessary, let us look at the current products offered in USA for Muslims to

finance their homes, according to Islamic Sharia. There are several companies

established in different part of the country, and some service the whole country,

while others just the local area. Moreover, there are three types of products

available i.e. Murabaha, Ijara, and Musharaka Mutanaqisa, but we will not be

looking at Murabaha, as it is inherently unsuitable for a home purchase.

Additionally, Murabaha transaction adds the complete markup or profit

instantaneously as an obligation to the client, and if the client tries to sell the

property, the whole amount comes due. Any Murabaha contract that does not

charge the whole price plus markup during a premature sale, does not adhere to

Islamic Sharia.

So, we will be looking at Ijara and Musharaka Mutanaqisa, but they both are

very similar in nature for home financing, because they both establish a rental

agreement for the client, and the client buys back ownership shares from the

Islamic Bank. As a matter of fact, we will only look at the Musharaka Mutanaqisa

contract offered by the Guidance Residential, and evaluate it according to the

principles described earlier. Guidance Residential is one of the largest Islamic

home finance companies, and they are very well established in most of the states

in USA, so it will certainly be the best case to evaluate.

The Declining Balance Co-ownership Program (Guidance)

First of all, Guidance Residential is providing a great service for the Muslims

in the USA, and this paper is just a way to provide improvements that can be

made to reduce the presence of Riba from the transaction. Their product is well

documented in their white paper, but some of the details are only shared with an

actual client, so it was necessary to become a customer, and have access to that

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knowledge. In fact, a home was refinanced, for the purpose of this research from

Guidance Residential, which allowed access to their closing documents including

the partnership agreement, and the title procedures. Basically, following are the

steps of establishing this financing.

1. A co-ownership agreement is signed between a corporation representing

Guidance Residential, and the client, establishing the client as the sole

responsible for the property, and giving the client exclusive right to occupy.

Also, this agreement is not recorded in the county.

2. A mortgage is signed to secure the interest of Guidance Residential on the

property in case of default, and recorded in the county records.

3. Title is issued in the name of the owner as the full owner of the property,

and recorded in the county records.

4. Once the transaction is complete, the ownership interest and ability to

collect rent is sold to Freddie Mac, or appended to the credit agreement

between Guidance Residential and Freddie Mac.

Ideally, this is the best method for Islamic Home Financing, because the

Guidance Residential takes ownership of 80% - 85% shares of the property, and

it requires the client to own the remaining 15% - 20% shares of the property by

paying the down payment. In addition, this is a partnership, so the client can

modify or refinance this contract, or sell home at any point. However, the issues

come in when Guidance Residential does not take any responsibility of a co-

owner, or even register their co-owner status with the government records in

county office, and use Freddie Mac as the funding source of the transaction.

Moreover, the official status of this relationship is identical to a conventional loan,

and in the event of foreclosure, it can be argued that the client is nothing but a

borrower, and Guidance Residential has secured debt guaranteed by security

instrument from the client, who is the only registered owner of the property.

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Freddie Mac being Funding Source

According to the white paper from Guidance Residential, Freddie Mac

provides the initial funding for the home finance, just like they do for other

conventional banks and after the contract is in place; it says “Freddie Mac

creates Sharia-compliant securities invested in the co-ownership assets. These

securities will be offered by Guidance to Islamic Banks and other Islamic banks

and other Islamic capital market participants around the world.” (Guidance

Residential, LLC, 2004). This does sound like a good way to refinance the

transaction to avoid keeping an interest based relationship with Freddie Mac, but

reality is that there is no way for the owner of these securities to have a loss on

their investment, as the profit is guaranteed, and in the event of the house losing

market value, natural disaster, or foreclosure, the house would need to be sold

and their shares need to be paid first, before any money can be given to the

homeowner client. In the absence of an actual profit and loss sharing between

the co-owners, it is impossible to avoid Riba in this transaction.

Missing ‘Iwad: No Liability for Guidance Residential

The objective of this transaction is to provide funding for home purchase for

a Muslim in USA without giving a loan with profit on it, and the claim is that

Guidance Residential doesn’t profit from the money they provided, but from the

property that they bought together with the client. It is acceptable for a co-owner

to give exclusive right of occupancy to one of the owner in the partnership, and it

is also allowed for that occupant owner to take the majority of liabilities of the

property, and possibly manage the property. However, Guidance Residential or

whoever is the majority co-owner is, need to have some skin in the game, and

has to take some risk in owning the property. If there is a major repair needed in

the house, would the co-owner help pay for the repair, or would the client be on

their own to pay for the repair?

For example, in the co-ownership agreement section 5.1, the consumer is

charged with all taxes, insurance, expenses, maintenance, liabilities, and repairs,

and the consumer is barred from putting a lien on the house, but Guidance

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Residential is allowed to put a lien on the house in the event of default (Guidance

Residential, 2014). If they truly co-own the home, then there is no need to lien

the property, but rather evict the client and rent the property to third property, and

then share the profit. This absence of liability, basically, sets up a Mudaraba

relationship between the Islamic Bank and the client, which chips away on the

claim of asset based financing.

No Co-ownership on Title

In USA, clarity in ownership of properties is utmost important, because the

legal system is efficient, easily accessible, has been in place for more than 200

years, and because it is very common to have disputes over property

ownerships. Of course, similar facilities of legal system exist in many countries,

but American system is the focus of the world, due to the economic implications

of the real estate market in USA, more than other countries. In order to meet

these requirements from the legal system, local governments in USA have

developed extensive rules over how a property’s ownership is recorded, and how

it can be transferred, and how this information can be researched during a legal

case. As a national custom, the word “Title” is used to represent the ownership

interest of a person or a company in a property. Moreover, title comes into

existence by recording official ownership documents like “Deeds” and the nature

of ownership is defined on the title. For example, if two owners hold a title as

partners, it is automatically assumed that they hold equal interest in that property

(Office, 2015).

In essence, it is a custom and an official expectation to represent the co-

ownership on the Title, so it can be made public, and if anyone has to put a lien

or file a lawsuit against that asset, they are aware of the owners. In Musharaka

Mutanaqisa offered by Guidance Residential, the Title does not mention the co-

ownership, because it will reduce the tax advantage that the client receives from

US Internal Revenue Service, similar to an advantage under a conventional loan.

Guidance has obtained a fatwa on this matter from the Sharia board that the co-

ownership agreement signed is enough to establish the co-ownership, if

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accepted by local law, and the name of the Guidance Residential does not need

to be on Title (Guidance Residential, LLC, 2002). However, this goes against the

local customs, decent business practices, and deceives the public about the true

nature of the ownership of the property. Also, this tax advantage is originally

created for the consumer who pay interest to the Banks, and this is not intended

for the people who pay rent to their partners for living in that house. So, the co-

ownership of the property should be recorded in the official county records, and

the best method would be to create a corporation and issue the title under that

company name, and then the co-ownership agreement will represent the

ownership interest of each property, and the contract will be public, and

acceptable.

In isolation, this fatwa is correct, but in the big picture of this home

financing, this removes another liability from the Islamic Bank, and brings it yet

closer to the conventional loan. So, the Islamic bank provides the fund, doesn’t

have any stake in maintenance of the property, and now, doesn’t even take the

risk of official ownership of the property. At the end, if an outsider looks at this

home financing, they will have hard time differentiating between it and

conventional loans, and the involvement of the Islamic Bank would seems very

similar to conventional Bank, because conventional banks are renting the money,

so they don’t usually care what happens to the property, which makes the

conventional transactions Riba.

No Equity for Guidance Residential

Islamic Sharia has provided principles that establish justice for all parties,

and abandoning these principles can take away someone’s right unjustly. One of

the unusual aspects of Musharaka Mutanaqisa home financing offered by

Guidance Residential is that they give up their right to the equity in the property.

According to the white paper page 7, Guidance will not share in the equity profit

with the client, and the client can buy out the shares from Guidance, and then

sell in the market (Guidance Residential, LLC, 2004). However, there are two

issues with that clause. First, Guidance giving up their right of equity profit as co-

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owner is another damage to their claim of asset back financing, because the

whole purpose of the asset based financing is to avoid injustice in both direction.

When the bank demand interest from the client without taking any stake in the

property, they are committing injustice, and similarly, when the client enjoys the

complete profit from the property sale, an injustice is being done to the Bank,

because they invested in the property.

Guidance goes around this by allowing the client to buy out the remaining

property ownership first, during a premature sale, but if we look at this point in

detail, it is impossible for the client to buyout the property without having funds

from the seller, who would never give the funds unless the property is sold, so

both transactions have to happen simultaneously. This is very tricky and doubtful

process, to say the least, which leaves a lot of room for speculation about issues

like having two agreements in one, and selling something one doesn’t own. Both

of which are not allowed in Islam, so this clause need to be looked at by Islamic

scholar once again, under the customs of USA, if not in general. Since this paper

is not only about protecting the rights of Client from Islamic Bank, but doing the

right thing, it is recommended that this clause be replaced with allowance to

share of the profit between the Islamic Bank and the client, along with other

changes like the Bank taking partial responsibility of maintenance, and the Bank

taking liability. They all have to go together to protect the rights of both parties.

We cannot have it both ways, meaning that we cannot have Islamic finance

and have all the advantages of conventional financing at the same time, because

the conventional financing provides those advantages as compensation for the

injustice it does, and due to its nature of being a purely financial transaction. We

have to look at the big picture, and come up with solutions that start to separate

away from Riba practices, wherever law provides.

It is safe to say that the form of this contract is a partnership, but substance

of it is a disguised financing with doubts on it being asset backed financing,

which is admitted by Guidance in their paper to some extent (Guidance

Residential, LLC, 2004). These small exceptions can come together as a whole,

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and certainly provide ability for the bank to foreclose on the borrower easily by

declaring their interest as purely debt in nature, and putting aside any illusion of

partnership thereof.

Foreclosure: The Criterion for Adherence to Islamic Sharia

An important aspect of the home financing is how it impacts the bank's

ability to foreclose on the property. Foreclosure laws and bankruptcy laws define

the rights of a lender and borrower very clearly, as long as the transaction is a

debt transaction. However, the laws are less friendly for a major holding partner

with a mortgage security, and there is a possibility that the judge dismiss the

foreclosure in case of insolvency of the customer. Also, if the partner is not on the

title, and there is no official document declaring them to be the co-owner, it

supports the case of lender-borrower relationship. Basically, all the issues we

identified earlier about Guidance not showing as co-owner, and showing as more

of a lender, comes down to the ability to foreclose, because Freddie Mac and

other investors do not intend to share the loss with the client homeowner, and

they would expect to recover their investment as primary mortgage priority lien.

In order to foreclose on the property with full force, the lawyers would have to

argue the financing nature of the contract as dominant, and the co-ownership

nature of the contract will be downplayed, if not completely rejected.

In other words, default and foreclosure is the test for any home finance

contract for its adherence to Islamic Sharia, and it can expose the flaws in the

contract. For example, if the property is sold in the auction, and Guidance and

the client receive the money from the auction sale, according to their percentage

of ownership share, then it is truly an Islamic Finance, but if the money is used to

satisfy the balance of Guidance, and its investors first, and the client getting

money, only if any left over, then it will show the contract as interest based loan.

Furthermore, if Guidance owns 80%, and the client owns 20%, and the original

home price was $100,000, which means the Guidance still have an investment of

$80,000. If the foreclosure happens, and the property is sold in the auction for

$75,000, would the Guidance give the client 20% of $75,000, and share the loss,

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or would Guidance satisfy the Freddie Mac and security instrument holders first

by giving everything to them. This decision will determine the true nature of the

Islamic Finance, and its adherence to Islamic Sharia.

We do not have any cases of foreclosure from Guidance to inspect at this

time, but foreclosures has happened elsewhere in the world, and the Islamic

Bank has taken the role of Lender during these foreclosures (Siddiqui, 2014),

and looking at the documents and practices of avoiding official ownership, it is

safe to presume that the case will be same in USA as well.

Current Solutions Not Adhering to Islamic Sharia

In theory, this financial transaction complies with Islamic Sharia, since the

financier is not lending the money but taking the risk by owning the property.

However, IRS tax breaks, and other government benefits are not supposed to be

extended to the customer, as they are extended to homeowners in the

conventional interest based loans. So, the financiers have worked out some

exceptions, where the financier don't actually hold the Title and Deed of the

property in a partnership, and they establish partnership as an independent

business contract. Exceptions like these allow the Islamic Finance products to

compete with conventional products, and they have been approved by the

Islamic Scholars in Sharia Board (Guidance Residential, LLC, 2004).

However, the combination of Deed to the customer, recorded mortgage,

and unrecorded co-owner agreement, leaves the transaction as a secured debt,

and it does not comply with the principle of profit and loss sharing, or asset

backed financing. For all practical purposes the customer own and maintains the

property, which means that the customer bears the full risk of ownership, and

operation. In the case of Bankruptcy, or decline in the market price of the

property, the customer takes the loss, and the financier does not share the loss, if

the property is sold undervalue (Guidance Residential, LLC, 2004). This makes it

clear that the Islamic Bank is not sharing the risk, and there is no equal counter-

value (‘Iwad) for the profit gained by the Islamic Bank, as Islam prescribes, and

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hence leaves doubts in the compliance of these products with Islamic Sharia

(Rosly, Sanusi, & Mohd Yasin, 2001).

For example, Islamic scholars have allowed the Islamic Bank to issue Title

under the customer's name, as long as a written contract is done, since a written

contract in Islam represent legal binding document of ownership (Guidance

Residential, LLC, 2002). Also, at the time of the premature sale, the customer is

allowed to sell the property and benefit from the equity in the home, and left to

absorb the loss from price, if it falls below purchase price (Guidance Residential,

LLC, 2004). In theory, these exceptions meets the Islamic Sharia requirements in

isolation, but they do not meet the requirement of profit and loss sharing between

both partners, as a whole, because the Islamic Bank is not liable for expenses as

co-owner, the Islamic Bank doesn’t participate in profit/loss sharing, and third

party cannot litigate against the Islamic Bank. This gap of legal recognition of co-

ownership document, and other issues, leaves the risk solely with the customer,

which renders this transaction into conventional financial secured debt, where

profit to the Islamic Bank is basically guaranteed.

Of course, the scholars, who have approved the product, may or may not

be aware of these short falls coming from practical implementation of the

product, but Mufti Taqi Usmani hints at his doubts when he talks about temporary

nature of his fatwas in western countries, and he encourages local scholars to

come up with local solution, and he seems to be aware of the need of

reformation and improvement (Usmani, Looking for New Steps in Islamic

Finance, 2008). So, there is a desperate need of research into Islamic home

Financing to come up with an Islamic contract that conform to the Quran and the

Sunnah and follow the local regulations appropriately. This study seeks to fill this

gap of knowledge, and provide recommendations to reform and to improve

Islamic home financing products in USA.

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Chapter 6: Supporting Cases

AMJA Fatwa on the Islamic Home Finance in USA

Assembly of Muslims Jurists of America Fiqh Committee Resident Fatwa

Committee (AMJA) gathered in Houston on September 15 – 17, 2014 to review

Islamic home financing in USA. In the history of Islamic Home Finance in USA, it

was the first time that the local scholars and the financial experts had come

together to evaluate and analyze the companies and products offered for Islamic

home financing in USA. Furthermore, a conclusion was reached by this council,

and opinions over validity of the various companies and products were provided,

according to the Sharia. Also, some guidelines were issued for Muslims in USA to

follow. Remarkably, the companies sent their representatives to facilitate this

process and they answered any questions raised.

After reviewing the white papers, fatwas, and documentations from these

companies, the Resident Fatwa Committee (RFC) presented the following

ranking system consisting of three ranks or categories.

Category 1:

These companies can independently fund their transactions, and do not

require assistance from the conventional bank or government agencies, which

reduces their exposure to Riba, but they may not be scalable, and may not be

able to meet the needs of Muslims in large in USA. Purchasing home through

their services is permissible.

Category 2:

These companies have tried their best to establish Riba free contract, but

they are not able to fund on their own, so they have to utilize funding from

agencies like Freddie Mac. Also, their products have some parts that do not

adhere to Islamic Sharia, but they are motivated to avoid Riba as much as they

can. Purchasing home through their services can be permissible depending on

the severity of the need and the severity of violations in their contracts.

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Category3:

These companies are providing interest based loans disguised as Islamic

financing, and have not done enough to avoid Riba. Their products are inherently

flawed, and are just variation of conventional loans. Purchasing home through

these companies is not permissible, and Muslims should avoid them at all cost.

Besides ranking the companies, RFC committee also ruled that owning a

home in USA is considered a need, and not a luxury, so depending upon the

severity of the need, purchasing home should be allowed (Assembly of Muslims

Jurists Of America, 2014).

Following are the ranking of the companies currently operating in USA:

1. Ameen Housing (Permissible in all cases) (Category 1)

2. Guidance Residential (Permissible in time of need) (Category 2)

3. Devon Bank (Permissible in time of dire need) (Category 2)

4. University Islamic Financial (Permissible in time of dire need) (Category 2)

5. Ijara Loan (Not Permissible in any case) (Category 3)

6. Lariba (Not Permissible in any case) (Category 3)

Dubai Financial Crisis: A Case Study

Since our argument against Islamic Banks is that they do not record their

name as the owner of the property, and that they use loop holes to structure the

transaction in a way that it resembles a secure debt (interest based loan), we

would like to know what happens if the client is not able to make payments, and

goes in default, because the financing transactions are tested best when there is

a threat of default, and the true nature of the ownership and liability will need to

be determined in the foreclosure and bankruptcy courts. So far, there have not

been any significant cases in USA to look at, but we can look at a similar case in

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Dubai where an Islamic Bank had to foreclose on the property that they financed

using Islamic financing model.

On June 14, 2014, an Islamic Finance Conference was held in Chicago,

and experts for different fields were present, but Shaikh Mudassir Siddiqui had a

unique story to share with the participants, which he further explained during one

on one interview. Briefly, he served as a Judge in the arbitration court in Dubai

during financial crisis of 2007-2008, and there were many Islamic financing

contracts that fall through due to the inability of the client to make payments. The

court had to decide whether the client is considered a tenant or a borrower,

because as a tenant their responsibility to pay back the remaining balance are

limited, and the property is essentially owned by the Islamic Bank. On the other

hand, if they are the borrower, then they are still responsible for the balance

personally.

So, what the judges came to know was that the Islamic Bank was not on

the title, and the ownership was not recorded in the official government records.

In these cases, the Islamic Bank's lawyer argued to the Court that the transaction

that was recorded in the official records should be considered a secure debt on

the basis of what was recorded, and the Islamic aspect of the transaction should

be ignored, and the Islamic Bank should not be considered as an owner of the

property, rather a financial institution with a note from the client, secured by the

mortgage on the property. So, after a lot of deliberation and thorough review of

the contract and document, the Court had to rule in the favor of the Islamic Bank

because the substance of the financing was still interest based loan, and the

Islamic contract was not officially recognized as proving the ownership of the

Islamic Bank. Transaction was determined to be secured debt, and all the

obligation of borrowers were imposed on the client (Siddiqui, 2014).

This example from real world clearly supports the argument that if the

Islamic Bank structures the transaction in a way that it is indistinguishable from

the conventional loan transaction on official records, then it does not pass the

test of ‘Iwadh, and hence should not be considered as Riba free. If there is a

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partnership in ownership of a property, it must be declared openly and recorded

on the official records, no exemption should be given to undermine the core

nature of the contract, which can undo the asset based nature of the transaction,

because that aspect of risk taking and co-owning of the property is what makes

this financing halal, in the first place.

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Chapter 7: Solutions for Islamic Home Financing in USA

Funding Islamic Bank without Riba

One of the biggest challenges to Islamic Home Finance in USA has been to

fund the financial institutions, so they can provide these funds available for halal

home financing transaction. Providing these funds, free of Riba, to Islamic Bank,

will strengthen their image in the community for a valid Islamic option for home

financing, because if the original funds are coming from conventional sources

using Riba, Muslims are hesitant to accept the home financing, even if the

transaction is completely halal.

Islamic Banks and home financing institutions should provide a halal source

of funds to their client, because it matter to the client where the funds come from.

There are many ways to provide halal funds, but it may reduce the profit margin

slightly. For example, funds can be raised by setting up investment deposit

accounts or money market accounts, where Muslims and non-Muslims deposit

their savings and hope to earn a return. Of course, this method is used by the

conventional banks as well, but the difference here being that the profit is based

on an asset that Bank owns, and hence the depositors owns indirectly. In this

case, the loss can be shared between the Islamic Bank, and the depositors.

Another method is to look for private investors who are willing to invest in a

specific property or partially fund a project, and willing to take risk on liabilities of

owning a property. Islamic Bank here is merely a facilitator for the transaction,

and may not be on the title or named on the documents, but Muslims who are

looking to buy homes are matched with investors who are willing to participate in

Ijara or Musharaka contracts. In addition, these investors can choose the Bank to

manage the property on their behalf, or manage it themselves.

It is understood that this change will not happen overnight, and may require

slow progressive movement away from Riba based funding source to pure and

halal private investment based funding source. Moreover, US Government is a

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big player in the funding of homes, and has many rules that can be a hindrance

to these solutions, but we should strive to establish Islamic systems of finance

and not continue to use the government agencies and conventional banks as

source.

Islamic Bank Taking Risk and Having Liability

As we explained above that current solutions in USA are not adhering to

Islamic Sharia completely, because the Islamic Bank profits from their investment

without taking any risks. Islamic Sharia requires 'Iwad (balancing profit with

possibility of loss), and if they don’t have liability of ownership, the transaction

becomes a loan, because the Islamic Bank cannot have a loss on the asset, if

they are not owners. So, Islamic Banks and other home financing institutions in

USA should move towards contracts and products where they take ownership

and manage the property, so their involvement is based on asset itself, and not

only through money.

One way to achieve this is through setting up an asset management

department within the Islamic Bank, and recording their name on the title, so

when the client is living in the home, this management department serve as the

landlord, and possibly take some loss on maintenance and operations of the

property. However, it is possible that this will make Islamic Finance less attractive

on the market then conventional loans, but that is a sacrifice we have to make to

provide halal product. Similarly, some Muslims may not chose this option

because they will not enjoy the full ownership, and tax benefits that are available

with interest based loans, but hopefully most will prioritize the need to purify their

lives from Riba over benefits of tax breaks and equity.

Another way to accomplish this is by facilitating these transactions for

private investors, who will ultimately be responsible for co-owning the home, and

managing the property as landlord. In fact, The Islamic Bank could provide a fee

based service where financed properties are managed on behalf of the private

investors. As long as, the Islamic principle of ‘Iwad is present. In fact, the market

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can come up with any variation or combination of these solutions to implement

what works for everyone.

Mudaraba as a Solution

One solution could be to use Mudaraba (Sleeping Partnership), and the

bank finances the price of the home only, and earns profit from the sale of the

home, when it is sold in the future. Of course it doesn’t make a lot of commercial

sense, as the investor usually are not willing to wait 15 to 30 years to earn profit,

but this type of financing need to be explored more, and may be used in the

conjunction with other components to create a viable solution.

Multiple Option Strategy

May be what is needed is to provide multiple options for Islamic home

financing by Islamic Bank, and let the client chose which option they like to

choose. For example, Guidance Residential can add a new product that is purely

Islamic in nature, but the client shares that tax advantage, and liability, and then

shares the profit if the home is sold. It will be definitely less attractive for some

Muslims who are not ready to sacrifice in order to get an Islamic Financing, but it

may be available for Muslims, who are willing to share loss and profit and earn

the reward in the hereafter.

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Conclusion: Avoiding Riba while Financing Home in USA

Local Solutions

After presenting all the details, and analyzing the current solutions, we

should be able to determine the correct course, or at least the direction for the

Muslims, who like to finance their homes in USA. Buying a home in USA could be

a necessity, but Islamic Sharia rules about Riba should not be bent to

accommodate this type of financing. Also, the Islamic Scholars in USA or the

ones who are familiar with customs and rules of American culture and

economical system should be leading this industry, and not the Islamic scholars,

who are not able to determine the impact of their rulings, first hand. Of course, it

does not mean that we cannot benefit from their vast knowledge on this subject;

rather scholars like Mufti Taqi Usmani should provide guidance and technical

expertise, but may not make the final call.

Client Oriented Solutions

Islamic Banks should allow the ordinary Muslims to advice on the contracts

and products, which is not contrary to American traditions, because American

companies often take feedback from their customer in order to improve their

products, and this American tradition should be incorporated into Islamic home

finance companies and Islamic Banks. Furthermore, the objective of these

advisory boards should be to oversee the contract details, and provide

perspective of the client, and prevent any one-sided conditions from being added

to the products. In fact, this practice is endorsed by Allah, if not required in the

following verse.

“O you, who have believed, when you contract a debt for a specified term,

write it down. And let a scribe write [it] between you in justice. Let no scribe

refuse to write as Allah has taught him. So let him write and let the one

who has the obligation dictate. And let him fear Allah, his Lord, and not

leave anything out of it. But if the one who has the obligation is of limited

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understanding or weak or unable to dictate himself, then let his guardian

dictate in justice…” (Quran 2:282)

Final Advice to Muslims Living in USA

Following are some suggestions to the Muslims, who are living in United

States of America, and who like to practice Islam, but also live comfortably.

1. Muslims in USA should try to avoid Riba as much as they can, and choose

to live on rent, instead of buying a home, if there are no Islamic finance

options are available in the area. It is not necessary to buy a home, and

one should not give in to the desire of home ownership and indulge into

Riba. In fact, renting the home of the same size can be an alternative, and

desires and dreams can be partially satisfied without taking undue risks

with financing a home.

2. If it seems necessary to buy a home, Muslims should migrate to the area

where Islamic home financing is available, or to the nearest country where

Islamic Banks are present. Usually, American companies providing Islamic

Finance are available in the areas where Muslims are in large numbers,

so migrating to such areas is a good idea generally, because many other

facilities like Masajid, Islamic schools, halal meat, halal restaurants, and

Muslim friendly environment are also present in these highly populated

communities.

3. When buying a home, choose the company that best adheres to Islamic

Sharia, and is more transparent, and forthcoming. For example, a good

company will be avoiding conventional banks as source of funding, and

will have a panel of Islamic scholars on their advisory board, and will

possess current and specific fatwas on their website. A practicing Muslim

should make the effort to research the details about the companies, or rely

on the local Imam or other knowledgeable person of their locality to decide

the company to use for the home finance.

4. If the home finance company or the Islamic Bank happens to provide an

option of benefit which seems to resemble Riba, one should not select that

option. For example, some home finance companies provide a 1098-INT

for the rent or profit paid in a year, similar to conventional banks, and this

form can be reported on IRS return to earn thousands of dollars in

discount by the client. However, this tax discount is only available for

interest paid, and utilizing the profit on the Islamic home financing in this

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manner is not free from doubts, and could render this portion as Riba, so it

should be avoided.

5. Lastly, Muslims in the USA should not be satisfied with the status quo, and

just get comfortable with the concessions provided by the Islamic scholars

due to their situation; rather they should always be looking for the better

option. Muslims should use their buying power to choose the correct

company, demand changes from those companies, and participate in

researching better solutions.

A Muslim living in USA should understand that these challenges are part of

their lives in non-Muslim lands, and they will be rewarded by Allah for being

steadfast, and striving for the halal and pure provisions. They should not give in

to the desire to easy methods and conveniences afforded by the interest based

loans, because this world is not our objective, but a means to an end, and Riba is

a major sin that draws anger of Allah (subhana wa ta’ala). In fact, they should be

looking for Islamic financing, and demanding from the Islamic Banks to adhere to

Islamic Sharia as decreed by the local scholars, and support the new companies,

who are trying to improve the process. All in all, Muslims in USA are responsible

for providing solutions, establishing, and supporting options for Islamic home

finance, and we should not look for help from UK, Dubai, or other countries.

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