A Proposal on Islamic Home & RE Financing Companies in the US.
All praise is due to Allah, and may peace and salutations be upon the Prophet صلى الله عليه وسلم. The Fiqh Council of North America (FCNA) met to discuss the findings of research papers on Islamic home & real estate financing companies in the US and the related critics of its financing products and services. Currently, Islamic financial institutions (IFIs) in the US provides four types of financing services: I. Murabaha to the Purchase Orderer (Murabaha). II. Lease-to-own/Ijarah Muntahia Bittamleek (Ijarah). III. Sale of the Property with the Exception of the Usufruct for a Specific Period (Declining Participation in Usufruct). IV. Declining Balance Co-ownership/Partnership (Diminishing Partnership).
Major Critics by US Muslim communities regarding the current products of Islamic finance are summarized as follows: i. Overpricing Islamic financing instruments and some additional managerial expenses in comparison with conventional financing. ii. Utilizing conventional terminologies (i.e., interest), in documents for the purposes of Internal Revenue Service (IRS) and government sponsored enterprises (GSE), and in promissory note and lien documents (i.e. Mortgage/Deed of Trust) to document and protect Shari’a legitimate rights. iii. The relation between GSEs (i.e., Fannie Mae/Freddie Mac) and Islamic residential finance providers as sellers or agents. iv. Lack of differentiation between current Islamic finance products and conventional finance products. v. Lack of transparency and disclosure with respect to Shari’a rulings on current applications and absence of independent Shari’a audit at some IFIs. After due deliberation on findings and critics of the applications, FCNA decided the following: First: Approach of Maqasid (Higher Objectives of Shari’a) • When considering macroeconomic analysis, current applications of Islamic finance do not achieve the ultimate aspiration of the higher objectives of Shari’a concerning the prohibition of interest (Riba). These applications do not serve as the comprehensive Islamic alternative but as a partial solution in a phased approach. To fully satisfy these Maqasid, FCNA encourages Muslim communities to develop these applications within an economic system that is independent from the conventional Riba-based system. While aspiring for the comprehensive solution to become an attained reality, utilizing these applications is the only available avenue
for US Muslims communities to avoid Riba. Conforming with the aspiration toward Maqasid urges Muslims to deal and communicate with current IFIs and their Islamic alternative financing products. This resolution provides IFIs in the US with support and advice. Second: Spiritual opportunism • IFIs in the US are expected not to burden their customers with expenses that may be perceived as a practice of spiritual opportunism. The criticized practices include overpricing, early settlement fee, late fee and LLC fee that is an additional managerial cost which is not related to Shari’a requirements. It is not acceptable to exploit Muslim communities by unethical marketing practices because of their religious needs to avoid Riba-based institutions. At least, IFIs shall deliver competitive Islamic solutions at the price and quality of their comparable conventional services. IFIs shall take responsibility of meeting the needs of US Muslim communities with pricing strategy and quality control that is not an excuse to bypass Islamic financial products to conversational products. Third: Business Environment • As long as Shari’a features of Islamic financial transactions as preserved, FCNA finds no Shari’a objection to the practices of some IFIs in utilizing conventional terminologies (i.e., interest), in documents for the purposes of IRS and GSE, and in promissory note and lean conventional documents to protect Shari’a legitimate rights. Any language or document shall not override the Shari’a features of sale, Ijara and partnership as utilized in the financing structure of each product. Fourth: Relation with GSEs • Some IFIs in the US have established business relations with GSEs. This relation helps IFIs to meet the financing demand of Muslims communities in the US. IFIs in the US may only serve a fraction of the need in our US Muslim communities with their own sources of funds. Nevertheless, dealings with GSEs shall comply with the rulings of Islamic jurisprudence. Shari’a compliant business relations between IFIs and GSEs is either based on investment agency arrangement (for financing debt-based financing transactions like Murabahah) or outright sale (for diminishing partnership or Ijarah). However, FCNA affirms that it is a violation of Shari’a rulings to attain Riba-based conventional loans from GSEs or sell debt-based financing transactions at a discount to GSEs. Fifth: Differentiation between Islamic finance and conventional finance • The claim related to similarities between Shari’a legitimate sale and Shari’a prohibited Riba-based transactions is a well-known accusation based on lack of differentiation. It is the corner stone of the claim that Islamic finance and conventional finance are the same. There are two main roots of this claim. First. minimal risk of ownership on the financing entity. Second, direct title transfer from
the original seller to the customer without registering the title in the name of the financing entity that is selling the property to the customer. This claim is addressed as follow: 1. Ownership and risk-bearing is among the major differentiators between Islamic finance and conventional Riba-based finance. In Islamic finance, the financing entity acquires the property solely or jointly with its customers. Therefore, the finance entity would bear the risk of owning the property or share it with its customer in partnership arrangements. Thereafter, the property is sold to the customer through one of the four types of financing services: Murabahah, Ijarah, declining participation in usufruct, and diminishing partnership. While in conventional finance, the customer purchases the property; thereafter, attains an interest-based loan to pay the price. 2. Minimal period of ownership is not associated with all types of Islamic financing services. It is associated with Murabahah and declining participation in usufruct. While in Ijarah, the financing entity keeps its ownership of the whole property till the end of the financing period. Thus, the financing entity is solely bearing the ownership risk throughout the financing period. Similarly, shares of ownership in the property are being transferred to the customer gradually throughout the financing period in diminishing partnership. Thus, the financing entity is sharing the ownership risk proportionally with its customer throughout the financing period. 3. Registering the title of the property in the name of the financing entity is not by itself a Shari’a requirement. Direct transfer of the title from the original seller of the property to the customer of the financing entity is an acceptable practice as long as it does not undermine the financing entity’s actual whole/fractional ownership and associated risk-bearing of the property. Both parties might have interest in this direct transfer of title to avoid the cost of double closing or make dealing with third parties easier for the customer. 4. Prohibition of Debt rescheduling with additional charges is also among the major differentiator between Islamic finance and conventional Riba-based finance. It is called Riba Al-Jahiliyyah in which a creditor would address the debtor saying, “Will you pay it or increase it?”. It is not Shari’a compliant as well to impose late fee to compensate the creditor for costs in handling and processing delinquent payment and for the loss of the use of such payment. It is also considered Riba. 5. Actual ownership of the property and associated risk-bearing by the financing entity, debt rescheduling without additional charges, and no late fee to compensate the creditor are together material and essential differentiators between Islamic finance and conventional finance. A conventional financing entity does not adhere to any of them. It does not own the property and avoid bearing any associated risk. It may also reschedule debt for additional interest and benefit from Riba-based late fee to compensate itself. 6. The aforementioned differentiators are sufficient enough to associate Islamic finance with legitimate trade deals and associate conventional finance with
forbidden Riba transactions. “Allah has permitted trade and has forbidden Riba.” (QS 2:275) Therefore, the perceived similarities between Islamic finance and conventional financing are not critical enough to nullify the essential differentiators. Sixth: Transparency and Disclosure • IFIs in the US have to realize that labeling their business activities and services with Shari’a compliance necessitates transparency regarding two important disclosures: 1. Rulings of Islamic jurisprudence related to the types of financing services that is being offered by each financing entity. These rulings shall be authorized by independent Muslim jurists who are specialized in Islamic financial transactions (Islamic business jurisprudence). These jurists shall not be employees of the entity itself. Their resolution on the Shari’a ruling shall contain sufficient clarification that addresses issues stated in sections two to six of this resolution. 2. Independent Shari’a Auditor’s Report that affirms the compliance of the entity’s activities and transactions with Shari’a rulings as authorized by the independent advisors. Publishing Shari’a rulings related to the structure of the applied types of financing product is not sufficient to claim the compliance of the application. Also, the Shari’a auditor’s report shall be issued by an independent Shari’a auditor that is not an employee of the entity itself. When making a decision to deal with IFIs in the US, US Muslim communities shall consider these two disclosures. Awareness among US Muslim communities will raise the level of Shari’a governance in such institutions and assure their compliance with Shari’a ruling related to their services. All praise is due to Allah SWT.
Prepared by Dr. Abdulbari Mashal, member of FCNA and discussed by the Fiqh Council General Body Meeting on February 20, 2021. It is the personal opinion of Dr. Mashal and not the Fatwa of Fiqh Council. FCNA is going to discuss this issue further.