Friday, October 24, 2014

Conclusion: Is Islamic Home Financing in USA Halal?

In the Name of Allah, the Entirely Merciful, the Especially Merciful.

All praise is due to Allah, Al-'Alim (The All-Knowing)

 "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)

As I mentioned in my previous article, search for more knowledge on Islamic Finance took me to Chicago in June. After a week of enjoying the beautiful weather and tasty food, I finally made my way to the conference. Did I mention Sabri Nihari? Wow, I have never tasted food like that before. Alhamdulilah. Anyways, it was pretty well organized, but audience was thin. My goal was to confirm or deny the conclusions that I reached on the Islamic Home Financing in USA, and was not sure if there would be enough information to do that. Specifically, I went to see Shaikh Mudassir Siddiqui, who seems to have a very balanced view on this. Another person was Khalid Elsayed, the CEO of Guidance Residential, who can provide some insight into how a financial company owner view Islamic Home Financing.

As the conference progressed, I observed so many different aspect of Islamic Financing. There were seasonal bankers, career Scholar-cum-Consultants, theorists, pure businessmen, Jewish brokers etc. Finally, I get to hear Mudassir Siddiqui, and ask him direct questions, and of course Khalid Elsayed from Guidance. In order to keep this short and concise, let me present you the conclusion and some supporting evidences. Most of the videos, contracts, and white papers can be presented upon request. If you wish to know full details, please contact me offline at ajumani@hotmail.com.

Khalid Elsayed seemed sincere, and seemed like a very good businessman who is willing to, at some extent, take the loss to provide halal home financing for Muslims in USA. However, he was very focused on the profit and potential of the industry. Although it is understandable, this driving force for profit, and market share is making it very difficult to establish proper Islamic financing products that comply with Islamic Sharia.

Shkh Mudassir told a story from Dubai that clarified everything for me. Dubai has been the center of Islamic Financing experiments for decades. During the financial boom of early 2000s, many businesses were financed based on Islamic Financial contracts like Murabaha (Deferred Sale), and Musharaka (Partnership), and one of them was a Shopping Mall in Dubai. When the market took a downturn in 2008, Dubai economy was hit specially hard, and this Shopping Mall suffered. Owner was not able to make the monthly "Profit" payments, which were suppose to be rent to the supposedly partner in profit/loss. This is a very common structure of Islamic Financing where the financing cost is recovered by collecting rent on the property from the client, but in order to remove the responsibility and the liability from the Islamic Financial Institution, only the client's name is put on the Title, which makes the transaction, essentially a debt transaction, since the only claim of money remain is in a form of a loan. In fact, there is a contract of partnership or sale that is kept off the books which suppose to make this "Halal", since bank seemingly sharing the liability.

From Usamah ibn Zayd : The Prophet, , said: "There is no riba except in Nasiyah [waiting]." (Bukhari, Kitab al-Buyu', Bab Bay' al-dinari bi al-dinar nasa'an; also Muslim and Musnad Ahmad)

However, when the matter came to the court for judgement, Bank's attorney argued that this was a case of secured debt financing, and the Bank is not liable for the property and the owner is responsible for the full amount financed, because Islamic Bank are still banks whose main concern is money and not the property. Of course, the owner insisted that he is just renting the property from his partner, according to the signed Islamic partnership contract, and willing to surrender the property to the Bank. Shaikh Mudassir was part of the judge tribunal, and carefully looked at all the documentation. Judgement was given in the favor of the Bank, because the contract based on profit/loss partnership was not the driving factor, and the true intention of the transaction was to provide financing. In fact, all the details of the end transaction were identical for a interest based transaction, and Bank was not responsible or liable for the property involved, since property was clearly owned by the client. Based on these evidences, owner was held liable for the full amount, and the supplement agreement that made the transaction halal was set aside, because it conflicted with practices of common law.

Shkh Mudassir and several consultants, in the conference, explained that all Islamic financing transaction contains a conflict of jurisprudence authority, because the transaction is recorded as debt transaction with no evidence of sharing loss/profit is published to the local authorities. So, when the matter comes to be adjudicated, in case of default, there is no way to proof that the financing institution has any share in the property, unless the conventional law recognize the Islamic Contract which Islamic Scholars recognize. In other words, Bank's attorney will never admit to sharing risk and hence relieving the minor partner from majority of the burden, and official document will support the case of this being a pure debt transaction. I have a video recording for this back and forth, if anyone interested.

"I need to make this point clear to prevent undue confusion. For example, when the polytheists in the city of Mecca say, "Trade is like riba..." and the Quran detested it by saying "Allah allows trade (al-bay') but prohibits riba," the former, i.e., al-bay' implies the existence of 'iwad, or equal countervalue in the transaction. When the requirement of 'iwad is fulfilled in trading (al-bay'), it brings along the sense of equity and justice into business transaction, that rendered it superior to an interest-bearing system"  (page 30 Saiful Azhar - IBF)

So, it is clear that if Islamic Home financing transactions are not clearly identified as true Partnership or Rental agreement, it is just a debt transaction with profit collected on financing provided to the client who can not afford on their own. We can not have it both ways. We can not base the transaction on Declining Partnership and Rental agreement to make it halal, and at the same time, relieve Islamic financial institution from the responsibility of being the co-owner of the property. And, we can certainly not allow the homeowner to profit from the equity 100% when it is sold, as Islamic financial Institution should share the profit according to the ownership at the time of sale. That is what makes Islamic Home Financing halal, and deviation from it makes the transaction invalid.

So, does that mean, there is no halal way to finance a home, without dealing in Riba in current financial framework? No, Declining Partnership (Musharaka Mutanaqisa), Lease to Purchase (Ijara), Sleeping Partnership (Mudaraba) are all 100% halal transactions, but the Islamic financial institutions in USA have chosen to structure their contracts in a way that it renders the transaction into a simple interest based loan. If a Islamic financial institution chose to put their name on the title, responsible for maintenance, liable for loss, and share the equity in the house, then Alhamdulilah there will be no doubt whatsoever. Of course, most of us have weak faith, and we are willing to practice Islam as long as it is convenient. So, if we don't get our tax break, or have full ownership, or full equity profit like we do with conventional loans, we will find another Islamic Financial Institution who does with a fatwa from the same scholars.

"...they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest..." (Quran 2:275)

In essence, Guidance Residential, LaRiba, Ijara Loans, University Financials, Devon Bank, etc. are all structuring their transactions to avoid owning or being liable for the homes, and have individual fatwa for each exception. There is a fatwa to provide a 1098 form. There is a fatwa to not have the financing institution name on the title (based on a signed contract which is never recorded in the official records, and will not be held up during foreclosure). There is a fatwa on selling the home back to the client for $1 after he sells the home ( of course he can't sell the home until the financing institution removes the mortgage, so both are done simultaneously to deceive the government). There is a fatwa for financing company to not be liable for insurance, taxes, and maintenance. So, at the end, what you have is a homeowner owning the home that was financed with Cash, and paying back more in cash with a mortgage being the only connection to the financing institution. In order to keep it Halal, homeowner should give up the equity share, and financing institution should give up profit from rent unless they take liability.

"O those who believe fear Allah and give up what still remains of the Riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. ..., then everybody shall be paid, in full, what he has earned. And they shall not be wronged." (Quran 2:278-281)

This is a harsh example, but it brings the point across, as the above verse of the Quran is even harsher. These transactions are similar to making a Mutta (temporary marriage) halal by approving parts of it. For example, a traveler comes to a new town, finds a woman, and proposes a temporary marriage, and they both announce it, and do proper Nikkah. When the husband is returning home, he gives a proper divorce, and pays the dowry. We can certainly get fatwa for each individual aspect of this temporary marriage, and these individual actions are definitely halal, but is the marriage as a whole Halal? Of course not, because both husband and wife knew that this is a temporary marriage and dowry was agreed accordingly. So, the intention was not to marry each other for indefinite term, but intention was to provide companion ship for the man during his trip. Similarly, the intention behind all the Islamic home financing transaction is to finance the home without any liability or responsibility for the financing institution, and no profit sharing in equity, and full rights to foreclose on the property as 100% debt default. There is a famous saying in politics that "It is the economy. Stupid!". Similarly here, "It is the intention. Stupid!"

Umar ibn al-Khattab relates that he heard the Messenger of Allah, say, "Verily actions are by intentions, and for every person is what he intended...." (Agreed upon)

Ironically, some scholars in Saudi Arabia allow this type of Nikkah for foreign travelers, but Mufti Taqi Uthmani and other scholars have , rightfully, criticized it due to the intention and the contract as a whole not being Islamic, However, Mufti Taqi Uthmani and others have signed on to the Islamic Home financing contracts which follows the same pattern. Not sure, if they are not aware of the local laws in USA of ownership and partnership, or some other reason. Interestingly, I have a recent article from Mufti Taqi Uthmani, where he admits the above faults in these home financing contracts and encourages Americans to come up with alternatives, which I truly admire. What I don't understand is that why he doesn't pressures the US companies into putting their name on the title with the threat of revoking the fatwa. That is something I would like to ask him InshAllah, when I see him. following is the link to his recent article.

http://www.muftitaqiusmani.com/index.php?option=com_content&view=article&id=5:looking-for-new-steps-in-islamic-finance&catid=12:economics&Itemid=15

Of course, this is only a refutation of the fatwa of the scholars, and business practices of Islamic Financial Institutes, but if one is in a need to buy a home, they should try their best to chose the best among these Islamic companies. This is not my opinion, but opinion of renown scholars of USA as the link below show. With my research and concurred by following fatwa, Guidance Residential is the best company in USA for Islamic home financing with the best contract and scalable solutions, only if they can correct the above faults. As you can see in the opinion of the scholars issued after a recent conference in Houston below. All the companies' contract are defective, including Guidance Residential, and only allowed in a need, but there is a stacking order, and as practicing Muslims we should " leave whats doubtful towards what is not doubtful", meaning that it is toward things without doubt, but not necessarily abandoning everything with a fraction of doubt, and cause harm to the family and the society, which is sometimes the misinterpretation of this hadith. In this case, one should not force their families to live in rent, if it harms them, if they can make use of these Islamic loans, as the basic purpose of Islam is to ease our life, unless one is very strong. May Allah give us strength to practice Islam even when it is not convenient.

And Allah knows best.

http://www.amjaonline.org/en/articles/entry/amja-resident-fatwa-committee-resolution-about-islamic-home-financing-companies-in-the-us


JazakAllahu Khairin

A student of knowledge.
AbuArman Jumani

Sunday, June 8, 2014

Case Study: Is Islamic Home Financing in USA Halal?

In the Name of Allah, the Entirely Merciful, the Especially Merciful.

All praise is due to Allah, Al-'Alim (The All-Knowing)

 "And whatever you lay out as usury, 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)

Several years ago, I was sitting outside the masjid and waiting for iftar, and one of the brother engaged with me in a conversation about Islamic finance in USA, and how it is just another name for interest (riba). According to my knowledge at that time, structure of the loan was similar, but terms made it halal. So, I suggested him to take the islamic loan, if it is the same, and have faith in the scholars who have passed the fatwa. From that day, my secondary interest, beside fiqh in general, has been to learn about Islamic Finance in modern age. How can we buy a home without having the full amount in cash?

Some say that one shouldn't buy a home, if they don't have cash, because they shouldn't desire things that they can not afford. Others say that if we don't understand the difference, there is no difference between conventional loan and Islamic loan. Both are extreme views and does not need any further attention here. We should be able to pursue our dreams in this world using halal methods, but at the same time, we should strive to go towards less doubtfull, and Allah knows best. Specially, when a believer says that Islamic loans looks the same, so they can not be halal, without understanding the fatwah of the scholars, they are playing with fire. Even if the scholar is wrong, one is obliged to followed them, unless one has a indisputable proof from Quran and Sunnah.

"...they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest..." (Quran 2:275)

So, purpose of this article is to share the knowledge I have gathered in last 3 years with everyone, and not to ask anyone to sell their homes immediately, due to their loans are not completely halal. As always, we will start with the golden principle of Islam, which makes everything in this world and in our imagination permissible, unless it violates any rules of Sharia. So, all business transactions and loan terms are permissible, unless there is a defect which invalidates that transaction. In USA, there are two major types of home financing Ijara (Lease to Purchase), and Musharaka Mutanaqasa (Declining Partnership). I will be showing how these are halal theoretically, and how practical implementations in USA could put doubts in them, and how they can be improved.

Main reason for establishing these Islamic Financing Institution is to provide a halal alternative in USA to interest based loans. Of course, Alternative to interest is trade, and we need to see if these profit based Islamic financing transaction qualify as trades, or do they fall short of the basic requirements. So, what are the basic requirements for a profit based Islamic financial transaction to be trade and not Riba(Interest). Saif ul Azhar explains the requirements as the concept of 'Iwad (Equal Countervalue) in the following way, and many of the early and modern scholars like Imam Ghazali agree with these criteria. 'Iwad means to take risk, have liability, and make effort to earn the halal profit from the trade.

"I need to make this point clear to prevent undue confusion. For example, when the polytheists in the city of Mecca say, "Trade is like riba..." and the Quran detested it by saying "Allah allows trade (al-bay') but prohibits riba," the former, i.e., al-bay' implies the existence of 'iwad, or equal countervalue in the transaction. When the requirement of 'iwad is fulfilled in trading (al-bay'), it brings along the sense of equity and justice into business transaction, that rendered it superior to an interest-bearing system"  (page 30 Saiful Azhar - IBF)

First, in Ijara (Lease to Purchase) financing, the home is owned by a trust. Then, the customer sign a lease agreement with the trust, where they pay the rent and separate on-account payment towards buying the home. Trust holds the title and maintain the property taxes. At the end of 30 years the Trust transfers the title to customer. This is completely halal, as the customer doesn't own the title directly, and buys the home slowly.  Following are the issues with the implementation of this in USA ( based on my own home financing).

1) Financier should bring halal funds and not have conventional loan at the back to finance their share of the funds. Also, customer can not be asked to sign a mortgage with any of the investors of the financier ( usually conventional bank will require that). This is completely unacceptable in Islam, and defeats the purpose.

2) Customer should not be a full trustee on the trust, but the lease agreement should be structured to protect their right as usually the case with leasing to purchase contracts. This is a very common transaction in USA. Giving customer part ownership is unacceptable.

3) If the home is sold before the customer purchase the property, the profit of the sale should be divided according to the share of funds paid so far by the customer. This is to keep the intention of the transaction as honest. It is unjust to give full profits to a lessee for a property owned by someone else. Imaging your tenant asking for that.

Second, in Musharaka Mutanaqasah (Declining Partnership) financing, the home is bought as a partnership between a sub-corporation of financier and the customer according to their share of the funds. After the purchase, the customer is allowed to live in the property as a privilege, and in return they pay rent. They also pay a small amount to buy back the share from the financier. After 30 years, the customer owns 100% of the partnership, and hence owns the home completely. This is completely halal, as the home is purchased as partnership and there is no loan. It is also allowed to purchase the share of other partners, and pay the partner compensation of exclusive use rights. Following are the issues with this type of implementation (based on case study of a home in Windermere, FL area, proof documents are available upon request).

1) Although the property is purchased as partnership, the financier does not appear on the title. According to the fatwa, this is done to provide the customer the conveniences they usually have with conventional loans. Ownership only exist on a contract that is never recorded in the county, which means legally it is not a true ownership in partnership. Scholars seems to allow it, because Islam recognized signed contract as a legal bind. However, that allowance is only in the cases, where local laws allow it, and we are required to follow the laws of the land where we live in. In this case, scholars need to require both partners to be on the title. According to the requirement of 'Iwad (Equal countervalue), we have to take the risk, liability, and effort of partnership, to reap the benefits of this being an Islamic transaction. This is completely unacceptable.

2) Although the financier owns majority of the property, they do not take any responsibility of the property. If roof leaks, or taxes are not paid on time, they are not liable. This is exactly the unjust relationship conventional banks have with their investment. They provide cash, and collect rent on the cash. Since they are not collecting rent on the property, they usually don't get involved in the day to day operation. Islamic financier are not renting money, but renting the property, so they need to take responsibility. This is completely unacceptable. Financier should manage the property, or pay someone to do that. Just waiting idly to collect rent is dangerous, as per the following hadith.

From Usamah ibn Zayd : The Prophet, , said: "There is no riba except in Nasiyah [waiting]." (Bukhari, Kitab al-Buyu', Bab Bay' al-dinari bi al-dinar nasa'an; also Muslim and Musnad Ahmad)

3) Customer is allowed to take tax break available for Mortgage Interest for the rent they pay. That is completely unacceptable. If the intention of the rent is to pay the partner for the use of the property, it need to be disclosed as such to the government. Deception to allow a convenience to the customer that they have with conventional loans is not allowed in Islam. This is completely unacceptable. There is a reason IRS provides this break only for interest, and not for rent payments. We can't have it both ways. Customer should not use this, even if they are provided, because of the following verse.

"O those who believe fear Allah and give up what still remains of the Riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. ..., then everybody shall be paid, in full, what he has earned. And they shall not be wronged." (Quran 2:278-281)

4) If the home is sold before the customer owns 100% of the property, the profit of the sale should be divided according to the share of partnership. This is to keep the intention of the transaction as honest. It is unjust to give 100% profits to one of the partners. Financier play a trick to make this happen. They will allow the customer to buy their partnership first, and then let them sell as 100% owner to gain the profit, but since the customer has no money to do that, they execute the contracts simultaneously to avoid this paradox. This is completely unacceptable. Financier should benefit from the profit or take the loss according to their ownership, because they claimed that they owned it to make this transaction halal. If they back out from that claim, then only Allah knows what comes of the whole transaction.

"... Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)." (Quran 2:279)

"And be afraid of the Day when you shall be brought back to Allâh. Then every person shall be paid what he earned, and they shall not be dealt with unjustly." (Quran 2:281)

Yes, these restrictions will reduce the benefit to the customer compare with conventional loan, and make the financing less competitive against conventional loans, but there is a reason Allah called Riba unjust (profit), and if the benefits to parties are similar in both transaction structures, then there is no justice. If it does not attract most Muslims, so be it, because those Muslims may not be ready to understand the benefit they will receive in hereafter, by giving up rights, which are unjustly entitled to them in an interest based loans. In essence, Lease-to-Purchase, and Declining Partnership financing is completely halal, if implemented according to the intention of that type of transaction, and not a restructured debt loan on deferred payments with profit, which is the definition of interest based loans.

According to my little knowledge, these implementations of the halal alternatives are not 100% compliant with Sharia requirements yet. Scholars have singed on to this as halal, according to their understanding. So for people, who are not able to determine these defects, they should continue choosing halal options over conventional. For people who already have a conventional loan, or these pseudo Islamic loans, they should not oppress their families by selling their property immediately, but find a transition plan. For people who can buy on cash, go right ahead, but please do not discourage people from halal financing, as it may lead to extreme hardship, and destruction of their faith in Islam. Reducing great harm with minor harm is one of the principle of Islam.

Next step for me is to reach out to the scholars, and seek out their opinions on these apparent defects. Find out, if they understood the details in USA, when they signed the fatwa, and if they conitnously montior these facilities. For this purpose, I will be travelling to Chicago, inshAllah, for the Islamic Economic Conference. I will share what I learn when I comeback, God Willing.

If any of you have more information that removes these defects or explain how they are not, please feel free to forward it. As I mention, I also have one of these type of financing on my home, and that is my primary purpose of this research. I would continue the research, and see what else I can find out.

I would like to end this with the hadith that Muhammad ibn Ismail Al-Bukhari started his collection with. Basically, it comes down to the intention of the person and the transaction, and if the intention is pure, business will come and homes will be bought. Bending the rules to the extent that they reaches boundaries of prohibited areas is not a wise business plan. Let us keep striving for halal.

Umar ibn al-Khattab relates that he heard the Messenger of Allah, say, "Verily actions are by intentions, and for every person is what he intended...." (Agreed upon)


JazakAllahu Khairin

A struggling homeowner
AbuArman Jumani

Saturday, April 5, 2014

Racial Pride: Why Iblis did not repent?


In the Name of Allah, the Entirely Merciful, the Especially Merciful.

All praise is due to Allah, Al-Qaadir (The Capable)

"And We have certainly created you, [O Mankind], and given you [human] form. Then We said to the angels, "Prostrate to Adam"; so they prostrated, except for Iblees. He was not of those who prostrated.[ Allah ] said, "What prevented you from prostrating when I commanded you?" [Satan] said, "I am better than him. You created me from fire and created him from clay." " (Quran 7:11-12)

"And Adam disobeyed his Lord and erred.Then his Lord chose him and turned to him in forgiveness and guided [him]." (Quran 20:121-122)

Recently, I observed the pride among some Muslims, who boasted their race, language, country, unique circumstances etc. They would claim that they were born in a family of scholars, and hence have some magical  knowledge flowing through their blood. They would claim that they were born to family of the Prophet (PBUH), which makes them superior than others. They would claim that they are following a madhab that is superior than others. They would claim that their customs are above the commands of God. I hear them, and wonder, what Iblis did to deserve the disgrace no creature ever receive from Allah.

Iblis, was the best among his race of Jinn, who were the custodian of earth, and creature of higher status before humans.He had earned the status in eyes of Allah so much so that Allah allowed him to dwell among the Angels, and in the presence of Allah. When Allah commanded him to prostrate a seemingly inferior creature, he refused, because he couldn't surrender his pride to the will of Allah. On top of that, he did not repent, because he didn't see his mistake in refusing it.

Now, one should wonder that Iblis must have been obeying Allah's command for a very long time to be in a high status with Allah, so why he couldn't just obey another, and surrender his pride. Well, sometimes pride and customs become the reason for existence and breaking them could be seen as losing all the respect. It is easy to read these verses and explain their meaning, but it is hard to do what Iblis didn't do, which is to admit that Allah's command is right, and anything contradicts it is wrong.

On the other hand, Adam and Hawwa, disobeyed Allah as well, but they did it in absence of any such emotions, and hence when they realize the punishment, they surrendered and repented, because they knew that Allah's command is above everything we possess and love. If we are not ready to give in to the Haqq ( the absoluteness of Allah's Command), we are not on the winning side.

In Iblis, we have an example for us. We can be the highest ranking scholar, or the best of the worshiper, but if we refuse a command of Allah because it contradicts our culture, or office status, or status quo, we are following the path that Iblis paved with his example. He was not an evil entity, until his racial pride became more beloved to him than his Creator's command. It was definitely an awkward command to prostrate a seemingly weak being, and he refused, although his belief in Allah was much stronger than any human being, since we have not seen the world that he saw.

It does not matter what the command is that we are disobeying. It could be shaving beard, in fear of Employer, or not wearing hijab, in fear of bullying. It could be participating in the tradition of Milad, in fear of taunts from family. It could be not standing up to justice, in fear losing facilities from the person in charge. It could be not reminding a brother, in fear of losing social connections.It could be disobeying parents, in fear of wife. It could be not practicing Islam, in fear of being called religious. If we disobey Allah, to avoid embarrassment, we are putting ourselves ahead of our Creator. What went through Iblis mind before he refused? He must have known what Allah's reaction will be. After the reaction, he stood firm, so what was motivating him. Any of us can fall into this, and some of us are motivated by this firm notion of being better.

I seek refuge in Allah from Shaytan, the one who was disgraced. We should examine our lives, and make corrections, if we are not obeying any of Allah's command, even if it is very awkward. It is not the sheer quantity of our deeds that will take us to paradise, but Allah's approval of our sincerity.

Without his forgiveness, there is no peace,
 a single disobedience, we lose it all.
Oh believers! this world is not what it seems,
pride in the world, will ruin it all.

JazakAllahuKhairin

A repenting sinner.
AbuArman Jumani