Islamic Banking and Islamic Mortgages:
Name-Games
at Islam’s Expense
In a hadith, the Rasul might have been talking about us: “There will come a day when the mu’min will
try to hold on to his Deen and it will be like he is holding a hot coal
in his hand.”
Living an Islamic way of life in the absence of a true Islamic
state is hard, no doubt. True, we can have halal foods, masjids, and
Islamic weddings; but when it comes to the majority of our economic
and political transactions, most of us living in the West have resigned
ourselves to the capitalist-slave way of doing these things. Finding
Islamic alternatives often seem too difficult, nearly impossible, under
current conditions.
Home-buying and mortgages are an important case in point. It
would be a blessing to live under a political system, backed by the
resources of the Ummah, that is obliged to provide comfortable shelter
(though not necessarily a McMansion) to everyone under its protection—without
selling them into the bondage of riba and heavy debt. But how can Muslims
tangled in capitalism buy a nice home and
keep their Deen unblemished?
On this issue, the Detroit
News of December 21, 2004 published an article entitled, “Banks
offer no-interest options for Muslims.” Written by a non-Muslim, it
introduced readers to the idea of “Islamic Banking.” This new industry,
often an offshoot of commercial banks already existing, wants the dollars
of sincere Muslims. In return, Islamic Banking offers a promise: Muslims
in the USA and Canada can have their American Dreams too, and purchase
homes the Islamic way, without paying interest. According to the author,
“Islamic mortgages,” supposedly in compliance with Islamic law, are
the key.
Our researchers at halalfoodforthought.com have reviewed the
“new” product and spoken with people currently utilizing the service.
Their conclusions are shocking and nauseating: as it turns out, the
structure of these so-called “Islamic mortgages” is nothing more than
a disguised conventional mortgage with different names for the interest
(riba).
But before we can decide whether Islamic mortgages and Islamic
banks really have done away with riba, we must first clearly understand
how Islamic Law—i.e., Allah—defines it.
The Shari`ah definition of riba (or to be more precise, riba
an-nasiyah) is “an increase over the original amount lent that
the borrower pays in return for delaying payment to the lender.” In other words, any transaction where your
payments over time result in an increase over the original principal
is a riba-based transaction.
For example, let’s say that Abe and Mike both buy a leather
couch from Art Van. Abe is a
good bargainer who talks the salesman down to $3000 for the piece. But
to pay for his couch, Abe uses Art Van’s third party in-house finance
company. The finance company agrees to give Art Van the $3000 on Abe’s
behalf, and Abe signs an agreement with the finance company to pay the
money back over 3 years at 20% interest. Over the three years, Abe’s
payments mount up to $3600, consisting of the original $3000 principal,
plus an interest payment of
$600. Mike, on the other hand, simply accepts the asking price of $3600
for the couch. Then Art Van and Mike agree to a “no interest-same as
cash” deal: 3 monthly payments of $1200. In the end, Abe and Mike pay
the same amount for the same couch; but that alone is not what Allah
will look at. What matters is
the nature of contract, not the words used or the amount paid. Abe’s
contract involves a third party paying the original principal, and then
Abe having to pay an increase over this original principal in return
for the delay in paying back—i.e., riba.
On the other hand, Mike’s contract is a direct contract between
buyer and seller, where the buyer agrees to pay only the principal over
the time agreed upon. Now let us apply the same definition to purchasing
a home.
Today, purchasing a home has become enslavement. Buyers approach
a seller to negotiate the price of the home. Once an agreement is made,
the buyer goes to a third party, like a mortgage company or bank, to
get money to pay the negotiated price to the seller. The bank, however,
does not give the buyer money unless the buyer agrees to pay the bank
an amortized interest rate.
The key word here is “amortized.” To give you an idea of what
the term means, take a look at the schedule of payments of someone whom
you know that owns a house. The bank takes the principal amount, multiplies
it by the interest rate, and then divides that by the 12 months of the
year. This tells you how much of your first payment will go to “interest”
and how much will go to pay off the original principal. Whatever principal
is actually paid will then be subtracted from the original principal,
and then the process starts anew for the next payment. Your mortgage
payment is split into two parts; one part reduces the principal balance
and the other part goes to the bank as interest. The result is a contract where a third party
steps in to pay off the seller’s original price, and in return you agree
to pay back the original principal, and more besides, in return for
not having to pay it all back for 15 or thirty years.
Banks call this increase “interest”; Allah calls it “riba”.
Banks and mortgage companies love this arrangement. The mortgage
payment schedule is designed so that the vast majority of the money
you pay in the first few years goes towards paying interest instead
of building equity in the home.
“And why is it done this way?” you might ask. Most surveys say that the average person buys
or sells a home every 6-7 years. The bankers make out big time: within
that period, only 24% of all the money you pay actually goes to reducing
the debt owed on the home. The other 76% goes to the bank’s pocket.
When the home is sold, and the buyer goes out to get a new loan, the
customer starts all over again to pay a majority of their payment as
interest. But this is how a conventional home loan works today; lucky for
us Muslims we have Islamic banks so we can avoid such sinful transactions,
right? WRONG!
Current day “Islamic” banks are sadly taking advantage of the
crushing ignorance of Islamic law in the Muslim Ummah today. To sell
their product, they attempt to redefine and limit the Shari`ah definition
of riba (Interest). These banks define riba as simply “profit through
lending money”. It is true that gaining profit through lending
money is one type of riba transaction, but this not the only form of
riba that Islamic Law covers.
By
defining riba as simply “profit through lending money” the “Islamic”
banks create a fictitious loophole—as you will see, God willing—to mislead
us Muslims. They claim that they are not lenders of money. Instead,
they say, they buy the home with you, thus setting up a type of “musharaka”
or “joint ownership,” in which both parties—you and the Islamic bank—sign
the deed to the home. Then,
in order for you to acquire full ownership of the home, you pay the
Islamic bank payments, based on a schedule that they determine, called
a “utilization schedule.” The general premise is that each one of your
payments results in you acquiring a bigger share of the partnership,
until you fully own the house.
For
example, let’s say you found a home you want to purchase for $200,000.
Then you the buyer approach the third party Islamic Bank for
the money. The bank steps in and pays the seller the $200,000.
Then you and the Islamic bank would set up a partnership contract in
which you agree to pay back the $200,000 according to their utilization
schedule, which in this example would mean a monthly payment of $1680. Thus, the “Islamic” bank would claim that it
is not directly lending you money for profit, but going into partnership
with you. This then would make the whole transaction halal or, as they
phrase it, “Shari`ah Compliant”. But
a closer look at the payment schedule shows that this claim is not true.
Remember
the phrasing of a contract or the amounts paid are insignificant; it
is the nature of the contract that Allah looks at. The “Islamic” bank’s
payment schedule has the same structure as a regular bank’s amortization
schedule; both are based on current market interest rates. So in year one of the above example, $715 of
your payment would go towards buying a greater share of the “partnership,”
and the reminding $965 would go to the Islamic bank, in a pattern very
similar to the commercial banks. But instead of calling this second
part of your payment “profit” or “interest” like regular banks do, “Islamic”
banks call it “utilization” or sometimes “rent”. This payment schedule
continues throughout the duration of the contract until year 15, where
$1630 of your payment would go towards buying into the “partnership”
on the home, and the remaining $50 would be “rent” for the Islamic bank.
In the end, there is no real difference over dealing with a regular
mortgage company. You still have a third party stepping in to
pay off the seller, and you still agree to pay additional money over
the original principal in return for delaying payment.
In addition to this, regular banks or mortgage companies do
not directly give money to individuals. Rather, they step in and pay
off the seller and transfer the deed over to the buyer. Then to protect
themselves, they put a lien on the home—an enforceable claim against
the resale value of the home—until the loan is paid off.
“Islamic” banks essentially do the same thing: they pay off the
seller; but instead of putting a lien on the home, they sign the deed
with the buyer. Both of these methods produce the same result,
protection for the bank until the loan is repaid according to their
terms. So calling it a partnership
instead of lending money does not make it “Shari`ah compliant” because
the main problem posed by Islamic law—not paying more than the original
borrowed amount—is never cured.
No matter how they try to change or disguise the terms used,
the Islamic bank’s contract is virtually identical to a regular conventional
loan. It is as they were placing
an Islamic cover on a kufr book, hoping that people won’t notice.
This type of Islamization of kufr is an approach never taken
by the Rasul (SAAW). You cannot Islamize something that is kufr. It
must be uprooted and replaced by the policies of Allah (subhanahu wa
ta’ala). Islam was sent as a mercy to mankind, and we must not take
kufr concepts and sugar-coat them with Islam. The people of this country
are in prisons of lifelong debt, and we betray the very trust that Allah
(subhanahu wa ta’ala) has given us if we don’t work to free them. We
are supposed to be examples of Allah’s mercy, not opportunists who twist
the Deen of Allah to make a buck. How can we show this religion to be
one of mercy when we Muslims take banks and other oppressive institutions
and give them an Islamic whitewash? Islam truly is a mercy from Allah (subhanahu wa ta’ala): in sha'
Allah, we must demonstrate this not only with our words, but also with
our actions.