Fatwa Regarding Islamic Home Financing for Muslim Americans

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Fatwa Regarding Islamic Home Financing for Muslim Americans

From AMJA (Assembly of Muslim Jurists in America) Fiqh Committee

Published October 14th, 2014

This fatwa regarding Islamic Home Financing has been SUMMARIZED by Carolina Muslims staff. Direct statements from AMJA are in quotation marks.

In September of 2014 the AMJA Fiqh Committee Resident Fatwa Committee met in order to provide a resolution for Muslim Americans with relation to the issue of Islamic home financing. Following this meeting, the subsequent Fatwa was corresponded with the companies listed in order to clarify with issues regarding Shariah compliance. Sheikh Jamaal Zarabozo also participated in this meeting as it endeavored to answer the questions of truly Shariah compliant lending.

The Fatwa committee analyzed that companies dealing with Islamic home financing in the USA were separated into three categories as they defined to be:

1) Contracts which are, generally, in agreement with Shariah. The companies in the first categories are stronger because they do not need any connection with government funded enterprises [e.g. Freddie Mac] which allows them to write contracts with individuals in compliance with Shariah without compromising any pre-arranged restrictions. These companies, however, are not able to supply financing for large numbers of homes and are often limited by state boundaries and they cannot, therefore, fulfil the needs of the millions of Muslim Americans.

“The ruling of the RFC Committee is that it is permissible to deal with and purchase homes from companies of this nature.”

2) Companies whose contracts do not fall into explicit interest (Riba). Instead of interest based loans they deal with either Murabahah (Cost plus purchase order), Musharakah (Diminishing partnerships) and Ijarah (rent-to-own).  “Many of the people who run these companies, we noticed, are anxious to avoid forbidden transactions and have exerted a great deal of effort with their legal advisors to produce legally sound contracts that will allow them to avoid what the Shareeah would consider void contracts.”

The Fatwa committee noted that there were many irregularities among those contracts such as mixing different schools of jurisprudence in order to come up with a way around things. They also noted that these companies have made what some might consider compromises by dealing with organizations such as Freddie Mac in order to take care of more clients at a time.

“The ruling of the RFC Committee specifically concerning this set of companies is that there is an exemption to buy through them in the case of need or dire need, depending on the different intensities of violations and the fact that need must be dealt with according to its severity.

We encourage these companies to continue their efforts in developing their contracts in order to bring an end to their shortcomings that the Committee has noted. If someone can find an alternative and not deal with these companies, he will be safe and will be protecting his faith and his honor.”

3) These companies “still continue to deal in interest-based loans. Their contracts are no more than offshoots of traditional interest-based loans or simply a form of impermissible legal stratagem to get around the prohibition of interest.”

“The ruling of the RFC Committee with respect to these types of companies is that it is not allowed to purchase homes through them. We advise those who are administering these contracts to adjust them and make them proper.”

What follows is a summary of the specific major Islamic home financing groups along with a verbatim of the Committee ruling on these companies.

Guidance Residential: Contracts are based on a rent-to-own model with minor concerns remaining to be corrected in terms of full Shariah compliance.

“The ruling of the RFC Committee concerning this company is that it is permissible to deal with them in the face of need. The representatives of this company are advised to review those defective portions of their contract.”

Ameen Housing: They also use a rent-to-own contract which is not linked to institutions like Freddie Mac but the committee stated that there was “unfairness in the percentage that they discount in the rent to take care of basic maintenance” and had concern about late payment fees which they declare to be a violateion of Shariah principles.

“The ruling of the RFC Committee is that there is no harm in dealing with this company in case of need, although one should do one’s best to make one’s payments on time in order to avoid the late payment fee. The Committee also encourages the company to abstain from those aspects pointed out by the Committee.”

Devon Bank: There are two kinds of contracts with this company.  The first is a cost-plus purchase type which the committee expressed concerns about the validity of the bank having ownership before the home is ready for sale. They also stated concern about the contract giving the bank unfair rights and abilities regarding the buyer’s accounts, insurance pay-outs, etc.

“The ruling of the Committee is that there is no harm in dealing with this [contract of] this company in the presence of dire need. Whoever remains away from it has kept himself safe and has protected his faith and honor.  The Committee advises the Bank to correct these aspects and to affirm the ownership of the property before selling it and to avoid the other invalid conditions as much as possible.”

The second contract type is a rent-to-own structure which the committee declared to have many shariah violations including having concurrent sale and lease contracts which has been ruled as not permissible by various fiqh councils.

“The ruling of the Committee is that there is no harm in dealing with this [contract of this] company when one is in a state of dire need. Whoever remains away from it has kept himself safe and has protected his faith and honor. The Committee emphasizes its recommendation to the bank to rectify the current model by separating between the two contracts and avoiding the defective or void stipulations as much as possible.”

University Islamic Financial: “The same comments concerning their cost-plus model and lease-to-own models as were stated concerning Devon Bank can be repeated here. Thus, their models have the same rulings and the Committee offers them the same advice. There is an exemption to deal with this company only if one is in a state of dire need. Whoever remains away from it has kept himself safe and has protected his faith and honor.”

Ijara Loan: This company requests the home buyer to get a standard bank loan (mortgage) and then creates an agreement with the buyer to join in the mortgage to take it over and create the rent-to-own contract with the buyer.

 “The ruling of the Committee is that it is not allowed to deal with this company as their model contains clear and explicit interest. We advise those in charge of this company to review and correct their model and to fulfill the trust that has been put in them by those who wish to avoid interest in their financial dealings.”

Lariba: “The contract of this company does not differ from a traditional mortgage that interest-based banks provide. This is the overriding contract between this company and the purchaser and what they present as an Islamic form to it actually has no existence in reality and has no legal authority in case of dispute.

The ruling of the Committee is that it is not allowed to deal with this company as their model contains clear and explicit interest. We advise those in charge of this company to review and correct their model and to fulfill the trust that has been put in them by those who wish to avoid interest in their financial dealings.”

AMJA went on to state that this ruling about Islamic home financing supersedes all previous rulings made by individual AMJA scholars on their website and publications. “Finally, the Committee would like to encourage those Muslims who have experience and those who have funds to invest to create a competitive Islamic alternative, perhaps a credit union among themselves which may have profit in this world and we hope also a profit in the Hereafter if the intentions are sound.”

To read the entire AMJA ruling on Islamic home financing, please visit the article on their website: www.amjaonline.org/en/articles/entry/amja-resident-fatwa-committee-resolution-about-islamic-home-financing-companies-in-the-us

LaRiba has issued a press release to address this particular Islamic home financing fatwa; Please read it here

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