I often receive questions about pages on my website, usually via the reader writing a public comment using the Disqus comments facility. (Readers can also email me via the "Contact me" page.)
As soon as I read a recent question, I realised that it would provide the basis for one of my monthly columns in the magazine "Islamic Finance News." My column was published on 4 November 2020.
You can read it below.
When Muslims address religious questions by analysing the sources and then giving their opinion (i.e. write a “fatwa”), they traditionally conclude with the phrase “and Allah knows best.” That acknowledges God as the ultimate Arbiter of religious questions.
Despite that, I encounter many Muslims who believe that Islam has a monolithic set of rules.
Last month, my article “A simple introduction to Islamic mortgages” received a website comment about the future price when the Islamic financial institution (“IFI”) owning the property sells it in stages to the occupier, specifically asking about falls in value. The reader stated: “In my mind the “Owner” [the IFI] of the property has to bear this risk.”
There are many was of financing a property acquisition including:
In 4(b)&(c), the reset could be:
In practice, (A) is never (or almost never) done. The reason is that comparing the economics of such a diminishing musharaka transaction with a conventional mortgage would then become much more complex for both financial institutions and their customers.
I have not attempted to exhaustively list all possible alternatives. Instead, I have focused only on those which I consider most relevant.
There are Muslims who consider every one of the above alternatives to be religiously permitted within Islam. Conversely, some Muslims will reject every alternative, at least where the rent is explicitly reset by reference to market interest rates, which is the norm.
Within diminishing musharaka, I regularly come across Muslims who consider that only scenario 4(c)(i) is religiously permitted.
My view is straightforward.
Religious freedom requires the state to stay out of religious questions, and to allow citizens to enter into the economic arrangements that they wish.
Accordingly, provided there is clear disclosure of the contractual terms, with deceptive advertising being prohibited, financial institutions and individuals should be free to structure mortgages as they wish. Obviously, it is important that financial institutions are adequately capitalised and take into account the economic risks of the contractual structures used, and also important that individuals are not misled.
In the United Kingdom, tax law was revised in 2006 to make diminishing musharaka mortgages possible. This was done by introducing a UK tax law concept called Diminishing Shared Ownership (“DSO”).
Qualifying DSO contracts exclude 4(c)(i) but permit 4(c)(ii). I cannot see any logical reason for this, except perhaps protecting consumers from agreeing to “give away” to the financial institution future price increases without understanding the financial implications of doing so.