Home Financing through an Islamic Bank
Q: Our community bank offers Shari’ah compliant home financing which is structured as follows:
1) The Muslim buyer will select the property and the bank will purchase it with a contract for immediate resale to the Muslim purchaser for a fixed amount that will include the bank’s profit.
2) The Muslim buyer will be given a fixed price that will not vary with interest rates.
3) The Muslim buyer will have to sign a contract to buy the house from the bank before the bank purchases the property from the original seller.
4) The bank states that they will take a loan on which they pay interest from a secondary source to finance such a purchase.
5) The bank states that the buyer will have to insure the property.
Is this form of finance permissible and Shari’ah compliant?
A: This operation is not Shari’ah compliant for the following reasons:
1. The bank will have to take an interest-bearing loan in order to purchase the house and sell it to the client. This is not permissible as taking an interest-bearing loan is haraam in Shari’ah.
2. The bank’s regulation that the purchaser will have to insure the property is a condition that is not compliant to Shari’ah.
3. The bank makes the buyer sign a contract obligating him to purchase the property from the bank after the bank purchases it from the seller. This condition is non-Shari’ah compliant as it is impermissible in Shari’ah to subject one transaction upon another.
4. The contract of the bank when examined closely shows that there is no difference between a conventional bank compared to an Islamic bank, except in words. Once the client signs the contract that he wishes to purchase the property and he wants the bank to assist him purchase it, then from this point onwards, the client cannot back out, even though he has not yet purchased the property from the bank. In the case where he has a valid excuse (e.g. he loses his wealth or falls ill) to cancel his intention of purchasing the property from the bank after the bank has purchased it from the seller, he will be unable to back out of the promise he made to the bank of purchasing the property from the bank. All this goes to show that just as he is unable to back out from the interest-bearing loan taken from the conventional bank, the Islamic bank deals with him in the same way.
And Allah Ta'ala (الله تعالى) knows best.
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