Question # 162: What banks are doing now-a-days by helping in mortgages, is it allowed as I am assuming they are dealing in interest and interest is haram?
Bismi-llahi r-raḥmani r-raḥīm,
Assalamu ‘laikum warahmatullahi wabarakatuh,
All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).
First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.
Shorter Answer: Riba (Interest) exists in every modern-day conventional banking debt, carrying a stipulation binding the debtor to pay to the creditor a sum of money in excess of the principal sum of the debt. There are 12 verses in the Quran categorically prohibiting riba. A number of reasons for the prohibition of riba can be inferred from these verses: Corruption in Society, Unlawful appropriation of other people’s property, Negative growth, Demeaning and diminishing human personality and Injustice. Riba is also mentioned in ahadith, considering it one of the seven major sins. Prophet (صلى الله عليه و سلم) cursed the accepter of usury and its payer, and one who records it, and the two witnesses, and he said: They are all equal. Also, he (صلى الله عليه و سلم) said: A Dirham of usury a man devours with knowledge is greater than thirty-six fornications.
The concept of Islamic banking, on the other hand, is based on the permissibility of trade and profit-loss-sharing arrangements in Islam.
Long Answer: For the benefit of the readers with little or no knowledge about mortgage or loan financing, we shall cover the issue on hand in the following order:
MODERN DAY MORTGAGE FINANCING FROM BANK
The most important task of conventional commercial banks may be described as mediating between lenders and borrowers who lend or borrow on the basis of interest. The borrowing and lending may take several forms which include mortgage/ loan.
A loan is a highly personalized contract between the borrower and the bank and is tailor-made to the particular needs of the customer. Bank loans are the primary business activity of a commercial bank. They generate the bulk of a bank’s profits and help attract valuable deposits.
Most bank loans consist of promissory notes. A promissory note is an unconditional promise made in writing by the borrower to pay the lender a specific amount of money, usually at some specified future date. Repayment can be made (1) periodically, in installments; (2) in total on a single date; or (3) in some cases, on demand. If the loan is due on demand, either the borrower or lender can end the contract at any time. Bank loans can have either a fixed rate of interest for the duration of the loan commitment or a floating-rate commitment. Bank loans may be secured or unsecured. The security, or collateral, may consist of merchandise, inventory, accounts receivable, plant and equipment, and, in some instances, even stocks or bonds. The purpose of collateral (pledge) is to reduce the financial injury to the lender if the borrower defaults. An asset’s value as collateral depends on its expected resale value. If a borrower fails to meet the terms and conditions of his or her promissory note, the bank may sell the collateralized assets to recover the loan loss. (‘Islamic Financial Services’ by Mohammed Obaidullah)
ISLAMIC APPRAISAL OF CONVENTIONAL MORTGAGE
Riba exists in every debt, which carries a stipulation binding the debtor to pay to the creditor any sum of money in excess of the principal sum of the debt. When a conventional bank raises funds through deposits, the depositor is often entitled to fixed and predetermined return in the form of interest on the amount deposited. The return at times is not fixed, as in case of floating-rate deposits where the interest rate is linked to some other benchmark, such as, the London Inter Bank Offering Rate (LIBOR) and varies over time depending upon the value of the benchmark. But under both situations, the rate of return can never be negative, the nominal value of deposits is guaranteed and the depositor is entitled to an amount in excess of the amount deposited. Hence, the conventional deposits, which constitute the most important source of funds for a modern bank, involve debt-related riba. Banks also borrow from other sources, such as, the central bank or the inter-bank money market for raising funds. All such contracts requiring interest payments clearly involve riba. When banks invest, their investments are again primarily in the form of loans which involve interest payments over and above the loan amount and hence, clearly involve riba.
Direct loans may take the form of a simple loan of a definite amount repayable after a known maturity or time period. These loans involve payment of interest by the user of funds and hence, clearly involve riba. (‘Islamic Financial Services’ by Mohammed Obaidullah)
QUR`AN ON RIBA
There are 12 verses in the Quran dealing with riba. The word riba itself occurs eight times, three times in 2:275 and one time each in 2:276; 2:278; 3:130; 4:161 and 30:39. The following are some of these verses evidencing prohibition of riba:
- Muslims, Do not devour riba, doubling and redoubling it and fear (the punishment) of Allah that you may be successful. (Soorah Al-Imran, 3:130)
- Those who live on riba will not rise (at Resurrection) but like a man possessed of the devil and demented. This is because they say that trading is like riba. But Allah has permitted trade and forbidden riba. Those who after receiving the Direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who revert to it again are the residents of Hell where they will abide forever. (Soorah Al-Baqarah, 2:275)
- Allah will deprive riba of all blessing, but will give increase for deeds of charity: and Allah does not love the ungrateful and unjust. (Soorah Al-Baqarah, 2:276)
- O believers, fear Allah and forgo the interest that is owing, if you really believe. (Soorah Al-Baqarah, 2:278)
- If you do not, beware of war on the part of Allah and His Apostle. But if you repent, you shall keep your principal. Oppress none and no one will oppress you. (Soorah Al-Baqarah, 2:279)
- What you provide with the prospect of an increase through the property of (other) people, will have no increase with Allah; yet what you give in alms and charity, seeking the countenance of Allah, (will increase): it is these who will get a recompense multiplied. (Soorah Ar-Rum, 30:39)
- And their taking of Riba (usury) though they were forbidden from taking it and their devouring of men’s substance wrongfully (bribery, etc.). And We have prepared for the disbelievers among them a painful torment. (Soorah An-Nisa’a, 4:161)
REASON OF PROHIBITION OF RIBA
Even though there is no reason in the form of a direct statement, a number of reasons can be inferred from the texts read in their context:
- Corruption in Society
- Unlawful appropriation of other people’s property
- Negative growth
- Demeaning and diminishing human personality
The Qur’anic ayaat (verses) establish a number of important points. Firstly riba is categorically prohibited, secondly, it is stated that riba is what is over and above the principal and thirdly that it is unjust (zulm). It is also said that riba is destined to destruction (mahq). And last but not the least, the worst effect of riba mentioned in the above passage is that on human personality: riba demeans and diminishes individuals who indulge in taking it. Also, Qur’an relies on the notions of equality and reciprocity inherent in the concept of justice.
Soorah Rum, ayaat 37-41 associates charging interest with fasad, (corruption); within the framework of the general message, fasad in society results from men’s own (wrong) behavior. From this, can be derived the sub-message that charging interest is one of those wrong behaviors that corrupt the society. As the experts say, this may have been the first time, chronologically speaking, that riba was mentioned in Qur’an. It was in the fitness of things to highlight its negative social role long before the practice of charging interest was banned. From some of the numerous verses in which the word ‘fasad’ has occurred in the Qur’an, one gets an idea of its dimensions. It is interesting to note the inclusion, into the concept of fasad, ‘destruction of crops and people’ (2:205), ‘severing the ties of kinship’ (47:22), dividing people into classes and discriminating between them (28: 4), ‘shedding bloods’ (2:30), giving people less than full measure and wronging them in their goods (11: 85; 26: 183), arrogance borne of enormous wealth (28:77) and sexual perversion (29: 28-30). (‘Riba, Bank Interest and the Rationale of its Prohibition’ by Mohammad Nejatullah Siddiqi)
RIBA IN AHADITH
Riba is also mentioned in Ahadith and is considered one of the seven major sins:
- Jabir (رضي الله عنه) said that Allah’s Messenger (صلى الله عليه و سلم) cursed the accepter of usury and its payer, and one who records it, and the two witnesses, and he said: They are all equal. (Muslim)
- It is reported on the authority of Abu Huraira (رضي الله عنه) that the Messenger of Allah (صلى الله عليه و سلم) observed: Avoid the seven noxious things. It was said (by the hearers): What are they, Messenger of Allah? He (the Holy Prophet) replied: Associating anything with Allah, magic, killing of one whom God has declared inviolate without a just cause, consuming the property of an orphan, and consuming of usury, turning back when the army advances, and slandering chaste women who are believers, but unwary. (Muslim)
- Abdullah-bin-Hanjalah reported that the Messenger of Allah (صلى الله عليه و سلم) said: A Dirham of usury a man devours with knowledge is greater than thirty-six fornications. (Ahmad, Darqutni)
- The Prophet (صلى الله عليه و سلم), during his last sermon addressed his revered companions, “Every form of riba (interest) is cancelled; capital indeed is yours which you shall have; wrong not and you shall not be wronged. Allah has given His Commandment totally prohibiting riba. I start with the amount of interest, which people owe to Abbas and declare it all cancelled. He then, on behalf of his uncle, Abbas, cancelled the total amount of interest due on his loan capital from his debtor” (Tafsir Al-Khazin)
ISLAMIC ALTERNATIVE OF CONVENTIONAL MORTGAGE
For the bank to run its business, it must find ways to buy and sell funds without entering into transactions and contracts involving riba and gharar. The Islamic law of contracts fortunately offers a rich variety of contracts. The concept of Islamic banking is essentially based on the idea that Islam prohibits riba, but permits trade and profit-loss-sharing arrangements. The two forms of profit/loss sharing, which find frequent mention in fiqh literature, are mudaraba and musharaka. In mudaraba, one party provides the capital while the other party manages the business. Profit is shared in pre-agreed ratios and loss, if any, unless caused by the negligence or violation of the terms of the agreement, is borne by the provider of capital. In musharaka, partners pool their capital to undertake business. All providers of capital are entitled to participate in management but are not necessarily required to do so. Profit is distributed among the partners in pre-agreed ratios while loss is borne by each partner strictly in proportion to the respective capital contribution.
The best way to summarize the status of lending / mortgage and Riba in Islam is that in Islam, one does not lend to make money, and one does not borrow to finance business. Loans are charitable contracts, and therefore if inflation causes the lender to lose more than he anticipated, then the charitable part of the loan is larger. Demanding compensation for such an increase in charity would be unwise and insolent in Islam, since only Allah (سبحانه و تعالى) can and will determine the appropriate reward. (‘A Basic Guide to Contemporary Islamic Banking and Finance’ by Mahmoud Amin El-Gamal)
Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.