Asalamu Alaykum Sh. Khaled,
Ramadan Karim, and I pray you are in good health.
I wanted to reach out about a question. We are considering buying a house of our own in the area. The issue of mortgage and interest came up. I wanted to know your position on the matter. Our sense is that a lot of the Islamic loan providers end up essentially mimicking the system, and end up being less advantageous/affordable than the mortgage system as it is. Is it alright, in your judgement, to take a mortgage out to purchase a home?
[Name Withheld for Privacy]
Al salamu alaykum Brother,
Eid Mubarak, I pray that you and your family are in good health and spirits and that Allah continues to aid you in your journey and guides you to the path of fulfillment and peace.
There is so much published on the issue of Islamic finance, both for and against, to the point that it defies citation. Islamic banking has become "big business" and it has its very outspoken advocates. I will limit my response to the issue of mortgages. The basic idea of Islamic home loans is that the bank buys the home and holds title while selling you back the house for a higher price than the original purchase price. Your position until you are able to pay the price of the home in full is effectively that of a lessee, or a renter. There have been a number economic studies that show that in practice, Islamic banks compensate for the risk they take with fluctuating interest rates by overpricing the value of the home. In other words, they end up being more expensive for the consumer than most commercial mortgage companies, not even to speak of tax implications.
To be honest with you, after reading numerous books on Islamic finance and re-reading all fiqh material on ribaal-nasi'a and riba al-fadl, I have come to the conclusion that fixed rate mortgage loans are Islamically more sound than current so-called Islamic home finance purchases. The prohibition of riba was designed to combat the abusive and exploitative practices of money lenders. The issue of speculation in contracts is much more complicated, however the prohibition against exploiting the weak, needy and indigent is far more clear. It is true that so many of our modern economic institutions are unethical in the sense that they are founded on the very idea of exploiting the weak and needy, but that is a much larger question than whether current so-called Islamic home purchasing options are any less exploitative or oppressive. After reading economic studies that show that purchasing a home through Islamic financial institutions end up costing at times significantly more than fixed interest mortgages, I have become very skeptical about the solutions that are currently offered by investors in the Islamic finance sector. If you want my humble opinion, knowing fully well that there are many who will disagree with me, get a mortgage with the best interest rate and make sure it is a competitive rate and a fixed interest rate. I offer you this advice and only Allah knows best.
Wa al-salamu alaykum wa rahmatullah,
Shaykh Abou El Fadl