Islamic finance dates backs hundreds of years ago where the very essence of real estate began. Islamic finance is the way to purchase homes without any interest and is more of a rent to own type program. Both the main types of Islamic finance are explained here along with seller financing, a third type of creative financing acceptable in Islam.
First it should be stated what the Sharia states about usury and its punishments. The committee of scholars, headed by Dr. Yusuf Qardawi met in Detroit, USA in 1999 to discuss and explain what is meant by "The Law of Necessity." The committee stresses, according to what has been agreed upon by the Muslim Ummah, that usury is forbidden. It is a major sin and is one of the seven gravest ones. Those who commit it are considered to be waging war against Allah, and His Prophet (peace be upon him*).
Fatwas were issued to accommodate Muslims living in non-Muslim countries. These fatwas are not according to Islamic traditions of Prophet Mohammad. It is up to each Muslim to pray and ask for Allah's guidance in the matter of home purchasing.
What is the Ruling on "The Law of Necessity"in Islamic Finance?
Dr. Yusuf Qardawi stated that a Muslim may use a interest bearing mortgage if all other means of purchasing a home Islamically has been exhausted and that the borrower has an extreme emergency or necessity.
The meaning of this statement is that a Muslim can take out a bank mortgage and pay interest if he has exhausted every possible means to purchase a home in the halal (permitted) way, such as seller financing, rent to own, Islamic banking and borrowing money from relatives.
Muslims should not resort to going against Prophet Mohammad's commandments halfheartedly. A mortgage should be the absolute last resort. A bank mortgage is only permissible when there is a necessity such as:
- No rental is available in a good area.
- The rental is too expensive.
- There is great harm for the Muslim family.
Seller Financing Explained
Seller financing is a mortgage that is held by the seller and allows the buyer to purchase the home without bank approval. It is an alternative to conventional methods and can be structured to include no interest at all. Seller financing is basically just a contract of deed written in easy terms for both the buyer and the seller to understand.
Through seller financing, the seller will contact an escrow company to handle the payments and escrow account and both the buyer and seller feel at ease with this no pressure type of sale.
What is Islamic Banking?
Islamic banking and finance has to do with two types of loans. These loans are not called loans
at all and the word interest is never used. It is a formal way of purchasing a home Islamically
and is the best way for a Muslim to purchase a home. These two ways are called:
- Ijara Declining Rent Agreement
Murahaba Islamic Mortgage
the home and then either rents back to the borrower or amortizes the amount of the full loanincluding an elevated price agreed upon by all parties in advance. The wording is made
simplified not to implicate a loan was every done.
Where are There Islamic Banks Located?
There are many banks doing Islamic mortgages and they should be used as a last resort. Those conventional banks doing Islamic mortgages and charging interest to normal customers are:
- JP Morgan Chase
Devon Bank of Chicago
University Bank of Ann Arbor, Michigan
*Muslims invoke Allah's blessings on the Prophet Muhammad whenever this name is mentioned.
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