Key to Islamic Mortgage Applicability

One of the consultation papers submitted to the British government stated that:

(Indent)“Complex contractual issues: The contractual arrangements and product information for these products is complex, which gives rise to a risk that consumers do not have a clear and sufficient understanding of the risks inherent in these products, which could lead to poor consumer choices and so potential detriment.” (FSA 2006, p 20).(Endent)

Controversy about Islamic financial practices can arise when the translation is made from Arabic to English, and again when existing English financial terminology is used to define the Islamic contract. To give some examples, British government departments employ the exact words for two different concepts: Ijara (FSA 2006, p 3) (leasing to rent) and Ijara wa Iqtina’a (HM Treasury 2007, p 9) (lease to own). This has been repeated in many formal papers dealing with Islamic mortgage regulations in the UK. The authors applied another interpretation of the Ijara, explaining it as a sale and lease arrangement (HM Treasury 2004, p 21). Also the bank offers the Islamic mortgage product and promotes it as Ijara (UNB), when it should be Ijara wa Iqtina’a.

Another example is the Defining Home Reversions that explained the Ijara as Ijara wa Iqtina’a (CD 2004, p 1). In one of the FSA papers that both Ijara and Musharaka Mutanaqisa (Diminishing Partnership) are used regularly as an Islamic mortgage mode in the UK (Ainley et al 2007, p 20). It would be more beneficial to use the Ijara and the Musharaka Mutanaqisa as the Islamic mortgage’s applicable modes. The Ijara- based contract is used to pay the rent of the bank’s share in the house. The Musharaka Mutaniqisa- based contract covers the arrangements of the bank’s share in the house, this is quite similar to the Ijara wa Iqtina’a mode. This could bring Ijara wa Iqtina’a and Musharaka Mutaniqisa together to make them a uniform terminology mode for the Islamic mortgage.

The confusion has been also extended to the Regulation of Financial Services (Land Transactions Act 2005). The explanatory notes state that ‘A typical Murabaha contract is an arrangement whereby a scheme provider buys a house and then sells it to a customer at a higher price to be repaid over time.’ It is correct up to this point, but it is incorrect when it follows this with: ‘The house is registered at the customer’s name and a charge given over it in favor of the scheme provider.’ The proper arrangement, which is one of the main factors in this model, is to keep the property title in the bank’s name until the customer repays all the installments. And once again, there is another misunderstanding when it states that: ‘A typical Ijara contract is an arrangement whereby a scheme provider buys a property and rents it to the customer over a term.’ This is correct, but the misconception starts when it continues: ‘The customer also pays an original purchase price over the same term and acquires ownership at the end of that term.’ The accurate term, in this case, would fit with the Ijarah wa Iqtina’a which is (lease to own), not Ijara, which the explanatory notes refer to. This is a very serious misunderstanding, and it could lead to the wrong application of the contract terms. Furthermore, this confusion could hamper the adoption of the proper Islamic mortgage models or make it difficult to understand. However, it should be pointed out that the UK Budget 2007: Regulatory Impact Assessment refers to the Ijara wa Iqtina’a as comparable to a hire purchase agreement (Balls 2007, p 2).

Leave a Reply

Your email address will not be published. Required fields are marked *