If you opened this article to find out which Islamic mortgage companies are halal and which ones are haram, then save yourself the time and close this page now because you won’t get it here.
This past weekend I was fortunate enough to attend the annual AMJA [Assembly of Muslim Jurists of America] conference. They cover a different topic each year and this time it happened to be home financing. This is a topic I’ve had a personal interest in for some time, regrettably caused a stir over a while ago, and have a vested interest in now particularly because of the DebtFreeMuslims project I am involved with.
How I Snuck Past Security to Get In
The first struggle was figuring out if I could even attend. It is an Imams conference after all. But it was taking place in my city, and I really wanted to hear the discussions on the topic. I decided to go ahead and register.
Yeah.. i feel out of place… pic.twitter.com/uI0jBgRq5R
— Omar Usman (@ibnabeeomar) January 26, 2014
You can see that the conference does have room for guys like me, although its quite a long and depressing scroll down to “Mr.” (as someone eloquently pointed out to me on Twitter).
Gets better. At least this one i can answer.. pic.twitter.com/1yF6eKm8MP
— Omar Usman (@ibnabeeomar) January 26, 2014
It also just so happens that this good looking (sorry he’s married now) guy, who happens to be the CEO of MuslimMatters, was helping organize the conference. I had him verify it was ok to sign up.
Turns out the registration wasn’t that strict – a few locals usually end up attending depending on the topic. In general though, it’s for imams and the conference content is tailored accordingly to that audience.
Overview: Setting the Stage for a Real Discussion on Islamic Home Finance
Upon registration we received a comprehensive notebook with research papers examining the contracts of various Islamic mortgage companies. Various scholars at AMJA did their best to go through the contracts. They made observations on what they felt were pertinent to the shariah compliance of these contracts along with some suggested changes. Before you ask – no, I cannot share these notes [more on that in a minute].
The way the conference was set up was that a scholar from AMJA would make a presentation about the contract, and then the company (we heard from about 6 different companies this weekend) would then give a presentation. These were done by some combination of their executive/administrative members and scholars on their shari’ah boards.
The encouraging part of this for me was that it was the first time I heard a lot of these issues being discussed openly and in detail. It also seemed like the first time some of these companies were speaking openly with an organization such as AMJA. I have to commend the scholars for showing by example the proper adab for these types of situations. I was impressed that the scholars were able to openly speak about the issues without anyone taking it personally.
The main shortcoming was that it seems proper notification was not given to the companies about how the discussion would take place. This became readily apparent as the presentations went on. The research from AMJA wasn’t made available to the companies with enough notice to get answers from their shari’ah boards. Unfortunately that made it feel a bit like a congressional hearing on steroid use in baseball, but nonetheless it was a good step.
Ideally, the research from AMJA should have been given to the companies a couple of months in advance. This would have allowed them to take suggested changes into consideration and then come back to a conference like this and explain what changes they made, and if they couldn’t implement something then why.
In addition to the banks, we also heard from a small housing co-op. It wasn’t critiqued in detail, but some pointed out that while it may be seemingly more shari’ah compliant in terms of the actual contract, it also faces difficulty in that it carries higher risks, long wait times, and is not scalable to actually be a national solution [the second they commercialize to that scale, they would be subject to the same regulatory requirements that throw a wrench in the other finance contracts].
The majority of discussion was at a very academic level, and analyzing very specific issues in some of the contracts and the mechanisms by which it was achieved. We learned the basics of the various Islamic companies, their core business, the types of financing they offer, and examining those specific contracts in light of shari’ah concerns and suggestions to fix objectionable parts of the contract.
As for the outcome of the conference, the finance companies’ shari’ah boards will look at the points raised at AMJA. They’ll go back and forth with each other for a bit and then present the final research to a larger assembly of global scholars to try and get final rulings. This process will take a few months. No final rulings were issued on any company at the conference (that’s why I told you to stop reading this post earlier if that’s what you were looking for).
The Big Picture
Islamic finance has to satisfy:
- Shari’ah Constraints – so its halal.
- Regulatory and Legal Requirements – so the government doesn’t shut you down.
- Investors – There has to be a viable business so people can make money [interest is haram, profit is not].
- Customers – Someone actually has to buy this thing you’re selling.
What this lays out for us is the big picture. A shari’ah compliant contract cannot exist in a vacuum. Otherwise, as common sense would dictate, every single one of these companies would just have a 100% shari’ah compliant contract that had no objections and just use that. But because we live in a world with specific realities, that is not the case.
Traditionally, the borrower/lender relationship in Islam is one of charity. Now it’s the predominant mode of business. No matter what solution we try to provide, we have to understand that solution is being implemented within a global system that is based on interest. This presents a number of complex realities that must be dealt with.
What may look like “repackaging existing mortgage contracts” on the outside is actually years and millions of dollars of research trying to figure out how to jump through hoops to put a shari’ah compliant program in place without crossing the boundaries set by their advisory boards and things like the AAOIFI standards.
We don’t see the research process that went into how the contracts were developed. Often times it consists of taking a shari’ah contract, trying to implement it then running into a legal or regulatory roadblock. Then they adjust the contract, within bounds of shari’ah to bypass that roadblock and move on til they hit the next one, and so on. This is further complicated by the fact that many of the government regulations are themselves nonsensical. Add to that how different contracts have implications in terms of taxes and so on and it gets complicated quickly. Some of the contracts are 200+ pages in length, and what we often see is a summation in English that doesn’t truly represent what went into the decision making process.
A lot of us sit back and assume there are simplistic solutions to these problems. Foreign investors are hard to find because they get better rates of return in other emerging markets. One of the reasons is due to government subsidies to keep the prices low (another complication to the whole process).
One thing that validates a lot of what is written above is the fact that many of the Islamic finance products are not available in certain states in the US. The reason is because complying with the regulations in those specific states would force them to bend the contracts beyond what their advisory boards would consider to be acceptable in regards to the Shari’ah. This costs them millions of dollars in business.
One question that comes up is to say that we should force the system to change. Here’s the truth. As far as Freddie and Fannie are concerned, the entirety of the Islamic finance industry here is barely a rounding error on their 2 trillion dollar+ balance sheet (as David Loundy from Devon so eloquently put it). The other sad reality is most Muslims simply do not care. How many Muslims would willingly take a mortgage where they had to give up a share of the profits when selling their house? One company said they tried it in a limited format and no one would sign up for it. Less than 10% of the Muslim audience is concerned with Islamic financing, and of that 10, only 1% are truly concerned for the shari’ah. The other 9 will simply go with whoever has the cheapest monthly payment. Some might say this is pinning ourselves in a corner and a position of weakness, but it’s reflective of reality.
By the same token, even with the big picture realities we deal with, the details cannot be overlooked either. Even though a lot of details and technicalities were discussed – those details are still extremely important. In many cases they can change a contract from being prohibited to permissible and vice versa.
The details help determine whether some of the liberties being taken are truly to fit the system, or if they’re a back door to interest. Are the contracts providing an illegitimate loophole for some kind of evil aim, or utilizing legitimate flexibility to fulfill a noble aim? We are truly in need of work-arounds to achieve the aims of the shari’ah and make things easy for Muslims. The details help make sure that the overarching wisdom of the technicalities within the shari’ah are complied with and not completely stripped of meaning. When this happens, people begin mocking the shari’ah altogether.
Going forward, I think it’s important to understand the roles at stake and how they can provide good checks and balances. I think AMJA serves an essential role in that they can provide outside scholarly insight. This is critical in that it’s a shari’ah advocacy and can do it’s best to provide an outside check on contracts to make sure Islamic principles aren’t being compromised. The everyday Muslim consumer also plays a role in that they can demand more transparency from these organizations. I personally felt a lot of debate that’s taken place over the past few years could have easily been avoided with some level of openness. But until we demand it, there is no incentive for anyone to open up. These components together can help push us toward a viable Islamic finance model in the US.
Litmus Test for Selecting an Islamic Finance Company
This is vital for most of us. We forget sometimes that we aren’t experts in Shari’ah, regulatory requirements, economics, or finance. This means at some point we must put our trust in established scholarship and make a decision. How do we know what company to pick, especially if we’re unable to navigate the murky waters of finance and regulations?
1. Is the Islamic finance company adhering to the AAOIFI standards?
Scholars from both AMJA and the finance company advisory boards advocate operating within the AAOIFI framework (one of the few points of agreement :)). This is the auditing organization for Islamic finance institutions. They all get their certifications from AAOIFI, which is headquartered in Bahrain.
2. Do they have a qualified independent shari’ah advisory board? Has this board actually issued a fatwa? And do they interface regularly with the institution?
You can look up the scholars on their board and see if they are trustworthy and qualified. Not just any scholar can sit on these boards, but they need to have expertise in the fiqh of finance and also an understanding of modern finance.
Unfortunately some companies are independently running without actual scholarly input. An example of this is a company that posts a fatwa thats similar to the model they use, but they don’t have an actual shari’ah advisory board.
I feel compelled to mention that only one company that presented at AMJA had no scholarly board. In fact, they seemed to take pride in that fact and bragged that they “don’t buy scholars.” The other companies supplied AMJA with updated contracts and information, but this company would not do so unless AMJA signed a non-disclosure agreement that essentially said they would sue AMJA if they said anything bad about them. When given a chance to present their side of their finance model at AMJA, they simply spoke in broad cliches and made some thinly veiled personal attacks at the AMJA scholars which was truly disheartening.
I mention this story to illustrate a couple of things. First, it is true, there definitely are companies that are operating outside relatively agreed upon frameworks. Because they’ve completely disregarded scholarly oversight, they make it difficult for anyone to take them seriously, but worse – they entrench the stereotype of just playing with the shari’ah and throwing together a conventional mortgage with a new package. Second, I mention it because it actually gives much more credibility to the other organizations. Simply showing a willingness to be transparent with an outside body like AMJA and discuss these issues in detail in such a venue gave me an immense amount of respect and confidence in their efforts.
Since the conference ended, I have been inundated with messages on Twitter, Facebook, email, and even phone conversations (that’s the sign of it getting serious). I’ll start by sharing some of the sentiments others have expressed to me and offer some closing thoughts at the end.
All Islamic Finance is a sham. You can put lipstick on a pig, but it’s still a pig. We don’t need Islamic finance anyway.
Being cynical is definitely the easy route. It takes more work to be able to give someone the benefit of the doubt. I’ve struggled with this myself, but finally hearing things in the open had a large effect on me. There are sincere people who have made huge sacrifices to try and figure out a way to bring halal alternatives to us so that ultimately we can achieve our goals in a halal manner. It’s extremely disingenuous to throw the whole thing out dismissively.
When you hear from scholars who have dedicated themselves to this field longer than most of us have been alive – you develop a huge appreciation for the work they’ve put in, and how foolish it is to just cast the efforts aside.
They’re just in it to make a bunch of money.
Interest is prohibited, profit is not. As long as the service is halal, I’m okay with it. As for why some companies might charge more than a traditional bank it simply comes down to volume. Big banks (you know, the too big to fail kind) have millions in write-offs built into their budgets. They can afford to do this because of the level of revenue they have. A smaller, Islamic, institution simply doesn’t have that kind of flexibility.
These scholars don’t know what they’re talking about. They just find loopholes to do the haram.
Most of us are not experts in finance, economics, business, law, government regulations, Islam, fiqh, usul al-fiqh, fiqh al-mu’amalat, financial transactions, and Islamic finance. Heck, most of us don’t even know Arabic. We don’t even know what bay’ ul-‘eenah and tawarruk are. It’s ironic then, that we presume ourselves to have a higher expertise on every single one of these subjects than scholars who are experts in these subjects. Let’s give them some benefit of the doubt.
What really strikes me, is that most people who make these accusations would never say it to the face of one of these scholars.
That’s not to say they’re above making mistakes or anything like that. The point is that there’s a way to handle those. I feel that the AMJA conference is a good first step in that direction. People with actual credibility and training in these subjects can challenge objectionable points and work with them to try and find resolutions.
It wasn’t terribly long ago that our parents’ generation was putting down roots here to raise us. This meant figuring out ways to make a living, try to put their kids through college, build masjids, Islamic schools – and yes, buy homes. Due to the lack of options, they invariably took traditional mortgages from the bank. We’re at least blessed in the sense that we have some options. We can agree that there’s a lot of work to be done – however, it’s up to us to advocate for a particular solution. Do we want to just kill the whole thing because we have some deep seeded animosity toward it? Or work with it and hope that better solutions continue to emerge for the next generation?