One of the most confusing issues for most people when they look at Islamic home financing programs, is trying to determine if the program is structured according to Shariah, or if it only appears to be so. Unfortunately, many programs today are based on a traditional mortgage structure with the terms reworded, creating confusion in people’s minds and a false sense of comfort.
While it may appear that rewording is sufficient to comply with Islamic Law, we are reminded with the violators of the Sabbath mentioned in the Quran. Allah warns us against subverting His rules with the appearance of technical correctness by telling us about a fishing village in which adherent Jews who observed the Sabbath were faced with an economic trial.
The fish would flock to the village waters on the Sabbath, when the faithful were commanded not to work, yet would be sparse on other days of the week. Some villagers, who did not want to break the Sabbath outright but wanted to take advantage of the flocking fish, decided to get creative. Their “solution” was to set out nets and traps before the Sabbath, and to collect the fish once the Sabbath had passed.
While it appeared to comply with the letter of the law, they were warned by those who were truly observant that it certainly did not comply with the spirit of what Allah had ordered. Unfortunately, the violators did not heed those warnings, so Allah saved the righteous and set upon the transgressors a painful punishment.
From this example we can see that it is clearly unacceptable to try to work around Allah’s commandments with ‘clever’ solutions, yet the similarity to many “Islamic” or “Shariah” compliant financing programs today is astounding.
Beyond Interest & Risk
The main focus for many programs is to obscure the most familiar components and terms of a riba-based loan. Since people are familiar with those terms, they are quickly comforted when they do not see them and accept assurances from the program provider that the program is uncompromising in its observance to Shariah.
Because it is the most obvious term, people usually search for the term “interest” and are satisfied when it is not prominent. Many people also want to see that there is an element of risk for the financier since we are programmed to think that it is considered trade if risk is taken while riba contracts generate risk-free returns.
Although programs work hard to eliminate the word “interest” from their contracts, they are unable to do so completely and blame “the regulations” for the instances where it appears. What many people don’t realize is that government regulations in no way require interest to be charged or erroneous disclosures to be made, and they only apply when lending is involved. Their intent is not to dictate a course of business, but to ensure proper disclosure for the protection of consumers.
Another indicator that many people misunderstand is the factor of risk. The thought is, that riba is a risk free appreciation scheme while trade involves the risk of loss and the expectation of profit. Programs capitalize on that misunderstanding by emphasizing the risk they take in extending the loan and claiming that what they offer is not riba but trade, making their earnings “profit”. However, interest-based lending is not risk free.
Risk is present in any human activity, including lending money with interest. Interest-based mortgage loans always involve risk to the lender, even when that loan is secured by a lien on the property. What if the borrower does not pay or dies while the property drops to a fraction of its original value? This is not a hypothetical scenario; it has happened many times over the years, most recently on a massive scale from 2007-2009. In fact, many banks went bankrupt and needed to be bailed out for just that reason. Therefore, risk is not what differentiates riba from trade.
The real difference between engaging in trade and engaging in riba is whether the rights and responsibilities belong to a lender or belong to a trader or investor.