Is the following ICFAL home financing product Shari’ah compliant?

Is the following ICFAL home financing product Shari’ah compliant?


Is the following ICFAL home financing product Shari’ah compliant?


In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

We have analyzed the contract in reference. Our understanding of the product is as follows:

1. The client identifies a suitable home.

2. The financial institution and client enter into a “Diminishing Musharakah” agreement.

3. The financial institution and client jointly purchase the home. The financial institution purchases the majority equity stake of the home.

4. The client unilaterally agrees to make several equity purchases after ownership of the entire home is completely transferred to the client.

5. The client unilaterally agrees and pays a rental amount to the financial institution for the usage of the financial institution’s equity.

6. The financial institution and client enter into a “Mortgage Agreement”. The financial institution holds the title deeds of the equity (home) in the capacity of “Mortgagee”.

7. The client makes equity purchase requisitions to the financial institution after which the financial institution sells a proportionate amount of its equity to the client.  In this way, the financial institution’s equity stake gradually diminishes while that of the client increases.

8. The financial institution releases the title deeds of the equity once the client completely owns the equity.

Hereunder are our observations on the contract in reference:

The product in reference is not Shari’ah Compliant due to the following reasons:

1. In Annexure A, Draft copy, reference number: 10032010P1, clause 2, it is stated:

“The occupant acknowledges and agrees that upon payment by the mortgagee, the mortgagee shall be entitled to hold the documents of title of the land on behalf of the occupant as security”

1.1) Analysis

According to Shariah, mortgage/collateral is referred to as “Rahn”. The collateral item is referred to as the “Marhoon”. The mortgagee is referred to as the ‘Murtahin” while the mortgagor is referred to as the “Rahin”.

1. 1.1) According to the Shar’ee laws of Rahn, the legal rights of the Marhoon (collateral/pawned item) should not be occupied with that of the legal rights of the “Rahin” (mortgagor).[1]

In the scenario in reference, the financial institution would be holding a portion of the Marhoon (home) belonging to the Rahin (client) as Rahn, therefore such a Rahn would not be Shariah compliant.

1.1.2) In principle, the Marhoon should not be an undivided and undistinguished item.

In the scenario in reference, the Marhoon would be an undistinguished and undivided home; therefore such a Rahn would be impermissible.[2]

1.1.3) According to the laws and principles of Islamic Finance and Economics, it is not permissible for any one of the transacting parties to be Dhamin (liable) and Ameen (trustee) at the same time. Both the contracting parties would have to undertake an individual role in the contract. No party can undertake dual or multiple roles at the same time.

In the above clause, the mortgagee, which is the bank in this instance, undertakes the dual roles of Amanah (trusteeship) and Dhamanah (liability). This clause is therefore non-Shari’ah Compliant.

2. In clause 9 of the said document, the following is stated:

“The occupant in accordance with the diminishing partnership principles hereby agrees to lease the mortgagee’s interest at the profit share of mortgagee”

2.1) Analysis

Musharakah Muntaqisah (diminishing partnership) is composed of different transactions and contractual agreements which come into play at different stages of the Musharakah Muntaqisah.

According to the laws and principles of Musharaka Muntaqisah (Diminishing partnership), all individual and separable agreements and arrangements have to be separated from each other and processed in different independent stages. For example, the (Ijarah) lease agreement has to be separated and individualized.

It is evident from the above that none of the separable agreements have been separated nor individualized; rather, they have been included under one contract.

3. In clause 28, it is stated:

“The occupant has the responsibility to safeguard both the occupants and mortgagees investment and accordingly has agreed to insure the whole of the land”

3.1) Analysis

Insurance is prohibited according to Shari’ah, therefore such a clause is not Shari’ah Compliant.

4) In Annexure A, Financial accommodation Contract, financial details, page two, it is stated:

“Default rate: $150 penalty fee shall be payable by the mortgagors for every month the regular payments are in arrears”

4.1) Analysis

According to the laws and principles of Islamic Finance and Economics, penalty fines or default fines are not permissible and non-Shari’ah Compliant.

and Allah Ta'ala Knows Best

Mawlana Ismail Desai
Student, Darul Ifta
Durban, South Africa

Checked & Approved:
Mufti Ebrahim Desai

(لا مشغولا) أما الشاغل فرهنه جائز كما في كثير من الكتب و قيد بقوله بحق الراهن احترازا عما لو كان مشغولا بملك غيره فلا يمنع كما في العمادية حموي. (رد المحتار، ج 6، ص 479، ايج ايم سعيد)

  (مميز) لا مشاعا و لو حكما بأن اتصل المرهون بغير المرهون خلقة كالشجر (الدر مع التنوير، ج 6، ص 479)[2]

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