Ijara CDC's Halal Mortgage - How Does It Work?

Halal home financing has always been a challenge for Muslims in North America. When everyone uses interest-based mortgages to finance the purchase of real estate, buying a home without one becomes almost impossible. Cheap and readily available loans drive up the price of real estate, as we’ve seen in housing markets across Canada over the past decade.

How can Muslims buy homes while avoiding interest?

One option is to purchase a home through a housing co-op where the funding comes from other potential home buyers and investors. The co-operative’s limited funds, however, mean that home buyers have to wait for their turn to purchase a home and are often not able to get the same amount of financing as they could though a conventional interest-based mortgage. In addition, because the co-operative model involves the co-operative first purchasing the house and then transferring the ownership to the buyer at the end of the purchase process, the land transfer tax will be levied on the property twice. Additionally, most of these transactions involve the sharing of profit in the event the property is sold or paid off early.

Ijara CDC provides a Shariah compliant home financing solution that works within the confines of the conventional western banking model. Buyers are able to access the same amount of funding, with the same down payments and other conditions that are available through conventional mortgages. The purchase process also involves only a single transfer of ownership, so the land transfer tax is only levied once.

What does Ijara CDC do?

Ijara is not a bank, lender or investor. Instead, Ijara CDC connects home buyers with investors and structures a legal agreement where the investor provides funds to purchase a property and the buyer pays the investor back over time in a Shariah compliant manner.

When property buyers come to Ijara, Ijara finds the most economical investor for them given their credit-worthiness, employment situation and the down payment they have. These investors are commonly conventional banks and insurance companies. As Ijara’s VP of Marketing, Gemala Afifi explains, “Buyers come to Ijara for funds, but the funds do not come from Ijara.”

Once the buyer has been matched with an investor, Ijara does its work of fitting a square peg into a round hole. The challenge is that the vast majority of investors will only provide financing in the form of an interest-based loan. Meanwhile, Muslim buyers will not be part of an interest-based transaction.

Ijara CDC’s solution is to create a trust that comes between the investor and the buyer. A trust is a legal entity created to hold assets on behalf of the grantor (i.e. the one who establishes the trust) for the benefit of the beneficiary (the one who benefits from the assets in the trust). The trust is managed by the trustee following instructions from the grantor.

What is a trust?

Trusts are legal entities separate from the grantor. They are commonly used to bequeath assets after one’s death. For example, a grantor may create a trust and instruct the trustee to invest assets in such a way that they can benefit a charity or individual(s) for years to come.

A trust can also be used to hold property. This might be done to maintain the owner’s privacy (e.g. a landlord who wants tenants to only deal with the property manager), to facilitate administering the property when the ownership is shared or to facilitate transfer of property ownership.

Ijara CDC uses a trust to set up a Shariah compliant home purchasing contract between the home buyer and the trust. In the home purchase agreements structured by Ijara CDC, the customer is both the grantor and beneficiary of the trust and Ijara CDC is the trustee. That said, “The trust is not the individual and the individual is not the trust,” says Gemala, emphasizing that the trust is legally a separate entity.

How does Ijara CDC structure a Shariah compliant financing agreement?

Here, it’s the trust that gets the loan from the investor and purchases the home through a conventional mortgage. Then the buyer sets up an agreement to purchase the home from the trust using a Shariah compliant lease and ownership, or ijara wa iqtina, contract.

The word ijara in Arabic means lease. It’s an agreement whereby the owner of a property allows someone to use the property in exchange for a fee. It’s the type of agreement we enter into when renting a home, car or pair of skis. In the ijara wa iqtina contract, the lessee (i.e. the person renting the property) agrees to buy the property at the end of the lease period.

In this agreement, the buyer makes monthly rental payments to the trust. In the mean time, the trust makes payments to the investor/lender and increases the beneficial rights to ownership in the home.

Once the buyer has finished paying off the house or wants to sell it, he would transfer $1 to the trust and the ownership of the house would be transferred from the trust to him. The $1 is necessary because for a Shariah compliant transaction there has to be a nominal exchange when the property is transferred from the trust to the buyer.

If he is selling the house before the trust has completed paying off the mortgage, whatever is still owing to the investor or lender would be repaid using proceeds from the sale.

Ijara CDC does not structure agreements that involve variable rate mortgages where the interest rate can change at any time. Instead, it only allows fixed rate loans where the rate is fixed for a set period. When the mortgage is renewed the ijara wa iqtina agreement between the trust and the buyer will be changed accordingly. Just like a landlord can increase the rent for his tenant, the rent in an ijara wa iqtina agreement can also change.

Along with structuring Shariah compliant contracts for new home buyers, Ijara CDC can also convert an existing interest-based mortgage to a Shariah compliant mortgage. Again, it would set up a trust and place the property in that trust. Then, it would set up an ijara wa iqtina agreement between the trust and the buyer

Is ijara wa iqtina really permissible?

With such a similarity in the rent and purchase payments in the ijara wa iqtina agreement and the interest and principal payments that in a conventional mortgage, it’s natural to question, is ijara wa iqtina really permissible? If the payments look the same, what makes it different from a conventional interest-based mortgage, which is well known to be haram (not permissible)?

They key difference is that in a conventional mortgage, you are paying to borrow money. This is riba (interest) and this is haram. In an ijara contract, you’re paying for the use of property. This is rent, which is halal.

For example, if you lent someone $100 to buy a bicycle and required them to return you $110 a month from now, that extra $10 would be interest, which is haram. If instead, you bought the bicycle for $100 and sold it to them for $110 to be paid a month from now, that’s trade, which is permissible. Even though in both cases you spent $100 in return for $110 and the other person got a bicycle, only one of these transactions is halal.

There’s nothing wrong with making profit in Islam but how you make that profit is critical. One of the prohibited ways of making profit is by lending money on interest.

Fatwa and the contract’s history

In its structuring of Shariah compliant transactions, Ijara CDC uses the same Shariah compliant contract used by the United Bank of Kuwait’s Al-Manzil home financing program. This contract was first developed and approved by a group of renowned scholars including Sh. Muhamad Taqi Usmani, Sh. Nizam Yaquby, Dr. Abdus Sattar Abu Ghudda, and Sh. Abdullah Al Mannae in the 1990’s.

How much does it cost to purchase a home through Ijara CDC?

Purchasing a home through Ijara CDC incurs the same costs as purchasing a home through a regular mortgage. There are closing costs such as land transfer tax, property appraisal, homeowner’s insurance, title insurance, etc.

Because of the additional complexity of the Shariah compliant contract, the fee for closing with a lawyer who is not familiar with this contract is $2500. Ijara CDC can also recommend a lawyer that is experienced with the Shariah compliant contract, whose fee would be $2000.

For the length of the lease period on the property, Ijara CDC would act as the trustee of the trust and charge an administration fee of $20 a month.

Buying a home without paying interest is a major challenge that faces many observant Muslims.  Through implementing a lease and ownership (ijara wa iqtina) contract between the buyer and a trust, Ijara CDC provides a Shariah compliant home financing solution for Muslims in North America.

Learn more about Ijara Community Development Corporation in their website ijaracdc.com.

This is Part 3 of a series on Riba in Islam.  Here are Part 1 - What's Wrong With Interest?, Part 2 - Beneficent: Empowerment Through Interest-Free Debt Relief and Part 4 - Iana Financial Revives the Tradition of the Benevolent Loan.

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Correction, July 19, 2018: The original article stated that part of the buyer's monthly payments goes towards buying the property and part goes towards renting. In fact, the buyer makes monthly rental payments to the trust while the trust makes payments to the investor/lender and increases the beneficial rights to ownership in the home.