Fatwa: # 46144
Category: Jurisprudence and Rulings...
Country: African Country
Date: 12th September 2020

Title

Purchasing a house in Australia - Is it permissible to get a home loan from the bank?

Question

Asalam-o-Alaikum,

I live in Australia and my question is regarding Mortgage (Home Loan), is it permissible to get home loan from local banks for the first home? (Here, I’m not talking about Investment Property), all these banks charge an interest rate. Local Banks purchase the house from Owner (bank pays full amount to the Seller) and then the terms are settled between the bank and the purchaser. Few famous banks in Australia are as under:
Commonwealth Bank
ANZ
NAB
Westpac

The loan's monthly repayments are equivalent to the rent we pay to landlords for our rental houses. It is the money which we already pay on a monthly basis and could not be considered as a burden, we have to pay this much amount every month one way or the other.

There are few Islamic Home Finance Institutions (available) in Australia who have Shari’ah Compliance Certificates from the scholars. These Islamic Finance Institutions have agreements or arrangements with local banks and they get the money from these banks and lend it to end users on much higher rates (almost double) than the local banks themselves. Many people have applied through these institutions and they receive the contract letter from the local bank.
Example
Australian Islamic Home Finance Institution https://www.mcca.com.au/

Moreover, I'll be highly obliged if you could explain the difference in Home Financing from an Islamic Institution and a conventional Bank. If a house of $100 costs $110 from a local bank after 10 years and $120 from an Islamic Institution within same period.

I would like to mention that during the COVID-19 situation, Banks gave relief to borrowers and did not deduct any monthly repayments.

I'll be thankful for the guidance.

JazakAllah Khairan

Answer

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

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

Brother in Islam,

The conventional bank and the Islamic bank both provide home financing. However, there is a difference in the procedure of the two banks.

The procedure of financing in a conventional bank is that the bank loans the client a lump sum of money to purchase a house. He then purchases the house and takes ownership of the house. However, the bank withholds the title deeds of the house until the client settles his loan repayment. This loan involves the client having to pay interest to the bank. If the client settles his loan with the bank, then the title deeds will be handed over to him by the bank. However, if he fails to do so, the bank may repossess the house.

The procedure of financing in an Islamic bank is that the bank enters into a sale contract (Murabahah) with the client, or partnership (Musharakah).[1] In Murabahah, the bank purchases the house for x amount and then sells it to the client with a profit margin. This creates a debt obligation on the client to pay the price stipulated in the sale. The client then pays the debt in installments. In Musharakah, the bank and the client pool their finances together and purchase the house. When the client pays off the amount that the bank contributed by purchasing its share, complete ownership is transferred to the client.

In brief, the difference between the conventional bank and Islamic bank is, in the conventional bank, the client simply takes a loan from the bank and pays interest. The client purchases the house with the loaned money. The bank does not purchase the house and sell the house. In an Islamic finance system, the Islamic bank actually purchases the house and resells it at a profit as in any other purchase and sale transaction.

The monthly repayments of the loan given by a conventional bank may seem reasonable as it is equivalent to the amount a tenant pays for a rental house, however, the conventional bank’s loan is not free of interest. Therefore, it is not permissible for you to take a home loan from a conventional bank.

Our advice is that if you wish to purchase a house, seek assistance from an Islamic bank. Your monthly installments may be greater, but at least you will have a clear conscience and peace of mind. You will earn the pleasure of Allah Ta’ala and receive direct assistance from Him as you are attempting to live your life according to Shariah.

You should enquire from your local Ulama which Islamic bank provider is Shariah Compliant.

You may refer to Mufti Faizal Riza at http://www.fatwa.org.au/ or Mufti Haris. Both are from Melbourne. They will advise.

 

 

And Allah Ta’āla Knows Best

Mohamed Ebrahim bin Ismail Abdullah

Student - Darul Iftaa

Pietermaritzburg, KZN, South Africa 

Checked and Approved by,

Mufti Ebrahim Desai.

 

20-01-1442|09-09-2020

 

 


[1] Islamic Finance by Mufti Taqi Uthmani (Madda Zilluhu) – Pg 95

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