What is the key differentiator between AHC's Investment System and conventional mortgages?
One of the primary condition that makes any financial contract acceptable, from the Shariah perspective, is that, "the parties involved agree to participate in both the GAIN and the LOSS that may result from such an investment". Any contract that is missing this clause is "not acceptable" from a Shariah perspective. In the conventional mortgage systems, lenders never agree to share the loss with the homeowner and hence are not Islamically acceptable and permissible. AHC in principle and as a part of its contract agrees to bear the losses with the homeowner in the same ratio it agrees to share in the gains. This differentiates AHC from all other conventional mortgage and financing systems and makes the acceptable as per the Shariah. Besides this, the second key problem from a Shariah perspective in the financial contract with the conventional financing systems is the agreement to pay interest at certain agreed rate. This is outright Haram. In the AHC contract the RENT (not interest) is decided based on the fair market rental value of the property and AHC's share or rent is dependent on its equity. The homeowners share of the rent is used to purchase more equity from AHC. This from an Islamic perspective is 100% legitimate.
Why is the rent that AHC collects not considered interest? Banks lend at variable rates which can change with the market conditions and demand...
There are two important concepts that have to be clearly understood:
1. PROFIT: Income from use of an ASSET or income from trading a permissible COMMODITY.
2. USURY: Income from use of MONEY
...and Allah has permitted trading and forbidden usury..."
Al-Quran, Surah Al-Baqarah (Chapter 2; Verse 275)
Consequently, the Shariah permits PROFIT but prohibits USURY. Bank's income is derived from the use of money by the borrower, which is prohibited. AHC invests in the property and derives its income from the compensation given by the user for the use of that property. This is perfectly halal.
Banks do take losses in case of foreclosures and bankruptcies, so they are fulfilling the condition of participating in losses. Why are they then not OK?
Yes, they do take those losses in case of foreclosures only when you file for bankruptcy and there is no other way left for them to get to your other assets. As we mentioned above the condition that makes a contract legitimate Islamically is "Agreeing and Willing to take part in the loses as well as the profits". The bank in this instance was forced to take a loss but it had never agreed to take a loss. Had it agreed to take the losses as AHC, you would get back a portion of your equity minus the losses.
A comparison table to clarify the differences in the process:
|AMEEN HOUSING CO-OP SYSTEM||CONVENTIONAL HOME LOANS|
|1. AHC INVESTMENT in a member's home is NOT a loan.||1. A BORROWER borrows MONEY from a LENDER for a home.|
|2. The member and AHC are PARTNERS in acquiring a TANGIBLE ASSET, the HOME.||2. The borrower buys a home with the MONETARY LOAN from the LENDER.|
|3. The member and AHC are CO-OWNERS.||3. The BORROWER is the OWNER. The LENDER is the LIEN-HOLDER.|
|4. The home is an ASSET for both PARTNERS.||4. The home is the COLLATERAL for the loan.|
|5. The member pays a monthly RENT for USING the TANGIBLE ASSET, the home.||5. The BORROWER pays INTEREST on the MONETARY LOAN that he/she OWES the LENDER.|
|6. The RENT is based on the FAIR-MARKET-RENT of similar homes in that neighborhood.||6. The INTEREST is based on some commercial LENDING RATE.|
|7. The rent is SHARED between the member and AHC.||7. The INTEREST is paid to the LENDER by the BORROWER.|
|8. When the member wants to take FULL ownership, he/she BUYS-OUT AHC Investment in the PARTNERSHIP.||8. The BORROWER simply PAYS-OFF the outstanding LOAN.|
|9. Before buying-out AHC's Investment, an APPRAISAL of the home is done to determine its CURRENT VALUE.||9. When paying-off the MONETARY LOAN, NO appraisal is needed.|
|10. The GAIN or LOSS in HOME VALUE is SHARED, at a previously agreed ratio, by the PARTNERS.||10. The GAIN or LOSS in home value is ONLY the BORROWER'S FATE. The LENDER will NOT share in the GAIN or LOSS.|
For further information against riba please read Sheikh Maulana Abul Ala Maududi's Opinion AGAINST RIBA based on Prophet Muhammad's (P&BUH) Sunnah and Ahadith