A question concerning Guidance Co. for financing the purchase of houses

Peace, mercy and blessings of Allah be upon you.

I Praise Allah, highly exalted is He,  and I attribute blessings, and salutations to His chosen Prophet (P.B.U.H). I ask Allah to provide me and you with, success, appositeness and consciousness.

I have been approached by some representatives of a company that works in the field of financing the purchase of houses to offer a substitute for usury-based credit, undertaken by usurious banks.

lots of people`s hopes are built on this company where some people thought to be righteous held some of its positions

They visit the mosques of the district to promote their programs and present their projects. I`ve met with them twice for more than two hours each, during which they explained their offer summed up in the following:

First: The Introduction

The introduction includes the basics depending on which the project is launched. These basics according to their explanations are as follows:

The fulfillment of the legislation thorough identifying the contract with the Islamic legislative rules.

The balance between the interests of both parties and achieving justice as much as possible in this aspect.

Competing with the offers presented by the usurious banks,  in the view of the fact that the contracting person with this Islamic company does not lose any of the basic benefits/advantages that he could acquire through usurious contracting.

Therefore I told them that theses introductions are essential and vital and should be precise so as there would not be any disagreement concerning them. But if there is a disagreement/contradiction between achieving the financial interests and fulfilling legislation, then the priority will be to the latter.

Second: The Form of the Contract

Afterwards, they began to illustrate the details of the project, briefed as follows

They say that the company uses the system of decreasing sharing ending in ownership.

They give an example on that saying: if we assume that the person who wants to buy a hous has 10% of the value of the house, so we share him/her as partners with 90%-rest.

We take from him a monthly installment which represents three items: first, the profit of the company from this operation. Second, a return for the deducted taxes imposed on the house by the official authorities. Third, the share quota that the partner owns gradually of this house.

Then they say that the profit amount will decrease asmuch as the shares owned in the months following the first one. And the more his house-ownership rate increases, the less the profits imposed upon him decrease accordingly. Because the increase of the shares of the buyer means the decrease of the shares of the financing company and consequently, its shares of profits decrease.

They mentioned then that the buyer solely undertakes the taxes, and the insurance value,  in addition to  any other expenses imposed upon the house by the official authorities.

They say, if the buyer stopped paying the due installments  during the period determined, the company should undertake selling the house; and the resulting profits or losses should be the buyer`s whereas we (the company) should take the debt due in full.

They said they will hold this contract for no more than a month, and sell it to Freddy Mac Co., one of the big financing companies in The US, looking for fields to invest its money. By the way, this company has been established by the decision of the American Congress in order to increase the opportunities of owning houses; due to the fact that  one of the policies of the government is that the greatest majority of people should own houses for some social and political considerations.

Freddy Mac Co is considered the biggest financer for purchasing houses and for companies financing the purchase of houses du to its enormous cash money in addition to the fact that joining this company guarantees an amount financed and an extent of flexibility in dealings especially with the companies that deal with minorities or low-income classes, because the government is keen on having no civil revolutions by those people. Moreover owning houses, gives them a sense of stability.

This company "Frddy Mac Co." shall take the place of their company in this contract with the same conditions so as liquid money could be provided.

So, whenever they conclude a contract, they sell it to this company (Freddy Mac) which consequently replaces them in executing it. Also it covers them with what is necessary of liquid money.

When I asked them about their profits out of such operations, they said that the share of profits they get from the clients will be divided between them and that financing company. We are like agents or clients to this company which can reach the Islamic communities through us. Thus, "Freddy Mac Co." is benefited by the revenues that it gets; and our company is benefited by the part it gets from that revenue. The buyer is benefited by the house he/she lgitmately owns  in the end.

Then I asked them  how the financing company determined its revenue of the money that it invested thorough their company. They said that would be on the basis of the rate of revenue or the rate of interest prevailing in markets.

"And how do you estimate that?" I asked. They replied that would be in the same way; in respect of the general rate of revenues, but we put it in an Islamic form.

Thereupon, I presented to them this analysis:

Your contract is based on two pillars:

The First: You share the client in the ownership of the house; you pay the share the client fails to cover because of his low-income which is -for sure- the greater share. This capacity will stand and adhere to you throughout the period until the client shall be able to buy your share altogether and to him the ownership shall be devolved in the end.

 The Second: The gradual selling of this share to the client. This happens by dividing your share into groups of shares or stocks. And whenever the client paid the value of a share or a stock,  he/she would own it.  

This selling is not concluded by one payment but gradually in installments. By such a contract you have two capacities. The first as "Partner"; and it is a continuous capacity that does not end until the selling of your last share to the client at the end of the term that may last for ten years or even more or less than this. The second capacity is as "Seller"; it is renewed each time you sell a share to the client.

Being partners, you are required to share loss and profits according to the ratio each of you has in the capital. Moreover, on grounds of being a seller, you are entitled to have the agreed-upon profit on the part of your share sold to the other party.

Then I directed to them these questions:

Why do you drop your capacity as a partner when the house is sold for a reason or another? Why don`t you all share the consequences when the house is sold because the buyer (second party) is not able to by the house? Why do not you profit? They said "we are satisfied with the profit that we impose monthly".

 I asked, "Why do not you lose in case of loss?" They said "we lose if the total vlue of the house does not cover what the buyer owes us. But except for that the buyer shoulders the loss".

And why do you let the client alone bear  the payment of due insurance, taxes and the other expenses imposed on the house by the official authorities although you are partners in this house and your share in the house-ownership surpasses the client`s? They said "that`s because the buyer is the owner of the house and is the only one who puts it to use. Just as if two persons share one car and only one of whom uses it, that one will pay for gas, the expenses of renewing the documents of the car and maintenance, etc.

Therefore I told them that would sound correct if the other partner has voluntarily forsaken utilizing the car to the one already using the car. But the situation is different when we are dealing with sharing, calculations of profits and loss and distinction between usurious returns and legislative investments.

On the other hand, the example mentioned regarding the expenses of the gas and maintenance of the car is not precise; because the expenses of property (used to refer hereinafter to houses/apartments) are set in two sections:

Expanses required to keep the property under the ownership of its owners whether it has been used or not. This is to be in joint ownership among partners.

Expenses resulting from using the property and benefiting from it; some of which to be shouldered by the two partners and some of which to be shouldered by only the one possessing the property.

To sum up, as a matter of fact you consider yourselves creditors and not partners. You may have been tempted by your thought that you are almost like the one who actually sells his portion to the other party; and the value of this portion has turned into a debt due by the other party. And so you have arranged your affairs.

On the basis of  this clarification, I have presented these comments:

I told them that they had not set yet an adaptation for this dealing, as for the following:

 If you consider yourselves partners, and you are still keeping the ownership of your share and you do not sell it to the buyer but gradually; whenever the buyer pays the value of a share, he/she will own its value. Thus, why do you get profits on your whole share from the beginning whereas you have not sold it yet and you still own it?!

They replied that practically their share was in the possession of the buyer who made use of the whole house while he owned only 10%. So, I said well, you could have leased the buyer this part with a separate contract; and what you should take in return would have consequently been a rent and not a profit because it would be in return for leasing this portion that you owned and did not sell it yet to the buyer - provided that you should undertake what the landlord is committed to - such as costs of maintenance, and others.

However if you had indeed sold the house to the buyer, you should have calculated  the total price of the house and then should have been divided on the number of years you agreed on and thus the buyer would have owned the house from the beginning.  In such a case, there is no need for you to say that you let the buyer own the house  gradually and thus you waive the profit relevant to the portion the buyer owned; as the buyer has already owned it and it`s all over. Such a matter is attributable in this case to Selling in installments in return for augmenting the price which is legal according to the most authentic opinions of scholars. But they said they did not want to lease the house as that had some practical problems in using that contract namely the lessee shall not have the benefit of tax discount in addition to the rental rate shall not be fixed as it has to be increased from time to time, which accordingly shall constrain the buyer to a difficulty.

Therefore, I told them that the solution of the last point of that matter was up to you, as you could fix the rental rate during the period of the contract and nothing wrong would be with that.

Then I told them if you had been real partners, why you would not have borne the consequences of this partnership when the buyer stopped paying the installments and the house was sold – as you were to have a part of the selling price equivalent to  your share in the house, and thus we can have a real partnership instead of  the use unmeant words to cast legality on  invalid contracts.

Thus, if the house costs 100 000 and you own 90% and then it was sold afterwards in return for 90 000 - you are then entitled to have  only 81 000 that is equal to the 90% you own. But they refused that.

So, I told them that you still did not get rid of usurious mentality that considers itself a creditor instead of a partner, and does not want to bear a part of the risk i.e.  you share the profits and the loss  alike. You should reconsider that matter because it has not fulfilled its legality yet in s           uch a way. Consequently, the contract is still invalid and inaccurate; as you are neither partners nor landlords nor creditors. What are you exactly?

Accordingly this contract with its current form- as appearing to me- keeps the company away from the risk resulting from the real partnership and ensures all/most privileges of creditors:

* Their capital represented by their share value is fixed from the beginning and  is not affected by the price changes of the house.

* Their revenue is specified from the beginning and shall be fulfilled monthly ab initio.

* They avoided -from the very beginning- taking the risk that results if the buyer probably stops paying unless the house was sold for a price less than the remaining value of their share - that can be covered by the insurance undertaken by the buyer at any how in a way a portion of the monthly commitment has been specified for the insurance, whose contracts are invalid in these communities.  . 

They practically waive being a partner when profits and loss are mentioned also when they undergo/afford down on the buyer the taxes, insurance sum and all other expenses that are imposed on the house by the official authorities. Although he does not own the house alone as he has just owned a little share.

They claim that they are sellers however they have not sold yet. So as their shares are still in their ownership. And it is sold gradually during the term of the contract.

 Therefore, nothing is new except the change of the title of the interest to be profit. As well creating some suppositive theoretical analysis to permit this dealing without mentioning a real change in practical fact/side of this contract.

Accordingly, I suggest them to correct/modify this contract as following:

They should rent their share to the buyer thorough a separate rental contract. In this case, they have the right to take the rent of this share. They should be committed to the commitments of the landlord. There is no wrong with fixing the rental rate during the term of the contract whereas they are proceeding giving the buyer the opportunity of ownership. And the more he has owned the less the rental rate should be reduced.

Or they should sell the house in installments if they want to fix their sum from the beginning to be a debt due by the buyer then they divided it according to the years they agree upon. By doing this, the sum shall be due by the buyer. He shall pay the installments according to the years they agree upon.

In such a case, if the house has been sold because of buyer`s inability to pay, they have the right to take due in full. There is no wrong in this case if they took the legal insurances which guarantee their rights towards the buyer such as a real mortgaging of the same sold.

This suggestion may have some practical problems. Because it undergoes/affords down on the seller the net profit which are imposed by laws. It reaches 25% and it seemed unfair overtax.

The buyer also shall miss the opportunity of getting benefit from taxes discount. Because the profits which are paid by the buyer to the financing buying houses Co. are excluded from the taxes collected by the government and which return at the end of the tax year to the owner. Thus it can be passed to others. However, this suggestion would not able them t sell their share to Freidy Mac Co. as by doing so they will sell a debt in return for a present money which is considered riba.

Or shall they present any other suggestion which avoids these evils and we will straighten it for them.

Your Eminence "may be you are about to face a renewal meeting to discuss this case again. You were afflicted with carrying the trust giving fatwa in this case. So kindly, reconsider this issue. I have written to my Dear brother Dr, Youssof Al Shabily and His Eminence Dr. Ali Al Salous. I hope to send me in writing your view according to your knowledge of the legislative rules and what is going on many financial institutions in this country. In order to be acquainted and to fulfill the trust. May Allah the Almighty guide your hearts, insights and says to reveal the right/truth.

Attached hereby a draft to reach the stage of initial view regarding this issue after consulting and holing discussions with some scholars and their students. I put this draft in your hands to point and revise.

Many thanks and appreciations.

Peace be upon you, and the mercy and blessings of Allah.