I am thankful to Radiance Viewsweekly for the report of my presentation through Zoom on Islamic home loan system. This was organised by Islamic Circle of Australia and Canada, Melbourne chapter, and its participants included viewers from other cities of Australia too. Some inadvertent errors crept in the report published by you, which need to be set right. This rejoinder is meant for that clarification.
Islamic finance, as practised today, is a misnomer because of many glaring compromises done on Islamic principles and its inability to serve the Islamic ideals of justice and equity. However, I do not consider these to be forbidden or haram in due regard to a number of Islamic scholars who have permitted these practices and let things go in their own deviant direction, expecting that something constructive will come out of such interim experimentations. I simply call it as ‘not bad’, avoiding the phraseology ‘bad’, as such!
The subject-matter of the presentation was home loan system as practised by Islamic Financial Institutions (IFIs). The repayment of such loan by a customer basically comprises three elements: An instalment of principal amount of the loan provided; Rent of the accommodation; and Periodical variation in rent amount. IFIs cannot provide loan in cash, rather they provide the accommodation on rental basis, retaining their ownership till the transfer of the property-right at the end of the deal. Obviously, rent can be charged only on an accommodation owned. Monthly or other periodical payments by the person availing the benefit includes instalment of the principal amount.
We discussed, in the presentation, various Islamic concepts involved and relevant Islamic principles of transactions and the definition of riba (interest). The right to get extra payment in return depends on specific justifications like taking risk, selling goods, doing services, etc. One of the justifications is the right to get return for the use of any usable item, which called usufruct or rent. No such rent or extra payment for any consumable item is permitted. Islamic transactions distinguish between usable and consumable items for the purpose. That is why any extra payment or benefit on loans is forbidden because cash provided as loan is consumed.
We elaborated, in some detail, the concept of gharar (uncertainty) and dharar (causing harm). Wherever, consideration of any one of the parties is not clear and there is any element of doubt, it falls under the category of gharar which adversely impacts the quality of the deal. This discussion was made in the context of the dubious practice of IFIs of linking the variations of rent to any benchmark. Further, the benchmark used for the purpose, like LIBOR (London Inter Bank Offered Rate), is based on variation of interest in the market. Indexation, that too based on interest rates, makes the current practice of home loan by Islamic Financial institutions beset with gharar. These institutions should adopt periodical increase in interest, say ten per cent.