UK Islamic Mortgages : Are the modes available “truly Islamic” and permissible?



A critical study analysing the Islamic mortgages options available in the UK to determine


whether they are “truly Islamic” and permissible alternatives by assessing the avoidance of


Islamic prohibitions and the fulfilment of Islamic ideals.



One of the biggest financial investments any person will make in their lifetime is likely to be


the purchase of their home and in the vast majority of cases they will need to borrow money


on interest from a bank. As the Muslim population in the UK is increasing[1]; the topic of


discussion becomes one of  paramount importance because Muslims are not allowed to pay or


receive  riba al nasiah which is a specific type of prohibited increase on loaned money paid


over time which is akin to modern day interest charged against loans. In light of this, Muslims


living in the UK need to understand what forms of finance they can use knowing that the


requirements of their faith are not being compromised.



Although there are innumerable writings on Islamic Finance which explain how it is different


to conventional finance and how it works, there are however very few writings which clearly


make the distinction between “permissibility” and “ideals” within Islamic finance. I feel this


distinction is imperative as often people assert that because all of the ideals of Islamic finance


are not fulfilled, this in turn would suggest that the products in question are not Islamic and


hence are not permissible.


There are three broad views in this area of discussion. Firstly there are those who reject

Islamic banking and hence Islamic home finance (Islamic mortgages) for a number of

reasons; its reliance and emergence from the riba (interest) based capitalist economy, the use

of paper money with no intrinsic value and the employment of fractional reserve banking

practices all of which are in clear contradiction to Islamic ideals. Secondly there are those

who object to the products and methods of financing on the basis they merely attempt to

circumvent the prohibition of riba, are not employing true Islamic modes which risk share

and hence are illicit. Finally there are those who have allowed these methods of financing

based on strict conditions having considered the concessions afforded under the pretext of

darura (necessity) whilst calling for the industry to develop  products that involve more

risk sharing..


In this essay I intend to argue that in Islam some matters can be deemed halal (permissible),

whilst not being truly Islamic (fulfilling all of the ideals of Islam). This is evident in many

facets of our lives; consider for a moment for example the food we eat, the clothing we wear,

divorce, qisas (legal retribution) to name but a few areas. Whilst all halal foods are

permissible; to eat unhealthy processed foods or to over eat for that matter is arguably not

Islamic, in the same light merely covering the areas of nakedness is permissible whilst

covering beyond this with modest attire is promoted and whilst divorce and qisas are

permissible they are not encouraged as maintaining marital relations and forgiveness is highly

stressed and praiseworthy in Islam.


In the case of the methods employed in modern day Islamic finance and in particular UK

Islamic mortgages this is also especially true. Hence at this stage whilst the methods

cannot be deemed as truly Islamic due to the fact they are not actual modes of Islamic finance

employing risk sharing, they are still however acceptable alternatives to conventional finance.

This permissibility is based on the fact that no express prohibitions have been infringed and

because there are no other better alternatives available at the moment.


This argument is in support of those who follow the belief that Islamic home finance is

permissible, however the approach taken is very different focusing on Islamic ideals and

permissibility. Further it provides a rebuttal to those who argue against the “Islamic banking

system”  and to those who raise more specific objections relating to the modes and the

products themselves.


There are many notable authorities in this field. However for the purposes of our study we

will be focusing on four personalities who hold very diverse opinions. In brief Umar Vadillo;

an opposer of Islamic banking calls for a system of muamalaat (Muslim socio economics)

which is backed by real wealth (gold and silver coins). Haitham Al Haddad on the other hand

accepts to a degree the permissibility of individual aspects of Islamic home finance contracts

when viewed in isolation but he argues that as they have the same net effect as and are

structurally indifferent from conventional mortgages they are hence impermissible.

Mahmoud  A. E-Gamal is of the opinion that adl (justice) is pivotal in Islamic finance and as

this is not present (due to the clear lack of risk sharing) this then is akin to riba. Finally a

great pioneer of the industry Mufti Taqi Usmani permits current Islamic home finance

methods based on strict criteria, he does however call for the industry to develop their

products to include more risk sharing.


The arguments presented by these authorities will be analysed and responded to under three

areas of discussion, to begin with Islamic banking in the context of a riba based capitalist

economy, followed by a discussion of the understanding and accepted definitions of riba and

then finally an analysis of the current Islamic mortgage methods in the UK.







Main body



This study intends to draw a distinction from the very outset between what can be constituted

As halal and what can considered as Islamic in the context of Islamic mortgages.

In order to achieve this, the various objections levelled against Islamic home purchase plans

will be analysed with a view of firstly determining their validity and secondly their affects on

permissibility and ideals. The objections will be categorised in a systematic manner under

three areas of discussion moving from the broader to the more specific.


To begin with there will be a consideration of the claim that as Islamic banking (and therefore

Islamic financing of any kind) is reliant on and part of a riba based economy it is implicitly

haram (impermissible), with the only real halal alternative being an independent system

which is backed by real wealth.  Then the “accepted” definitions of the various prohibitions in

accordance to the four madhabs (schools of Islamic thought) will be considered and

compared with the understanding of the authorities in this field allowing us to examine if any

such prohibition is prevalent in Islamic mortgages. Finally there will be a

consideration of the objections levelled at the Islamic home purchase plan products available

in the UK. This analysis will be on the basis of cost, structure, features and level of risk

sharing. Having discussed the objections an alternative method of home purchase will be

presented and analysed comparing it against the current range of Islamic mortgage options,

with a view of determining if it represents a more acceptable alternative and whether

it is actually a more favourable option for the home buyer and lender.





Chapter 1


Current Islamic Banking within the context of the riba based economy.



In this discussion I will assert that although the current “Islam banking system” has clearly

emerged from and relies upon the riba based economy it is arguably not “Islamic” however

due to the fact that Muslims do not have any alternative independent system at the moment it

is permissible on the grounds of necessity.


In opposition there are some who object to Islamic banking completely on the basis of what

has been mentioned. One such personality is Umar Vadillo. He is an academic who followed

a long period of study regarding the application of Imam Malik’s Al Muwatta to modern day

financial practices. He defines riba beyond the commonly understood definition and claims

that the “capitalist system” is essentially a “riba system” [2]. He further states that fractional

reserve banking practices [3]are implicit in this “riba system” (ibid) .


Such practices clearly allow banks to make much larger profits due to the “multiplying

effect”; the downside for the economy is that it contributes to the inflation of prices. This is

because the increased supply of money has the effect of reducing its actual “value” resulting

in an increase of prices to counter this loss. This in turn means that consumers have to spend

more of their money to make the same level of purchases. The adverse effect and burden of

the “riba system” then transcends beyond the lender and borrower affecting the rest of the



Umar Vadillo further argues that paper money is called a “promissory note” but in reality it

is not because it can no longer be redeemed for gold or silver. According to him this fiat

money has no intrinsic value and it is therefore an unacceptable medium of exchange (ibid). He

calls for a totally different Islamic banking system not dependant on the conventional. He

promotes the system of muamalaat as a replacement to the “riba system”, this system uses

gold dinar and silver dirham (gold and silver coins) as an Islamic real wealth currency

eventually replacing paper money as a medium of exchange (ibid).


The model of muamalaat presented by Umar Vadillo proposes a radically different system

which one cannot deny is arguably more robust and fair. The need to move towards such a

system is warranted, justified and required so that Muslims can deal with one another and live

a life which is in keeping with the principles that Islam is based upon not having to rely on a

capitalist system which is in clear contradiction to Islamic values. When viewed holistically

at least the current “Islamic finance model” is arguably not Islamic, the question arises

however if the current Islamic finance available in the UK can be classified as haram.


If one was to adopt this view this would clearly make everyday life very difficult for

Muslims, let us consider the permissibility of the food and clothing purchased using such

haram currency and the acceptability of ibadaats (worship) such as charity and hajj

(pilgrimage) performed using it.


The view of permissibility then is arguably due in part at least due to the concessions afforded

through certain legal maxims attributed to darura (necessity). Darura is mentioned by Imam

Al Ghazali in his Mustafa fi ‘ilm al-usul. where he states the “daruriya al khamsa”

(necessity of the five) and states “everything which partakes in keeping these 5 principles

(religion, life, reason, offspring and property) is a benefit and anything which disturbs

their existence is an injury and to drive away such an injury is a benefit”. This has been

discussed as a legitimate concession in the context of finance by some [4].


For those who claim complete impermissibility of current banking whether Islamic or

otherwise the juristic preference of istihsan (public interest or equity) [5] which is one of the

branches of darura can be used in place of nass (textual evidence) or qiyas (deductive

analogy) to allow that which is in the “public interest” due to a prevailing necessity. It can be

further substantiated through the application of umoom balwa (public affliction) which can

be used at times of public predicament to allow that which is ordinarily impermissible.

Istihsan has been endorsed by hanafi, maliki and hanbali scholars belonging to three of the

four accepted Islamic schools of thought. Once again this has been applied in the context of

Islamic finance to allow certain otherwise impermissible transactions such as bai salaam and

istisna [6].


There are some who claim there is no clear evidence to prohibit or allow current Islamic

banking as such a model is unprecedented in Islamic history. In this instance another branch

of darura namely masalih mursalah or istislah which are synonymous juristic terms

referring to accepting “public interest” in the absence of a ruling regarding an issue from

textual evidence  may be employed. It takes place to suit the changing conditions of life,

culture, locations, technology and industry and all madhabs accept it to a larger or lesser

degree based on their own criteria. Two examples of its general application is how Muslims

have been allowed  to charge for teaching aspects of  Islam which ideally ought to be free and

the compilation of the Quran in to a book form  which was never instructed by the Prophet

(peace and blessing be upon him) but permitted due the “public interest” of preserving the

faith. In the context of Islamic finance in addition to the allowance bai salaam and istisna (as

mentioned above) there have been some discussions of other applications in Islamic finance [7].


Although the application of darura and its branches has been to specific Islamic finance products

there is no reason why one cannot argue the validity of its application to the “Islamic finance system”

operating in the context of a wider “riba based system” which ordinarily may be deemed as haram by

some. Some may claim that these concessions can apply equally to conventional finance

however in response we argue that Islamic finance still goes further to satisfy the

requirements of Islam (as will be discussed later) and as it represents the “lesser of the

two evils” [8] it ought to be chosen over conventional finance [9].


The discussion of darura is a very lengthy one and was not intended to be discussed here in

great detail. It was mentioned as it is a crucial consideration in this discussion and I feel one

cannot legitimately make a claim of impermissibility without providing a satisfactory rebuttal

to its legitimacy and applicability which to date has not yet been done.


I conclude then that “Islamic banking” cannot be deemed haram due to reasons mentioned

and this view concurs with the majority of leading scholars.  As Muslims however we ought

to be working towards a system of muamalaat as presented by Umar Vadillo whilst focusing

on developing the current UK Islamic Finance within the context of the conventional system,

this is because such an “ideal” system could take many years if not decades to come into




Chapter 2


Prohibited transactions.



There are actually many prohibitions such as riba, maysir (gambling), short sales and gharar

(speculative transactions) which all have the combined effect of causing imbalance,

distributive injustice and inequality of opportunities. In the context of a conventional

mortgage contract it is the prohibition of riba which is paramount and for this reason this will

be the focal point of our discussion.


The accepted definitions of the prohibition of riba and what is required to effect this in a loan

has been clearly established by the madhabs based on the Quran, sunnah (sayings and

actions of the Prophet), ijmah (consensus) and qiyas (analogy) hence one cannot extend this

to include that which falls outside of these definitions.


To substantiate this claim this prohibition will be discussed with a view of determining its

“accepted definitions” according to the four madhabs and comparing this with the

understanding of some authorities in the field of Islamic finance. This is a very important

exercise for two reasons, firstly any disparity in the definitions could affect verdicts of

permissibility and secondly it will allow us to establish if it is existent in an Islamic mortgage




Before looking at the various definitions of riba it is crucial to establish the definition of a


mortgage so that one can better understand how this prohibition is infringed. A mortgage can


be defined as an “A debt instrument, secured by the collateral of specified real estate


property, that the borrower is obliged to pay back with a predetermined set of payments.


Mortgages are used by individuals and businesses to make large real estate purchases


without paying the entire value of the purchase up front. Over a period of many years, the


borrower repays the loan, plus interest, until he/she eventually owns the property free and


clear. Mortgages are also known as “liens against property” or “claims on property.” If


the borrower stops paying the mortgage, the bank can foreclose” [10]. A mortgage then is


essentially a loan offered for and secured against a property where any deferment of its


repayment results in a compensation or increase due to the lender.






In Islam the prohibition of riba began during the 8th or 9th century after the Prophets (pbuh)

hijra (emigration) to Madinah. Riba is forbidden in the Quran, sunnah (traditions of the

Prophet Mohammed (pbuh)) and by ijma (consensus). In the Quran the strongest prohibitions

are contained in the verses [2:275-279]. Here a distinction is made from very outset between

trade and riba, allowing one and forbidding the other, further Allah (the most exalted)

emphasises the utter worthlessness of riba in so far as it being totally devoid of any blessing.

Finally a mention is made of Allah and his apostle’s declaration of war between those who do

not take heed to this prohibition sending a very clear message with regards to its severity.


In the ahadith (prophetic narrations) there are very many in which riba is mentioned.


According to one narration it is considered as one of the seven grave sins [11].


In another narration the Prophet (pbuh) curses the devourer, the payer, the witness and the


one that documents the riba [12].


According to another narration there are seventy three different types of riba, the least of


which is equivalent to having relations to one’s own mother and the worst is of which is


equivalent to destroying the honour of a Muslim [13].




The types of riba.



Riba is divided into two categories by the majority of scholars (although other types have


been derived from them), namely riba al nasiah and riba al fadl [14]. Riba al nasiah which


translates to “increase of deferment” was the only type known to pre Islamic Arabia, here


compensation was collected for deferring a due debt to a new term. This definition applies


regardless if the debt was as a result of a loan or a deferred price in a sale and its forbiddance


was clearly mentioned in the Quran. Riba al fadl which translates to “increase of excess”


was established through hadith by analogy of riba al nasiah. This riba was forbidden to


prevent potential circumvention of the first.  Its establishment was based on six types of


goods which were mentioned in the hadith (gold, silver, wheat, barley, salt and dates), later


some scholars extended this to include other items including modern day fiat


currency due to it replacing gold and silver as a monetary numeraire. An example of this type


of riba is the sale of gold at a deferred price, which was later repaid at an increased value


represented in silver.





The classification of a mortgage contract according to the four madaihib.



In this section I intend to summarise how each schools classifies a mortgage contract in terms


of it belonging to one type of riba or the other [15]. According to the hanafi definition a


mortgage contract would fall under the category of riba al nasiah as there is both deferment


and compensation and both compensations are of the same genus [16]. Whilst with the shafiis it


partly qualifies for nasiah and partly for fadl not fitting entirely in any one of the definitions


as it includes both deferment and both genera are different. In any case there is no dispute


with regards to its prohibition. With the malikis on the other hand here it is unclear which


category a mortgage contract would fall within although there is no doubt with regards its


impermissibility based on the forbiddance of the trade of monetary numeraire with any


increase or deferment [17]. Finally according to the hanbalis although again it is unclear


which category a mortgage contract would fall within there is no doubt with regards to its

impermissibility due to the narrations mentioning “trading one dirham for two”, “hand to

hand” and further “same genus in equal quantities” [18].



It is clear amongst some of the schools which category of riba a mortgage contract would fall


within in. In others cases however it is not so clear for one of two reasons; firstly on account


of it not fitting entirely into one definition or the other, or secondly because of the lack of


clarity in the criteria for its inclusion in any given category. In any case what is clearly


established is that the trade of gold or silver whether in the form of jewellery or money and


hence any form of “fiat currency” cannot be traded with its own genus unless it is “hand to


hand” (no deferment) and without any increase. In a mortgage contract fadl (excess), nasai


(deferment) and matching genus are inherent and hence it is clearly forbidden.




The understanding of riba according to some authorities in the field of Islamic finance.



In the discussion of riba authorities such as Haitham Al Haddad, Tarek El-Diwany and


Mahmoud A. E Gamal have written much opposing the common understanding of riba


particularly in the context of Islamic mortgages [19]. In summary they argue that although


individual agreements of Islamic mortgages may be valid in isolation, but when the


contract is viewed holistically it has same net affect a riba based mortgage in terms in terms


of cost, structure and complete lack of risk sharing. In addition they argue that what is taking


place is a mere circumvention of the prohibition (riba is still intended) and hence it is still


riba based and therefore prohibited.



Having established what constitutes a riba based transaction according to the four madhabs


and what is required to effect this in a loan arrangement let us examine an Islamic home


finance contract. Here there is both fadl and nasai present, this is permitted on the basis of the


differing genus of each compensation each of which are not eligible for riba (the bank sells


the house to the buyer on a deferred basis and money is not simply being lent for more money


to be returned at a later date). To suggest then that the definition of riba can be extended to


beyond the established understanding is not tenable without presenting credible evidence. To


date all that has been presented is an opinion of impermissibility based the mechanics of an


Islamic home purchase plans rather than its establishment from Quran and sunnah. Although


these objections do not warrant a verdict of impermissibility they are still however genuine


objections in their own regard and will be discussed later.


Chapter 3




Islamic mortgage methods




There are many objections levelled against the Islamic mortgage methods in the UK,

whilst these objections impinge on Islamic “ideals” and hence arguably render the methods

not Islamic, they are still permissible as they do not contravene the prohibition of riba.

To support my claim I intend to analyse the objections levelled against the Islamic home

finance methods used in the UK. The main methods being Murabaha which is a sale with a

declared profit, diminishing musharakah which is a joint diminishing ownership

arrangement and ijara which is essentially a lease with option to buy [20].


In the UK the diminishing musharakah and ijarah schemes are most prevalent but in any

case the objections we will be discussing apply to all schemes to a greater or lesser degree

and will be discussed in term of structure, finance modes and risk sharing.




Having analysed the various Islamic schemes I have outlined the following observations in

terms of similarities with conventional mortgages.


  1. To begin with a minimum deposit or stake is required, the bank provides the

finance for the remainder of the purchase price and a lien is applied against the

property as a security.


  1. You can pay a lower amount during the term of the mortgage and pay a lump sum

at the end to purchase the property as is the case in an ijarah or “interest only”

type mortgage. Alternatively you can make a single regular payment which

includes any rent or interest and an element which goes towards repaying the loan

or stake of the bank (the level of interest or rent reducing over time). Here the

diminishing musharakah scheme is akin to a conventional repayment mortgage.


  1. In most cases the level of rent which is charged is benchmarked against interest

rates and hence the rent charged in the ijarah and diminishing musharakah are at

similar level of interest rates in conventional mortgages.


One has to concede to the fact that purely based on the structure of these schemes they seem

to be very similar to conventional mortgages and that ideally any Islamic alternative ought to

be fundamentally different. In any case “similarity in structure” however disliked or contrary

to Islamic ideals is not sufficient to conclude impermissibility; this is due to the fact that there

is no evidence of any clear contravention of any Islamic prohibition. This can be substantiated

referring back to the various definitions of riba; the fact that there is a commodity involved in

the transaction and not simply an exchange of money these products do not violate this

prohibition and therefore are permissible.


Modes of Finance.


It is very clear that none of the methods used for Islamic mortgages in the UK are true

modes of Islamic finance as the essence of Islamic finance involves risk sharing which is not

present in any of the methods used. The bank although a joint owner in the house do not share

in any beneficial interest (increase) and in any losses for that matter but rather have a virtually

guaranteed return of profit accrued over the term of the arrangement determined by the profit

or rental rate set by them. In addition to this a lien is placed on the property as a form of

security for the bank.


The two true modes of Islamic finance are musharakah and mudarabah. Although some

Islamic banks offer diminishing musharakah this is actually very different to the ideal

musharakah where profits and losses are shared and only resembles the former in the aspect

of joint ownership. In the case of mudarabah it is not workable in an Islamic mortgage

scenario as it is essentially a commercial enterprise between two parties, where one provides

funding and the other labour.


Some authorities in the field of Islamic finance such as Mahmoud El Gamal are of the

opinion that the lack of risk sharing suggests that there is no adl (justice) and this is

tantamount to riba [21].  One has to concede to the lack of risk sharing though this is not enough

to establish impermissibility. In addition to this under a true risk sharing musharakah

partnership model (which will be discussed later) there are instances where both parties can

actually be more at risk and hence who is to determine what is an acceptable level of risk

other than the two parties that are privy to the contract.


Conceding to the fact that the methods employed are not true modes of “Islamic finance”


would it be fair to say (as some claim) that what is actually being employed is hila (a legal


stratagem to circumvent a prohibition) and if this is the case is its application legitimate from


the perspective of shariah (Islamic law).



There has been many classical books compiled on this subject with some notable scholars


allowing the use of hila whilst others not. It is important to note that the nature of the hiyal


(plural of hila) varied greatly with some very abhorrent applications classed as disbelief and


hence condemned. For example A woman requests from her husband a separation (khul)


but he refuses, she is then advised that she should apostatise from Islam which would


automatically mean that that her marriage is annulled. Thereafter she should reaffirm her


faith” [22]. In another example A man took an oath that in no way would he divorce his wife,


thereafter a huge sum of money was offered to him to break his oath, a mufti (jurist) then told


him, a possible solution (hila) was for him to kiss his mother in-law. Such an act would


immediately annul the marriage based upon the rules of marriageable relations” (Ibid, 83).



Some contemporary jurists have concluded that hiyal is permitted only in certain


circumstances and current practices in the Islamic finance industry are illicit as there is no


attempt to develop the products in a way that they become truly Islamic [23].  In response to


these claims Mufti Taqi Usmani concluded that although he did not totally disagree with


these opinions the banking practices not being ideal did not preclude their legal validity (Ibid,


227). He reinforced his position justifying the use of certain hiyal  [24].  Both al-Khaṣṣāf and al-


Jaṣṣāṣ present the following well known ḥadith to substantiate their position on iyal, it


demonstrates the normativity of prescribing an exit. The ḥadith relates to an


exchange of high quality dates known as janib, for low quality dates known as jamʿ:



Abū Hurayra narrated regarding the Prophet (pbuh) that a person, employed to [oversee]

Khaybar, came to him with some janib dates. The Messenger of Allah (pbuh) said “Are

all the dates of Khaybar like this? ‘ he said “No by Allah! O Messenger of Allah (pbuh),

indeed we obtain one ṣa (measure)  for two ṣāʿs, [or] two ṣāʿs for three. To which he

(pbuh) said: Don‘t do that, [rather] sell al-jamʿ for dirhams and then buy with these

dirhams the janib [25].


Commenting on this ḥadith al Jaṣṣaṣ notes that the Prophet (pbuh) prohibited the transaction


due to riba al fal and also taught him a ḥila so he could legally acquire the dates. To further


substantiate this Al Sarakhsi says, rulings which provide an exit strategy from sins are


acceptable to the majority of scholars [26].



One must note that in the first two examples of hila a haram is being committed (apostasy


and kissing the mother in law) to achieve a desired objective which in its self is also


undesirable (divorce). Whilst in the case of Islamic home finance the attempt is to do


something which is not desirable or ideal with the objective of averting a haram (riba) which


is clearly very commendable.



Considering the views of the different madhabs and various scholars it appears each have


differing opinions as to what can be considered hila and which forms are permissible. Some


believe that Islamic banking is essentially based on hila, it is apparent that there are some


hiyal which are totally unjustifiable and hence forbidden whilst others are not. For those who


accept the use of certain hila do not do so unconditionally, limiting their use to


certain economic conditions stating that they do not have a normative role in the Islamic


economy. One such scholar Mufti Taqi Usmani is of such an opinion, although he does not


explicitly use the word hila he alludes to its application and contests its use indefinitely [27]


and it is this view that is found to be most acceptable.



Alternative model


Having analysed the Islamic home financing options in the UK and the objections levelled

against them one needs to consider if a better alternative is possible. As mentioned previously

the only method which is workable in an Islamic mortgage is a musharakah

(partnership) type arrangement. A musharakah arrangement represents a truly Islamic option

satisfying not only the “letter” but also the “spirit” of the law and overcomes all of the

objections discussed previously.


Halal Inc based in Toronto Canada is a home financier offering such a true musharakah

based product. In essence what they offer is a partnership in the truest sense of the word

sharing all the profits and losses proportional to the respective investment of each party [28].

In this model Halal Inc and the home buyer jointly invest in a property (no lien being

applied), the home buyer having the option to choose to live in the property and pay rent

(proportional to investment) or rent out the property (the rent being distributed after expenses

as per the share in the property). At any time the home buyer has the option to increase his

share or end the partnership by selling his share. He can either choose to sell to or buy his

share from Halal Inc, alternatively he can sell his share to another interested party. In this

model as opposed to other Islamic options both parties have a beneficial interest in the



Whilst this option is certainly more Islamic it may not necessarily be viewed as a better

option by the home buyers and the banks for a number of reasons. Firstly in the event of a

boom, the home owner will have to share the increase with the bank and in turn have to pay

much more to acquire the property, secondly in the event of a crash the bank will have to

share the losses with the home buyer. In addition to this from a regulatory perspective there

may be other challenges to overcome. In light of this it is questionable whether an institution

would be willing to offer such a scheme especially when the returns in the current home

financing methods whether conventional or Islamic are very lucrative and virtually

guaranteed. However if such a scheme could be offered alongside the existing range of

Islamic home finance options it would not only provide a better alternative from an Islamic

point of view but it could also be a catalyst for other banks to offer similar products or

develop their current range of products.







This study concludes the following; firstly that the “Islamic banking system” operating within

the context of the “riba” based economy which whilst arguably not “Islamic” is permissible

due to darura. Secondly one cannot extend the definition of riba and how this is effected in a

loan agreement and include that which falls outside of the accepted understanding of the

madhabs suggesting similarity in “structure” and “pricing” is tantamount to riba without

providing acceptable evidences. Finally the objections levelled against Islamic mortgages in

the UK arguably suggest the methods employed are not Islamic however are not sufficient

to preclude permissibility as the prohibition of riba has not been violated.


This study has highlighted the need for the objectors to provide credible proofs for their

various positions and satisfactory rebuttals to the various conclusions drawn. It stimulates

intellectual thought and consideration amongst other matters the legal maxims of Darura and

its application to Islamic finance, the accepted definitions of riba and the challenges of

developing the industry and its products. Finally the need to develop an independent Islamic

finance system over the longer term which will in turn make it easier for the industry to

develop truly revolutionary products fulfilling the all the ideal of Islam is also required.


In summary we conclude that some matters in Islam can be deemed halal according to the


shariah whilst not being truly Islamic. In the case of the methods employed in modern day


Islamic finance and in particular UK Islamic mortgages this is especially true. In light of


this although Islamic home finance in the UK at this stage is not truly Islamic, it is however


an acceptable alternative to conventional finance at least until better alternatives are available


such as the a true musharakah based home purchase method offered by Halal inc. Further


the need to move towards an independent Islamic finance system similar to that which Umar


Vadillo describes is required whilst developing the current home finance products structurally


to clearly distinguish them from conventional mortgages.


Appendix A


How Fractional Reserve Banking Works


When you put your money into a bank, the bank is required to keep a certain percentage, a

fraction, of that money on reserve at the bank, but the bank can lend the rest out. For instance,

if you deposit $100,000 at the bank and the bank has a reserve requirement of 10 percent, the

bank must keep $10,000 of your money on reserve and can lend out the $90,000.


In essence, the bank has taken $100,000 and has turned it into $190,000 by giving you a

$100,000 credit on your deposits and then lending the additional $90,000 out to someone else.


Now, if you take this out a little further, you will see that your original $100,000 can become

$ by the time it is all over. Here’s how:

– You deposit $100,000 Your bank loans someone else $90,000
– That person deposits $90,000 Their bank loans someone else $81,000
– That person deposits $81,000 Their bank loans someone else $72,900
– That person deposits $72,900 Their bank loans someone else $65,610
– That person deposits $65,610 Their bank loans someone else $59,049
– That person deposits $59,049 Their bank loans someone else $53,144
– That person deposits $53,144 Their bank loans someone else $47,829
– And so on


Ultimately, your initial $100,000 can grow into $1,000,000 with a 10 percent reserve



To find out exactly how much money the fractional reserve banking system can theoretically

create with your initial deposit, you can use the Money Multiplier equation:

– Total Money Created = Initial Deposit x (1 / Reserve Requirement)

For example, with the numbers we have used above, you equation would look like this:

– $1,000,000 = $100,000 x (1 / 0.10)





Appendix B


Hanafi Riba definition


They define riba al nasiah as a Compensation for the preference of immediate payment over


deferment, and [compensation for the] preference of an identified object over one defined by


its characteristics as a liability, where the objects are measured by weight or volume [29],


and are of different genera, or measured otherwise but are of the same genus.


Therefore, trading goods of some genus for goods of the same or another genus with an


increase in the measure (by volume or weight) in compensation for deferment fall under this


definition. Riba al fadl according to them is a sale where “It is an increase in the measure


(weight or volume) of one of two compensations of the same genus in a sales contract [30]” .




Shafi definition of riba



According to them riba al nasiah is when one of the two compensations of differing genera


are traded with or without an increase on a deferred basis. Proof of the prohibition of this riba


is provided in the hadith narrated by Muslim on the authority of Ubadah “And if the genera


are different, then sell as you wish as long as it is hand to hand”, as well as the hadith


narrated by Al-Bukhari and Muslim on the authority of Abu Sacd Al-Khudriy “And do not


trade when one of them is delivered immediately and the other is deferred”. Riba al fadl


takes place by an increase of one traded set of goods over its compensation without any


deferment. This type of riba comes in to effect only if the two traded goods are of the same


genus. One of the shafis (Al-Mutwalli) added a fourth type of riba, which he defined as the


riba of a loan which can be included under riba al fadl. They also mention a third category


riba al yad which is takes place in a trade with deferment of receiving one of the


compensations, or without mentioning the term of the deferment. In other words, this riba


comes into effect if two goods of different genera are traded without mutual receipt during the


session of the contract. The shafii ruled that the criterion that renders gold and silver eligible


for riba is their use as monetary numeraries. The traditional Shafii position with regard to


monetary numeraries is that it is restricted to gold and silver because coins made of other


metals were not used as commonly to define prices. Since fiat paper monies and various coins


have become the main form of currency they are now eligible for riba.



Maliki definition of Riba.



The most accepted Maliki opinion is that the goods eligible for riba are monetary numeraire

(money) and food stuffs (wheat, barley, salt and dates). Although there is some explanation

with regards to which food stuffs fall within the category of riba al nasiah and riba al fadl it

is unclear how each would be determined and hence it is difficult to determine which

category a loan would fall within [31].


Hanbali definition of riba



The most widely supported opinion of the hanbalis agrees with the hanafi criteria of


measurability by weight or volume, together with unity of the genus. They render all goods


(edible or not) eligible for riba if they are measured by weight or volume, while rendering


foodstuffs that are measured by other means ineligible for riba. This opinion is based on the


Hadith narrated on the authority of Ibn Umar that the Messenger of Allah (pbuh) said Do


not trade one Dinar for two, one Dirham for two, or one volume of food for two, for I fear


that you may fall into riba”. A man addressed him by saying “O, Messenger of Allah, would


you allow a man to trade one horse for many, and one camel for many, and he (pbuh) replied,


That is permitted, as long as it is hand-to-hand”, Also, Anas narrated that the Prophet (pbuh)


said “Whatever is measured by weight must be traded for goods of the same genus only in


equal quantities, and the same applies to goods measured by volume. However, if the goods


are of different genera, there is no harm in trading in different quantities[32].





Appendix C


Overview of Islamic mortgages


Please note that although only the three main forms of Islamic mortgages will be discussed

here that there are variations to these methods which may employ features from more than

one method.




This is a term of Islamic jurisprudence that refers to certain type of sale having nothing to do

with financing in its original sense. A murabaha transaction is where a seller agrees with his

purchaser to provide him a specific commodity on a certain profit added to his cost which he

declares to the buyer. This sale can take place on spot or at a later date. Using it as a mode of

finance has been allowed as a device to escape interest and not as an ideal instrument for

carrying out the real economic objectives of Islam [33].. When money is exchanged for money,

no excess is allowed (as established in the chapter of riba) neither in a cash transaction, nor

on credit, but where a commodity is sold for money, the price agreed by the parties may be

higher than the market price, both in cash and credit transaction. This position is accepted

unanimously by all four schools of Islamic law and the majority of the Muslim jurists


In the context of Islamic mortgages the home buyer would find a suitable property which he

would jointly purchase with the bank, the bank will then sell the home buyer their stake in the

property at cost plus profit basis over an agreed deferred basis.



Diminishing Musharakah


In this method the financier and his client participate either in the joint ownership of a

property, equipment or joint commercial enterprise. The share of the financier is further

divided into a number of units and it is understood that the client will purchase the units of

the share of the financier over time and eventually becoming the outright owner. In some

cases the share of the commodity which is not owned may be rented from the other party and

this is agreed upon [34]. There is some disagreement however if it is leased to a third party. It is

clear how this method would be applied in a home finance scenario, it is important to note as

the home buyers stake increases the rent decreases to reflect the increase in ownership.





Ijarah lexically means to give something on rent and is used in two different situations.

Firstly it can be used to employ the services of a person on wages and the second it relates to

the usufruct of assets and properties in exchange of rent. In the second case this is analogous

to the term leasing. In contrast to a sale where the corpus of the property is transferred to the

purchaser while in the case of Ijarah the corpus remains with the owner. It is evident that

Ijarah is not a mode of financing in its original sense. An owner of a joint property can lease

his proportionate share to his co sharer only and not to any other person [35]. .In the context of

home finance at the end of the lease period the lessee will need to furnish the initial purchase

price of the property in order to own the property. In most cases the bank will set up a

separate fund in which the home buyer will have to make regular payments over the term of

the lease to purchase the property. This method is very similar structurally to an “interest

only” type of mortgage.



Mohammed Saeed Bashir

BA (Hons) Financial Services






Books, Dissertations and Theses



Abul-Husayn Ahmad, The Mukhtasar Al-Qudoori,

Ashraf Ali Thaanwi , The Principles and Codes of Law in Hanafi Fiqh,

Clement M. Henry and Rodney Wilson, The Politics of Islamic Finance, Edinburgh, Edinburgh University Press, 2004

Dr. Sahar Nasr, Islamic Finance in the Arab World: Challenges and Prospects, World Bank, American University in Cairo, and British University in Egypt, Cambridge Business & Economics Conference (CBEC), 2011

Ghazali, M. A.H, al-Mustafa fi ‘ilm al-usul, ed Mohammed A.S.A. Shafi, Dar al-Kutub al-ilmiyah, 1993/1413AH.

Mahmoud A. El-Gamal , Islamic Finance: Law, Economics, and Practice, Cambridge,  Cambridge University Press, 2006

Mohammed Taqi Usmani , An Introduction to Islamic Finance, Karachi, Maktaba Ma’ariful Quran, 2010

Mohmoud A. El Gamal, Financial Transactions in Islamic Jurisprudence Volume 1 and 2, (translation of volume 5 of Dr Wahba Al-Zuhayli’s, Al Fiqh Al Islami wa Adilatuh), Dar Al Fikr Damascus, Syria, 1 Jan 2003,

Muḥammad Yūsuf Binnorī Town Karachī, Murawwaja Islāmī Bankārī: Tajziyātī Muṭālaʿa, Sharʿī Jāʾiza o Fiqhī Naqd o Tabṣira (Karachi: Maktaba Bayyināt, 2008), 168.

Muhammed Imran Ismail, Legal stratagems (hiyal) and usury in Islamic commercial law, Ph.D. thesis, University of Birmingham,, 2010

Oliver Wyman, The Next Chapter in Islamic Finance Higher Rewards but Higher Risks, 2009

Omar Mustafa Ansari & Faizan Ahmed,  Islamic Banking: Is it really “Islamic”? , 2010

Shafi Mohammed, The Issue of Interest, Karachi, Darul Ishaat, 1997

Tawfique Al-Mubarak & Dr. Noor Mohammad Osmani, Applications of Maqasid al-Shari’ah and Maslahah in Islamic Banking practices: An analysis, Qatar Faculty of Islamic Studies, Qatar Foundation, Doha, Qatar & Dept. of Qur’an and Sunnah Studies, IRKHS, International Islamic University Malaysia.


Online Articles

Alan O’sullivan, 2009, Is Islamic banking the model for fairness?,, 9th May 2014

Haitham Al-Haddad and Tarek El-Diwany, 2006, The Islamic Mortgage: Paradigm Shift or Trojan Horse?, , 9th May 2014

Haitham Al-Haddad, 2013, Islamic Ijara Mortgages by HSBC and Other Banks,, 9th May 2014

Khurram Baig, 2012, Islamic financial system shows inherent resistance to global crises,, 8th May 2014  

Luqman Zakariyah, Necessity as a pretext for violation of Islamic Commercial Law: A Scenario of Mortgage Contract in the UK,, 30th October 2014

M.Kabir Hassan & Rasem Kayed, 2012, The Global Financial Crisis & Islamic Finance P.1 , The Financial Crisis & the Islamic Finance Renaissance, , 8th May 2014

Mohammad Hashim Kamali, Maqasid al Shariah: The Objectives of Islamic Law:, 4th November 2014

Mohammad Tahir Mansoori, SHARIAH LEGITIMACY OF ISLAMIC BANKING: Is This Banking Really Islamic? Dean Faculty of Shariah & Law IIU Shariah Advisor, Askari Islamic Bank,, 9th May 2014

Mohammed Amin, 2011, A simple introduction to Islamic mortgages,, 9th May 2014

Mohd Azizi, The Application of Maslahah (Public Interest) In Contemporary Islamic Financial System,, 8th November 2014

Sajid Aziz, 2007, Is Islamic banking in Pakistan really Islamic?, 9th May 2014

Umar Vadillo, Muamalaat: The Alternative to the Riba system exists,, 10th November 2014





Ahli United Bank (AUB), AUB Islamic Home Purchase, , 11th May 2014

Darul Ifaa, [Mufti] Muhammad ibn Adam, If an Islamic Mortgage Costs too Much, Can I Take a Conventional Mortgage?,, 5th November 2014


Halal Inc, The Halal Inc. Home Partnership Program,, 11th May 2014

Investopedia, DEFINITION OF ‘SHORT SALE’, , 23rd December 2014


Investopedia, Fiat Money,, 29th October 2014

Investopedia, Fractional Reserve Banking,, 29th October 2014

Investopedia, Muliplier Effect,, 30th October 2014

Investpopedia, DEFINITION OF ‘MORTGAGE’,, 25th December 2014, Sheikh Alomgir Ali, Misconceptions of the principle: ‘the lesser of two evils’,, 5th November 2014


Islamic  Bank of Britain (IBB) , IBB Home finance ,, 11th May 2014

IslamQA, The Principle of Choosing the Lesser of Two Evils,, 4th November 2014

Learning Markets, Understanding the Fractional Reserve Banking System,, 29th October 2014

Office for National Statistics, What does the Census tell us about religion in 2011?,, 20th May 2014

Slide Share, Nabil Bello, The concept of Istihsaan and it’s application to Islamic Finance,, 7th November 2014


Slide Share, Hafizul Mukhlis, Masalah Mursalah,, 7th November 2014


The Institute of Islamic Banking and Insurance, Glossary of Financial Terms,, 20th May 2014

United Bank UK (UBL), UBL Islamic Mortgage,, 11th May 2014














































[1] Office for National Statistics: UK Muslims Population 2.7m in 2011 compared to 1.5m in 2001

[2] Umar Vadillo, Muamalaat: The Alternative to the Riba system exists.

[3] see “Appendix A” for an explanation of Fractional Reserve banking practices

[4] Luqman Zakariyah, Necessity as a pretext for violation of Islamic law: a scenario of Mortgage Contract in the UK.

[5] Hashim Kamali translates as Equity

[6] Nabil Bello, The concept of Istihsaan and it’s application to Islamic Finance.

[7] Mohd Azizi, The Application of Maslahah (Public Interest) In Contemporary Islamic Financial System.

[8] Derived from maxim “the removal of a greater harm with a lesser harm.

[9] Muhammad ibn Adam, Darul Iftaa: If an Islamic  Mortgage Costs too Much, Can I Take a Conventional Mortgage.


[10] Investpopedia, DEFINITION OF ‘MORTGAGE’


[11] Narrated by Muslim on the authority of Abu Hurayrah, that the Prophet (pbuh) said: Avoid the seven grave sins. The companions asked: And what are they, O Messenger of Allah?.. He said: They are: associating others with Allah, engaging in magic, killing a forbidden       human soul without a legal right, devouring riba, devouring the wealth of an orphan, escaping on a day of religious battle, and defamation of unsuspecting believing married women., c.f. Ibn Daqq Al-cId (, p.518).)

[12] Narrated by Abu Dawud and others in that form, and narrated by Muslim on the authority of Jabir that the Messenger of Allah cursed equally the one who devours riba, the one who witnesses it, and the one who documents it., which is also similar to the narration of Al-Bukhar. on the authority of Abu Juh ayfah. Al-Tirmidh and Ibn Majah narrated on the authority of Anas a H.adith that contained the same curse, c.f. Al-Haytham. (, vol.4, p.118), Al-S. anc¯an¯. (2nd printing, vol.3, p.36), Al-Shawkan. (vol.5, p.154).).


[13] Narrated in an abridged form by Ibn Majah, and in full by Al-Hakim, who rendered it valid. There are many similar Hadiths, which include the mention of seventy types of riba, and of seventy two types, c.f. Al-Haytham. (, vol.4, p.117), Al-Sancan. (2nd printing, vol.3,



[14] Ibn Al-Humam ((H.anaf.), vol.5, p.183), Ibn Rushd Al-H.afd ((Malik.), vol.2, p.129), H.ashiyat Al-Dusuq (vol.3, p.47), Ibn Qudamah (, vol.4, p.1), Ibn Qayyim Al-Jawziyyah

[15] For a detailed explanation of how each school defines the different classifications of riba see Appendix B.


[16] Ibn Al-Qayyim labeled this increase blatant riba. (al-riba al-jaliyy). It was common before Islam, where the creditor would

tell the debtor when the debt matures: pay or increase your debt. It results in compounded profits. Ibn Qayyim Al-Jawziyyah ((H.anbal¯.), vol.2, p.140).


[17] Mohmoud A. El Gamal, Financial Transactions in Islamic Jurisprudence Volume 1, pages 323.


[18] Narrated by Al-Daraqutni. on the authority of Al-Hasan having heard it from Ubadah and Anas ibn Malik, c.f. Al-Shawkani  (, vol.5, p.193).


[19] Haitham Al-Haddad, 2013, Islamic Ijara Mortgages by HSBC and Other Banks & Haitham Al-Haddad and Tarek El-Diwany, 2006, The Islamic Mortgage: Paradigm Shift or Trojan Horse?, Mahmoud A. El-Gamal , Islamic Finance: Law, Economics, and Practice, Cambridge,  Cambridge University Press, 2006

[20] For a detailed explanation of each method see Appendix C.


[21] Mahmoud A. El-Gamal , Islamic Finance: Law, Economics, and Practice, Cambridge,  Cambridge University Press, 2006.

[22] Al-Khatīb, Tarīkh, vol. 13, 403-4, Ibn Taymiyya, Bayān alDalīl, 82

[23] Written by associates to the office of Iftāʾ at the Islamic University ʿAllāma Muḥammad Yūsuf Binnorī Town Karachī, Murawwaja Islāmī Bankārī: Tajziyātī Muṭālaʿa, Sharʿī Jāʾiza o Fiqhī Naqd o Tabṣira (Karachi: Maktaba Bayyināt, 2008), 168.


[24] At that very time that this defence was issued, the historical precedent which he refers to, namely the Ottomans‘ useage of the iyal, was, fortuitously, a part of this study.


[25] The wording of the ḥadīth from the narration of al-Bukhārī, it is also narrated in the collection of Muslim. See al-Bukhārī, aḥīḥ, vol. 1, 407 (ḥadīth no. 2241); Muslim, aḥīḥ, vol. 2, 678-79 hadīth no. 4165, 4166, 4167, 4168.

      [26] Al-Sarakhsī, al-Mabsūṭ, vol.30, 228-9.

      [27]  Usmani, an Introduction to Islamic Finance, 15-24.


[28] The Halal Inc. Home Partnership Program,, 11th May 2014.

[29] Ibn Al-Qayyim labelled this increase blatant riba. (al-riba al-jaliyy). It was common before Islam, where the creditor would tell the debtor when the debt matures: pay or increase your debt. It results in compounded profits. Ibn Qayyim Al-Jawziyyah ((H.

anbal¯.), vol.2, p.140).

[30] (Hanbali.), vol.2, p.135). Ibn Al-Qayyim called it: The hidden Riba., which was forbidden to guard against circumvention of the law, as

evidenced by the Hadith of Abu Sacd Al-Khudriy that the Prophet (pbuh) said: Do not trade one Dirham for two Dirhams, for I

fear that you may fall in riba..


[31] Mohmoud A. El Gamal, Financial Transactions in Islamic Jurisprudence Volume 1, pages 323.


[32] Narrated by Al-Daraqutni. on the authority of Al-Hasan having heard it from Ubadah and Anas ibn Malik, c.f. Al-Shawkani  (, vol.5, p.193).


[33] Mohammed Taqi Usmani An Introduction to Islamic Finance, Karachi, Maktaba Ma’ariful Quran, 2010, page 116

[34] Ibn Qudamah, Al-Mughni, V6, P 137 and Radd al Muhtar V6, P47 & 48.

[35] Ibn Abidin, Radd al Muhtar V6 p47 & 48

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