Monday, February 21, 2011

'Profit for delayed period not Shariah-compliant' -Grand Mufti of Dubai

Emirates 24/7 is reporting that the Grand Mufti in Dubai has criticized a practice where purchasers of apartments in projects that have been delayed are being charged rent on the unfinished buildings. The Mufti, Dr. Ali Mashael, criticized this as being not Shari'ah-compliant. While the details of the contracts involved are not described, I went back to a paper by Dr. Abdul Sattar Abu Ghuddah on forward ijara (al-Ijara al-Mawsufah fi al-Dhimmah) [1] that I can no longer find a working link to. The usual warning applies that I am in no way qualified to offer any opinion on the Shari'ah aspects of the debate; I can only summarize what others have said.

The Emirates 24/7 article describes that "Some Islamic banks and mortgage companies have asked investors to pay advance installments (the rental profit or Ijara) even though an already delayed project is not yet completed or handed over." The contracts are further described as: "During the economic boom, many investors got in to agreement with Islamic banks and mortgage firms and the developers where the investor pays a down payment of about 5 per cent of the property price to the developer at the time of signing the contract. After that, the bank -- as owner -- pays the developers, and at the time of property handover, the investor pays the value of the property as rent-to-own installments to the banks over a period of time."

Dr. Abu Ghuddah focuses specifically on this type of transaction in his discussion of the forward ijara. The one aspect that is missing from his discussion is the down payment amount, which was paid to the developer, but this was outside of the financing aspect of the contract between the bank and customer (perhaps it is returned to the customer, who then uses it to make payments on the lease). After the customer agreed to buy the property (e.g. an apartment) from the developer, he has a debt that is due when the apartment was constructed. However, in order to finance that so it is not due up front, the customer went through an Islamic bank.

The bank approaches the developer and requests that the developer create an apartment meeting the customer's specifications, and agrees to an istisna'a contract with the developer. The bank then enters into a forward ijara contract with the customer to lease an apartment meeting the customer's specifications beginning on a set date in the future (when the apartment is expected to be completed) for a specified period with specified lease payments.

However, one key factor is that the apartment that is the subject of the lease is not specified in the forward ijara. Dr. Abu Ghuddah describes: "The suitability of this arrangement, or the solution to this circumstance by means of forward ijarah that ends in ownership, is that the subject of the contract is not a specific item". The permissibility of the forward ijara as Dr. Abu Ghuddah describes it that it follow the rules of a salam sale (with an exception to the requirement of spot payment) including that the item be precisely specified.

With regards to the banks requiring payment, Dr. Abu Ghuddah discusses what happens if the item described in the forward lease is destroyed: "A contract for forward ijarah is binding on the parties to the deal, and can remain valid even with the loss of the usufruct, since a replacement is to be provided in such a case." The binding nature of the forward ijara is probably what allows the banks to demand the rental payments beginning on the day specified in the contract; they couldn't have specified that lease payments begin at some date in the future when the project is completed, because that would have raised potential issues of gharar. However, in the same way that the bank would have been liable to provide a substitute if the one being constructed were destroyed, it is probable that they would be required to provide a substitute for the apartment that is delayed (i.e. that is not able to be occupied and used by the customer who is paying for the use of an apartment of certain specifications).

If that analysis is right and I am not misunderstanding (or misapplying) the description of the financing contract used by the Islamic banks or Dr. Abu Ghuddah's description of the forward ijara contract, then the Grand Mufti in Dubai is directing his criticism at the forward ijara that was used widely in the pre-crisis period (widely enough to merit an in depth paper from Dr. Abu Ghuddah), not necessarily the Islamic banks themselves. However, the banks don't get a clear pass either; if they are collecting rent for the use of an apartment under the forward ijara contract from 2009 until today without the specified apartment being inhabitable, then it would seem to me that they would be required to provide a substitute apartment to the customers from whom they are demanding lease payments.

I don't expect this article to be the last we hear about these types of contract and it would be good to see how the bank's Shari'ah boards (and other scholars) weigh in on the bank's responsibility to provide a substitute for the delayed apartments.

[1] Dr. Abdul Sattar Abu Ghuddah. 2009. Practical Application of al-Ijara al-Mawsufah fi al-Dhimmah (Forward Ijara). Paper presented at the 30th Albaraka Symposium. You can find a download link on Google (search for the title).

No comments: