Critiquing Rent-To-Own (Ijarah Muntahiya Bittamleek) and Diminishing Partnerships (Musharakah Mutanaqisa)
Ijarah Muntahia Bittamleek (rent-to-own) includes a promise by the lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the lease period or by stages during the term of the contract or at any time during the lease period when the lessee wishes to acquire ownership of the leased asset. (1)
So, in plain English:
- Adam wants to buy a house but doesn’t have the money to do it.
- Adam approaches the “Islamic” bank offering lease-to-own arrangements.
- The Bank agrees to purchase the property and sell it in deferred payments to Adam
- While Adam is paying off the price of the property, he pays “rent” for use of the portion of the house that he does not yet own. In other words, If Adam paid 10% of the house’s price, he pays rent on the remaining 90% he doesn’t own.
- Adam makes monthly payments, part of those payments are considered “rent” while the remaining part is used to fulfill his obligation to purchase the portion of the house he doesn’t own.
Difference between Rent-To-Own and Conventional Mortgage
So, how is this different from an interest-bearing loan? Well, I was kind enough to summarize the differences in a handy chart:
(Ijarah Muntahia Bittamleek)
|The buyer is part owner and part renter.||The buyer is the owner of the house.|
|The buyer is indebted with the remaining sale price of the house.||The buyer is indebted with the remaining sale price of the house.|
|The home buyer pays rent||The home buyer pays interest|
|As the term of the contract progresses, the home buyer owns more of the house and pays less rent||As the term of the mortgage progresses, the home buyers pay more principal and pay less interest|
|The financing contract ends when the “renter” has paid off the entire price of the house plus “rent”||The financing contract ends when the borrower has paid off the entire price of the house plus interest|
So as you can see, the “rent-to-own” folks, pardon me, let me use Arabic words to give the product the Muslims feel its marketing team will require: the “Ijarah Muntahia Bittamleek” folks have replaced the word “interest” with the word “rent” and the word “borrower” with the word “renter”.
Voila, It’s now Shariah-compliant.
I like to start my investigations into Shariah compliance by focusing on what I believe is the most important factor for determining Shariah compliance: customer experience. I have yet to find any Ijarah customer, in person or online, that can relay to me any distinct benefits Ijarah has compared to debt. That is, other than the peace of mind some gain from knowing it received a sharia board’s imprimatur. Which is a bit like doctors providing benefits to their patients by telling them they are illness-free when in fact they are not. While the patients may gain temporary peace of mind, they also have an untreated illness.
The absence of any distinguishing practical benefits for “Ijarah Muntahia Bittamleek” is confirmed by the benefits advertised by the product’s providers themselves.
According to one of these Ijarah providers, their product’s benefits are:
- No prepayment penalty
- Low-fixed late payment fee
- Non-recourse commitment on defaults [basically means, if you default they will only foreclose on your house not everything else you own]
- Risk sharing measures
Very quickly, my responses to these benefits are:
- Can be found in traditional loans
- Can be found in traditional loans
- Can be found in traditional loans (in fact some states require it by law for all residential mortgages)
- Like what? upon reading the white paper of one of these products they mention:
“Under certain circumstances, the situation may call for foreclosure. Under the Co-ownership Agreement, the customer commits to make scheduled monthly payments and fully acquire the property over time. If the customer fails to abide by this commitment, the Co-ownership Agreement allows the co-owner to foreclose and sell the property in order to reclaim its rights. From the sale proceeds, the co-owner recovers the funds that it would have obtained had the customer fully bought out its share of the property as well as other amounts that may be due. After the co-owner has been compensated, any surplus from the sale proceeds would be given to the customer. ”*
Basically, the bank is saying in event of foreclosure the bank is going to pay itself all what it is owed first. That doesn’t sound like sharing risk to me.
So we know from a practical standpoint this product doesn’t hold water, unfortunately, most Muslim “scholars” are more theory-oriented than they are pragmatic. So let’s look at the theoretical argument for this product:
- Is renting allowed in Islam? Yes.
- Is a promise to purchase allowed in Islam? Yes.
- Is purchasing through installments allowed in Islam? Yes.
From the aforementioned, nothing in the “Ijarah Muntahia Bittamleek” contract is forbidden and therefore the entirety of the contract is permissible.
And using the same line of logic, one could argue:
- Is eating grapes allowed in Islam? Yes.
- Is eating fermented foods allowed in Islam? Yes.
Therefore eating fermented grapes is permissible and Muslims can now drink wine.
You see, the problem with the above reasoning is that after one analyzes the component parts on their own, one must take a step back to analyze the interplay of these component parts with one another. That is, one must look at the product in its totality and more importantly, the experience of the product’s consumers.
Upon analyzing the rent-to-own scheme being used to provide “Shariah-compliant” financing, the following things we know are true:
- The consumer is receiving financing
- The bank is providing financing
- The bank has a right to a positive return and if it doesn’t receive it the customer is in default
- Interest (Riba) is defined as charging a predetermined return for the use of money.
That’s it. One can try to change what things are called and get heavily bearded muftis and imams to sign off on this product, but like lipstick on a pig, the pig stays a pig and Riba stays Riba no matter how you dress it.
Note: *A product called Diminishing Partnership (Musharaka Mutanaqisa) is essentially a replica of rent-to-own (Ijara Muntahia Bittamaleek) with different terminology. Unfortunately, modern “Islamic” finance practitioners got so used to replicating traditional products and changing their names that they managed to replicate their own replications. The article’s arguments can be used for both products just as well. Both products are not shariah compliant despite being advertised as such.
- Page 56 , Marifa’s Practical Guide to Islamic Banking and Finance