Fatwa on Source of Funding

Question:  How does the source of funding for Amanah’s home financing product impact on its Shariah compliance?

I can confirm that the source of funding for Amanah’s home financing product has been structured in a manner that is consistent with Shariah.

The reasons for my Islamic ruling are as follows:

Source of funding in relation to Ijarah over property

  1. Amanah’s legal contracts for home financing are based on Ijarah which is a well-established principle in Islamic fiqh
  2. Those contracts which I have endorsed provide that:
    1. The Customer acquires the Property on behalf of the Financier as its purchasing and custody agent (and mortgages it to the Financier) after which the Financier has a beneficial interest in the Property
    2. The Financier then allows the Customer to obtain use of the Property (subject to the Financier’s ownership right in the Property) and for enjoyment of that right the Customer shall make periodic rental payments
  3. The arrangement from a Shariah perspective is, therefore, similar to the position of a tenant making rental payments to a landlord
  4. Under Shariah, the permissibility of a rental arrangement (the Ijarah) will depend on the terms and conditions of the rental contracts and not what source of funding the landlord has used to purchase the rental property – that is the landlord’s issue
  5. Similarly, in the case of Amanah’s product, the Shariah will look to see whether the contracts that comprise the financing arrangement are permissible under Shariah and not whether the Financier has funded its purchase of the property through debt or equity
  6. Furthermore, it is an established Shariah principle that in Ijarah where the source of funds are mixed with equity, debt and other income (as in the case of Amanah’s source of funding), then the Customer is not obliged to investigate the exact funding source for that particular amount ie. it does not have to trace that the funding for the purchase of the Property came from the equity portion only. This principle is well-established in Shariah and is consistent with Islamic fiqh and accords with the consensus of opinion of all major Islamic finance scholars

The example of source of funding and contracts for service

  1. To explain this further, the Islamic Fiqh contract that will govern employment relationships is also Ijarah. The principles for the Ijarah employment contract are the same as the principles for Ijarah as a mode of financing
  2. By way of example, a mathematics teacher’s employment in a school (which is an occupation consistent with the Shariah) will be governed by Ijarah, and as they perform their services they will be entitled to be paid
  3. We know in Australia schools source a significant part of their money from government funding which in turn source their money from a number of non-Shariah compliant activities including conventional riba based debt and taxes levied on tobacco, alcohol and gambling
  4. Whether the mathematics teacher’s income is “halal” will depend on the terms and conditions of its contract with the school and how it discharges its duties. The Shariah will not require the teacher to investigate the source of funding that the school uses to fund the its wages
  5. This is another example of how source of funding applies to Ijarah in Fiqh

My ruling confirming the permissibility of Amanah’s  source of funding applies only in the limited circumstances of Amanah’s home financing product. This is because, from a Shariah perspective, it is very important that the terms and conditions of the financing documents be prepared in a manner that is consistent with Shariah. I have in conjunction with Amanah developed those contracts and subsequently reviewed and endorsed them, and for that reason, I am able to give this Shariah ruling.

Mufti Dr Mohammed Imran Usmani s/o Justice (ret) Sheikh Mufti Taqi Usmani

Shariah Advisor
Amanah Islamic Finance Australia

24 Rabiul Awal 1437 A.H
5 January 2016