I was looking into Ask Imam’s fatwa on the permissiblity of Manzil’s Murabaha-based financing and would like further clarification on a few matters:
The premise based on which banks/lenders can enjoy profit in Islamic financing is the presumption of risk. In Manzil’s scheme, they create an SPV (special-purpose vehicle) which purchases the house on your behalf at the agreed-upon market price, then immediately sells it back to you on a significant markup.
This markup is then amortized over 25 years (or as agreement states) and you make monthly payments towards fulfilling this obligation. However, the question arises: is Manzil justified at selling this house on a markup when the risk they undertook was for no more than a few minutes?
Essentially, the SPV purchases the house from the builder on your behalf and immediately sells it to you at a significant profit all in the same day. One can argue this goes against the spirit of Shariah, as the presumption of risk was next to nill.
Furthermore, if the land land title (ownership) gets immediately transferred to the buyer upon purchase from Manzil, how does Manzil justify using the house as security (rahn) against the mortgage? Essentially, if you default on your payments, they are using your house (which they do not own) as a security against the mortgage? Isn’t the presumtion of risk nullified right there? This process works very similar to a conventional bank.
Lastly, the issue of SPV. From a legal perspective, companies often create SPV (a seperate legal entity) to isolate themselves from potential legal and financial risks. In case of any potential litigation or lawsuit levied against the company, the plaintiff can only sue the SPV and this protects the parent company from all potential risks/penalties. Based on the legal understanding of SPV’s, doesnt this protect Manzil from all associated risks emanating from the creation of the SPV’s? Essentially Manzil itself cannot be held liable for any potential illegal activity, it would only hold the SPV responsible.
I would greatly appreciate your guidance on the aforementioned questions and am eagerly awaiting your response.
In the name of Allah, Most Compassionate, Most Merciful,
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Brother in Islam,
We will address your query in the following order:
1) The concept of risk in Islamic financial transactions
2) The concept of rahn
3) The issue of SPV
1.You are correct that an intrinsic element of Islamic financial transactions is the presumption of risk. However, the type of risk required slightly differ from transaction to transaction. For instance, in a Musharakah, both partners are liable to their respective proportions throughout the entire duration of the venture against any loss that occurs beyond their control. However, in a lease-to-own, although the lessee will eventually come to own the commodity, the lessor will solely bear all risks. Hence, keeping this in mind, it is important to understand what risks are required for the permissibility of a Murabaha transaction.
In principle, a Murabaha transaction falls under the category of a regular buy-and-sale transaction. Profit in Arabic is translated to Ribh. As such, it has been termed “Murabaha” as the seller discloses the amount he has paid to acquire the commodity as well as his mark-up (ribh). Being a regular transaction, the condition of validity rests on two factors, ownership, and possession. If both are found, then as a valid sale, the profit will be halal. The time for ownership is not limited to a specific time frame. Rather, a moment of time is sufficient. Consider the following example:
Zaid goes to a shop at 11:00 AM and purchases the last phone they have in stock. Zaid receives the phone at 11:05 AM and proceeds to exit the store. At 11:06 AM, Amr walks in and finds that there are no phones available. Amr pleads Zaid to sell him the phone. Zaid informs Amr the amount he has paid, and marks-up the price by nearly double the price. Amr accepts the offer and purchases the phone at 11:08 AM. Although, Zaid’s possession and ownership lasted for three minutes, such a transaction will be permissible.
Although this time frame seems insignificant, the risks are still very great. For one, if the item gets damaged or destroyed in the interim, the seller will be fully liable without being able to have any claim against the potential buyer.
2. Following our discussion above, we understand that a Murabaha transaction is a regular sale transaction. Hence, when the buyer has stipulated a delay for repayment, this creates a creditor and debtor relationship. Accordingly, Shariah does not mandate a person to assume creditor risk. Rather, they can use permissible methods to mitigate that risk. One such method is by means of a rahn. There are ample evidence in the Qur’an and Hadith that allude to the permissibility of stipulating a security in a credit based transaction.
It is important to note, that a Musharakah and Ijarah are trust based transactions and not credit based.
3. Although some have elected to term the mechanism used to purchase the property as an SPV, it is inaccurate to use the standard definition in this case. For further details, you may contact Manzil directly for further clarification.
In any case, the primary purpose of such a mechanism is to avoid double taxation. In view of the impracticality of double taxation, Manzil has adopted a method through which they purchase the property on their name, assume the risk, and sell the property to the client.
If you have any further questions regarding our fatwa, you may revert to us.