Will it be permissable to enter into such a transaction?

Ref no: 0326#

Category

Money Matters

Title

Will it be permissable to enter into such a transaction?

Question

Respected Mufti Saab

I’ve got an enquiry, and hope you can assist me in this regard.

My relative has purchased a home and has financed it via a conventional bank. He has approached me to assist him as he says that he realises he has made a serious error by financing it via a conventional hank. He says that he does not mind paying additional money, but he wants to get out of the interest transaction.

He has offered me the following option.

Current market value of the property is estimated 0 1 000 000 He advises that the capital amount owing to the bank currently amounts to approx 300000. Thus 500000 was paidup by deposit and instalments up to date. His current bond instalments are 5000 per month

He states that i could buy 30% of property from him 8 a price of R 300000. he will utilise the 300000 to settle the bond.

He will then pay me 5000 per month for the next 6 years

Thus he will pay me 60000 per annum to purchase from me a 5% share

In 6 years he will thus have paid 60000 x 6 years = R 360000 and purchased the 5% per year x 6 years = 30%. Me will also pay me R 1000 per month rent due to him using and living in my share of the house

Will it be permissable to enter into such a transaction? If not, please advise what other options are available out there

Answer

Muhtaram / Muhtaramah

In the Name of Allāh, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāh wa-barakātuh.

We understand from the query that your relative has bought a home and financed it via a conventional bank. The conventional banks restrict the client from selling the property until the whole bond has been settled. Therefore, it will not be permissible for you to buy the property from him until he has settled the bond. However, the procedure mentioned hereunder could be used as an alternative:

You could first lend R300000 to your relative as an interest free loan. He can then settle his bond through this loan, and he will become the sole owner of the property. You could then purchase 30% of the property from your relative at the price of R300000. At this point you will jointly own 30% of the property. Then you will split your share of the property into six units, i.e. 5% of the property per unit. These units will be sold for R60000 each, on a credit basis of R5000 per month for 12 months. The units have to be sold in separate transactions at the start of each year. It will not be permissible to sell all units in one transaction. If all units are sold in one transaction, then it will be considered that you sold your full share of the property for R360000; and you will not be able to rent out any part of the property.

Once you have sold one unit of your share of the property, you will own 25% of the property. Now it will only be permissible for you to charge rent on 25% of the property. Similarly, when you have sold the second unit of your property, you will own 20% of the property, and can demand rent only on 20% of the property.

All the abovementioned should be carried out in separate transactions. It will not be permissible to make one transaction a condition for another transaction. E.g. it is not permissible to make a condition that you will borrow the money on condition that he sells 30% of the property to you, nor is it permissible to make a condition that you will sell your share of the property back to your relative when purchasing 30% of the property from him. Any such conditions made during the transaction will render it invalid. Both parties will have the right to refrain from carrying out the second transaction after the completion of the one transaction. It will be a matter of mutual trust that both parties keep to their word.

The concept mentioned above is very close to the concept of ‘Diminishing Musharakah’ explained hereunder:

Diminishing Musharakah

According to this concept, a financer and his client participate either in the joint ownership of a property or an equipment, or in a 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 one by one periodically, thus increasing his own share till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.

Ref: An Introduction to Islamic Finance Pg.82 (Idaratul Ma’arif)

And Allah knows best
Darul Iftaa

Madrasah Inaa’miyyah