How is it, in the Shariah, to take an interest-based loan (mortgage/home loan) from a bank to buy or build a house? And what caution is necessary in adopting the models of the institutions that call their financing an "Islamic alternative"?

Interest is categorically forbidden by the Qur'an, the Sunnah and the consensus of the ummah, and is among the major sins. Allah Most High says: ﴿يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِينَ ۝ فَإِن لَّمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِّنَ اللَّهِ وَرَسُولِهِ﴾ (O you who believe, fear Allah and give up what remains of interest, if you are believers; and if you do not do so, then be informed of a war from Allah and His Messenger) (Surah al-Baqarah: 278–279). The Messenger of Allah, peace and blessings of Allah be upon him, cursed the one who consumes interest, the one who feeds it, the one who writes it and its witnesses, and said that they are all equal (in sin) (Sahih Muslim: 1598). Every loan in which there is a condition of excess over the principal is interest, whether it is for a house or for any other purpose.

The fatwa of al-Lajnah al-Da'imah is that taking a loan on interest from a bank or from anywhere is forbidden, whether it is to build a house or for food, clothing, treatment or trade (Fatawa al-Lajnah al-Da'imah: 13/385). The need for housing is fulfilled by a rented house, so ownership of a house does not reach the level of a Shariah necessity (darurah); and an interest-based instalment being cheaper than rent does not make it lawful either. A Muslim should be patient upon renting, and should seek an interest-free loan (qard hasan) or a genuinely Shariah-compliant alternative — whoever leaves a forbidden thing for the sake of Allah, Allah grants him better than it.

The European Council for Fatwa and Research, in its resolution (fourth session, Dublin, 1999), had, for the Muslims of non-Muslim countries, placed need (hajah) at the level of necessity and given permission with strict conditions: the house should be for himself and his family, he should not have another house, and he should not have the ability to buy except through a loan. But the majority of the verifying scholars — including al-Lajnah al-Da'imah — did not accept this expansion, because the Shariah measure of necessity is that without it the system of life becomes deranged, whereas the purpose of housing is obtained through renting. Therefore the preponderant and cautious view is impermissibility itself, and it is not correct to regard this permission as a general licence.

The models presented under the names of Murabahah, Ijarah and diminishing Musharakah (Musharakah Mutanaqisah) are permissible only at the time when their reality is also in accordance with Shariah principles: (a) the bank or institution should first truly buy the property and become its owner and bear the risk of ownership, then sell it onward or give it on rent; (b) the penalty imposed in case of delay should not become the institution's income; (c) no form of interest should be present in the contract, explicitly or by a device (hilah). If the institution never becomes the owner at all, its "profit" is in the very form of interest fixed with time, and the penalties for delay also go in its favour, then despite the name being "Islamic", the reality is that same interest — in the Shariah the ruling changes not by the name but by the reality and the meaning. Therefore, before entering into any housing-finance contract, it is necessary to place it before a qualified scholar or a credible Shariah board.

A Maqasid Note: The protection of religion (hifz al-din) and the protection of wealth (hifz al-mal) both demand that even a lawful need such as housing not be fulfilled by a forbidden means. An interest-based loan shackles a person for decades in debt and economic humiliation; it is because of these very corruptions that the Shariah has strictly closed the door of interest, and in that very closure lies the good of the individual and of society.

Translated from the original Urdu fatwa.