Conventional And Islamic Mortgage Financing; A Legal Comparison

Project and Seminar Material for Law

Conventional And Islamic Mortgage Financing; A Legal Comparison


Abstract


Home ownership has been a problem to many people in Nigeria. This is the more reason why efforts are being made from all quarters to alleviate this problem. The two most prominent of these efforts are the Home Financing Schemes, otherwise known as Mortgage Financing, which are made by the public corporations and private institution. The effort of the public corporations is known as Conventional Mortgage Financing while a part of the private institution is that of the Islamic Economic System known Islamic Mortgage Financing.

The focus of this research study is to compare the legal frameworks of these two opposite mortgage financing schemes. This is to be able to balance the regulatory issues that generate from the acceptability of these schemes in other to avail the Muslims the understanding of opting for the scheme that best aligns with the demand of their faith, without necessarily transgressing the law of the land in any way, bearing in mind the nascent status of the Islamic option, which is yet to enjoy a focused/specific municipal legal attention.


Chapter One


General Introduction

Introduction

Mortgage financing otherwise known as Home Financing is a product through which people are made or become home owners. It is a practice that is widely or relatively embraced by financial institutions as well as the private individuals (group of people). It is a subtle scheme that guarantees convenient home ownership through loan agreement. But in the same vein, it is seen generally beyond this perspective; a financing scheme through which desired property is acquired via the repayment process, especially with the conventional banking system.

It should be noted that this financing scheme is conceived in many ways: It differs in operationalization with the conventional banking operator, the legal practitioner and the practitioners of the Islamic economic system cum the (Shari‟ah) regulator. By and large, the converging point with all these practitioners is that Mortgage Financing is a method of acquiring legal or equitable property upon installmental repayment.

The Nigerian legal framework has thrived in the construction of provisions that regulate the operation of Conventional Mortgage Financing. This regulatory framework therefore enables the conventional mortgage financing, which is been executed by many finance institutions: Cooperative Societies; Commercial Banks; Mortgage Banks; Private Home Builders , etc to secure patronage of customers.

The practice of Islamic Mortgage Financing in Nigeria is relatively at its nascent stage but, just like the Islamic Banking operation, it has not secured express approval of the government let alone expresses legal frameworks that will regulate its operation. If at all it has been operating, it is still through an informal process and with an intendment of guiding its operation with the relevant provisions of the Shari’ah. Though, one is yet to come into record, in case of dispute, it should be expected that the jurisdiction will bonafide lie with the Shari’ah Court . From the foregoing notwithstanding, there are some specific areas of the legal framework dealing with transactions under which Islamic Mortgage Financing can be found fit and operational, within the entire laws guiding legitimate commercial transactions of all sorts. Thus, this research work is to examine by way of a comparative analysis how these two mortgage financing schemes operate under the related legal and regulatory frameworks, with a view to seeing the areas of similarities and disparities of these two financing schemes, within the purview of the laws.

This work is therefore divided into five chapters: the first chapter discusses the general background knowledge about what this long essay is addressing, including background of the study, literature review and definitions of terms among others. Chapter two examines the conceptual background of what is understood by Conventional mortgage financing and Islamic mortgage financing. Chapter three probes into the legal and regulatory frameworks guiding the operationalization of the two mortgage financial systems. Chapter four looks into the analysis of the legal frameworks. Conclusion, Summary and recommendation make the concluding chapter of this research work.


1.1.0 Background of the Study

The quest to research into this topic was appropriate by my interest to look into the Islamic Financial System. I have being opportune to have a critical experience of how Nigerians and most importantly muslims live in their various habitat and likewise attended some few seminars and talk shows even though they are not reported and have concluded to help the Ummah in my little way. However, in proffering a solution to the low standard of living among the Muslims I have also decided to look into the legal means of getting a meaningful life at the same time a life that is not against the doctrines of Islam. Islamic Financing System which I know has helped a lot of Muslims outside Nigeria should also be introduced to bring an end to the low standard of living of most Muslims in this part of the world.

Subject to my interest in eradicating the problems of home ownership among the muslims this work was researched into so as to bring to the notice of those in need of home where and how they can go about the funding of their homes and the measures put down by the government to assist home ownership and to realize the dream of everybody to become an owner


1.2.0 Objective of the Study

The major purpose of this research work is to do a legal comparism of Islamic and conventional mortgage financing and ways by which the lives of Muslims can be upgraded and how they can be landlords without transgressing the bounds of Allah. Also, this work intends to bring to the knowledge of muslims the varieties of private and public institutions [Islamic or contemporary] which can profer solutions to the problems facing the Ummah, that is, difficulties in accessing accommodation by the Muslims in Nigeria, which is evident in the light of their conditions of living.


1.3.0 Focus of the Study

The focus of this research work is to deal with the problems accruing among Muslims and the legality of the likely solutions resorted to. It is evident all over the country there is a problem of accommodation and it is in fact more rampant among the Muslims this is basically because of the process through which housing loans are gotten, i.e. the calculation of interest. Also to differentiate Islamic Mortgage financing and Conventional Mortgage financing. It is also to reposition the market for the Muslim individuals and Islamic Institutional Enterprises that have the potentials of assisting in achieving the goal of providing homes for the Muslims at affordable prices and/or convenient repayment plans. It is also to add a little new idea to the topic of Islamic Mortgage Financing knowing full well that it is relatively a new area of research. And in similar vein, it is to highlight some of the challenges of satisfying both religious tenets and governmental rules and regulations.


1.4.0 Scope of the Study

This work measures to seeing Muslims live a decent and stress free life with the concept of Home financing within Nigeria and also the entirety of the world because we are each other‟s keeper and usually at rest when our Muslim brothers and sisters are. The major issue is the possibility of a decent practice of a decent Islamic Mortgage Financing System in Nigeria and touching the lives of the target people.

The conceptual frameworks of the systems of Mortgage Financial Systems will be examined in this work; this is aimed at so as to examine the modes of operation of the systems. The legal frameworks of the system will be examined to know the extent to which the operation of home financing has been recognized.


1.5.0 Methodology

In carrying out the research, information will be gather from both published and unpublished materials, journals, textbooks, articles, fieldworks and most importantly the Holy Quran and Hadith. The project by its nature demands a very carefully handled research. This being that many people are just being introduced to this kind of Islamic Financial Institution. People‟s attention had earlier been averted to conventional banking system .That is why some a muslims have found it difficult to hold but to concur with some hired writers by the west that there is no difference between conventional banking system and Islamic banking system. There for the above listed methodologist have being employed and exploited in a bid to present or hit the target of the work.


1.6.0 Literature Review

The work of Dr. Abikan A.I. was examined titled Constitutionality Of Islamic Banking published in Contemporary Issues in Islamic Jurisprudence, a book published in honor of Chief Justice Of Nigeria Honorable Justice Idris Legbo Kutigi , this work was fully relied on for the legality of Islamic Mortgage Financing but the concept of Conventional and Islamic Mortgage Financing Systems were not discussed. This work discussed in details the history of
Islamic Banking in Nigeria and the laws in place for the establishment of Islamic Banks.

The work of Taiqullah Khan titled An Introduction to Islamic Finance is one of the relevant materials used in this research. He limited his discussion to the concept of Islamic Finance. He however did not discuss about the legality of Islamic Mortgage Financing which I intend to concentrate in this research work.

I have also relied on the article titled Theory and Practice of Modern Islamic Finance from Dr S.M. Solaiman. The author centered his discussion on the practice of Islamic finance system in Australia without making comparisms between Islamic Mortgage Finance System and Conventional Financing. The two systems will however be compared in this research work. Another material relied upon in the course of this research is that of Sheik Haithman Al-Haddad who in his work titled Islamic Mortgage: Paradigm Shift or Trojan horse? discussed extensively on the doctrines of Islamic Mortgage Financing and the fact that it has been introduced even in places where the practices of Islam has not been accepted and the fact that Islamic Principles and teachings of Islam should not be twisted to fit preconceived solutions. He however made his discussions not to go beyond the peripheral level and he has made wemuslims to realize our roles that is protecting the doctrines of Islam from external alterations.


1.7.0 Definition of Terms

i. Mortgage:

A mortgage is defined in another way as a mortgage that is not backed by government insurance, by which the borrower transfers a lien /title to the lending bank or other financial institution. These mortgages, which feature a fixed periodic payment of principal and interest throughout the mortgage term, are typically used for Home Financing.

ii. Financing:

The money necessary to do something, especially to fund a project. iii.Legality: the state of being in accordance with the law.

iv. Issue:

The prospects envisioned from the doing of an act.


1.8.0 Conclusion

The above is an elucidation into the thematic background of this research study. The Abstract succinctly explains what the main gist of the research study is all about while the researcher‟s interest about the line of research was briefly mentioned in the background. The primary goal that constitutes the base of this study is examined and after this objective, the direction in which the research work will follow is revisited. This is followed by the intended area of concentration of the study while the methodology to be employed in the search for facts and figures to give credit of validity to the research work is also revealed. In furtherance of broadening the understanding of the endconsumers, a quick review of the previous works in the same direction is done. This is ended by the definition of salient terminologies for correct and accurate comprehension of what the researcher intends by some of these key words. From the foregoing, it suffices to say that a clear cut path to be followed in the conduct of this research work has been laid.


Chapter Five


General Conclusion

5.0.0 Conclusion

This research work bothers on the legality of conventional and Islamic Mortgage Financing. As earlier discussed, the term mortgage has been given series of meaning by various people. The term could be used as security or home financing. The conventional mortgage financing is a system of financing where by the bank gives a home to the mortgagee and uses the same home as security in getting their funds with calculated interest on the property. Islamic mortgage financing on the other hand use this type of financing in two different ways; MurabahahandIjarah. It is used as Murabahah when the house is given to the party with a certain amount from the person and the rest money to be paid off while he resides in the house. The concept of Ijarah (rent) is by giving the property out as a form of rental to the party and will be given the option of buying the house by method of paying the money off while he still occupies it as a hirer.

The concept of conventional mortgage financing has been in practice for a while and in every country there are some basic terms peculiar to mortgage and these terms include; the mortgagor, the mortgagee and the property.
Conventional mortgage in this research work is limited to home ownership.

There are private and public conventional mortgage financial institutions in Nigeria. The public conventional mortgage financial institutions are less interested in making profit and are majorly governmental institutions. The private conventional mortgage institutions have investors who are basically interested in making profit as such these institutions are interested in making profit.

Islamic mortgage financial institutions are backed by the provisions of the glorious Qur‟an and Ahadith of the Prophet (S.A.W) which encourage transactions but forbid Riba.

Conventional and Islamic mortgage financial institutions are aimed at making home ownership easier. This is the major similarity between the two concepts. The differences however are quite numerous but the most important difference is that while the Islamic mortgage financial system is based on the doctrines of Shari‟ah (no interest rate) the conventional mortgage financial institution is based on man-made laws and principles‟ as such charging interest is eminent.


5.1.0 Recommendation

From the foregoing, the following will go a long way to enhance home ownership regardless of the mortgage system i.e. Conventional and Islamic mortgage. They include:

  1. Government, the prime mover of the economy should take holistic stance in implementing its planned programme aimed at bringing about a robust housing finance through review of laws and legislations.
  2. Government should show all the necessary political will to address the issue of housing by persuading it legislators to pass the laws that are under review. As a way out, is to reduce the number of legislations being reviewed as this will engender proper focus.
  3. Paucity of necessary specialist human resource calls for training of implementers (supervisory agency staff) and the private sector.
  4. Further, there is the need to strengthen the capital base of the PMIs as the mortgage business is a highly capital intensive business. “Mushroom” institutions should be made to merge with bigger ones with capacity to engender efficiency and performance.
  5. Certainty of burrowers character is important to investors particularly the footloose informal sector. Hence, there is the need to implement the national Identity Card scheme, enhancing good data base for mortgage security.
  6. Government should equally increase the pay package of the workers and improve the economy to guaranty affordability in lending.
  7. Functionality of supportive industries is a most to ease the burden of finance and enhance affordability.
  8. Following the fact that Islamic institutions have not been easy to point at in Nigeria, a proper enlightenment programs should be put in place to educate muslims about the operations and products of Islamic
    institutions.
  9. Acquisitions of land for home ownership should be made easier as such legislations should be enacted for the purpose of acquiring land by the two systems.
  10. Political interference: In situations, where the bank carries out its mandate more often than not public office holders (top government functionaries) interfere in the scheme of things due to their own personal interest these they accomplish using their office.

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