How do you buy a home without interest?

This is the first in a series of videos I’m planning to make about the diminishing partnership (musharakah mutanaqisah) model for interest-free home buying.

The 3 minute video illustrates the basic concept of how it works.

In the video, orange rectangles represent rent, blue represents the home buyer’s share of the house and green represents the investor / partner’s share.

Is the rent in Islamic housing the same as interest on a mortgage?

Someone posted this comment in response to my article on Islamic home financing:

“Is it really different from a conventional mortgage? Or are they charging a fee like interest but calling it something else?”

That question still remains …is the rent payable not synonymous to interest ?

Some of the comparisons are also flawed.

In some conventional mortgages where your contract allows overpayment ..any payments in addition to the monthly interest (rent) would also reduce the total capital owed which can be reflected as lower monthly interest (rent) payments or a reduction in the term should you choose not to go for the former option.

The only tangible difference seems to be around risk and profit which is a setup that has both pro’s and con’s.

If your property depreciates are not at a significant loss but equally if the price appreciates significantly over a lengthy period (more likely) then you would also not be party to the larger part of that increase.

So yet again..comparitively over a long term of lending you would be disadvantaged by engaging in such a venture but would have a degree of protection against any property market downturn.

My response:

“That question still remains …is the rent payable not synonymous to interest ?”

I can see why this can be confusing. The homebuyer is paying monthly fees (interest payments are also monthly fees) and they’re not getting more property from those monthly fees (interest payments also don’t earn you more property).

The difference here is that the financier (in this case, the co-op) actually shares ownership in the property. They will share in benefit when the property value goes up, they will share when it goes down. If the home buyer can’t pay rent anymore and the house needs to be sold, they will share the proceeds from the sale of the house according to the proportion that they each own.

In a conventional mortgage, the bank doesn’t share ownership of the property. Whether the property value goes up or down, the bank will still be entitled to get the principal of their loan back plus interest. If the buyer can’t make their mortgage payments anymore, foreclosure will ensue, and the bank will sell the house to recoup whatever is remaining on the loan. The buyer gets nothing even if they’ve been paying the mortgage for years.

You’re right about the tangible differences around risk and profit and the pros and cons involved. Depending on the price of the house, the market rent, the prevailing interest rates at the time, whether you can overpay the mortgage, etc. there are situations where the conventional mortgage is financially advantageous and where it’s not.

Do you mind elaborating on which comparisons are flawed?

The garden hose lesson

Fewer options are often a good thing.

When you’ve got restrictions and limitations on what you can do, this in itself becomes a new opportunity.

You don’t have to decide certain things because they’ve already been taken off the table for you.

You have no choice but to focus. And focus the key to meaningful work.

It’s like when you’re spraying with a garden hose.

What happens when you partially cover the tip of the hose with your finger?

By forcing the water through a smaller area, you increase the pressure and the spray goes further.

The downside of the plan

Sometimes, I find myself getting stuck because I want to do things in a certain order. I want to do A, B, C and D and I want to do it in that order. So when I get stuck on C, I’ll stay stuck there. I’ll leave the project for a bit. And then I feel this weird guilt about leaving the project so long that it blocks me from coming back. Of course the longer I stay away, the harder it is to come back. And the cycle continues.

So I need to let go of that original plan. Doing A, B, and D is better than doing only A and B. Who cares if C is missing. I might have been the only person that expected it to be there in the first place. No one might actually notice. And maybe, just by going ahead with D I’m able to figure out how to do C later. And in the end, I’ll have all the pieces I originally intended.

Now that I write this out, I realize I should have known this already. When we write exams, they tell us that if we get stuck with a question, we should just move on. Don’t stay stuck there. Keep going until you find a question you can answer and then go back to do the ones you can’t.

Make a plan, but when it becomes an obstacle to the work, let it go.

Working and watching

There’s a tiny little thrill we get from seeing the results of our work — stats going up, likes, comments, page views, a little edit on the back end that makes a website look better, a reply to an email.  It’s fun to keep checking these things.  To sit back and watch.

But it’s not where the real satisfaction comes from.  That’s like the icing.  It’s nice and sweet.

The cake is doing the work.  That’s the enjoyment that fills you.



Markets vs. Capitalism

…we’re used to assuming that capital­ ism and markets are the same thing, but, as the great French historian Fernand Braudel pointed out, in many ways they could equally well be conceived as opposites. While markets are ways of exchanging goods through the medium of money-historically, ways for those with a surplus of grain to acquire candles and vice versa (in economic shorthand, C-M-C’, for commodity-money-other commodity)-capitalism is first and foremost the art of using money to get more money (M-C-M’).

David Graeber, Debt : the first 5,000 years, p. 260

Maintaining momentum

When you’re on a roll, getting things done is so much easier. You’re confident, you know how to do it, it’s easy to keep going.

Inertia, in this case, is on your side. An object in motion remains in motion until an external force acts upon it.

Unfortunately, this inertia of motion is fragile. It doesn’t take much to break it. You get lazy, confused, not sure what to do, overwhelmed, something comes up, something else demands your attention and seems more important so you skip a day. That day becomes two days, three days, a week, a month and before you know it, this good habit that you had built, this project you were working on gets put on the shelf for a year or more.

So when you’re on a roll, protecting and maintaining that momentum is a high priority. An interruption isn’t just a pause for a day. It could be years. It could be the end of that project all together.

And if you do lose momentum, do whatever you can to restart. Break the task down to something smaller. Keep breaking it down. Lower the bar until you can’t help but trip over it.

When you’re going, keep going. Don’t let anything get in your way. There’s too much at stake here.

And if you stop, don’t just sit there. Get up. And get yourself going again.

Interest, usury and riba – what’s the difference?

In any discussion of Islamic economics and finance, the prohibition of riba inevitably will be mentioned. It’s a fundamental tenet of the Islamic economy system.

Riba is usually translated as interest or usury.

So, which one is it? Interest or usury? Are they the same thing? And are they accurate translations of riba?

Let’s figure that out.

We’ll start with the most commonly used word, interest. According to the Merriam-Webster dictionary, interest is “a charge for borrowed money generally a percentage of the amount borrowed”.

For example, if you borrowed $1000 at a 5% annual interest rate, at the end of the year, you would owe $1050. $1000 is principal. That $50 is interest.

As for usury, the Merriam-Webster dictionary tells us it is an archaic form of the word interest. In the past, usury is the word they would have used to describe the $50 extra that you’re paying on the $1000 loan. What we now call interest is the same thing as what they used to call usury.

It’s similar to the way that “common-law relationship” today describes what used to be called “living in sin”. They’re the same thing. It’s people who aren’t married, living together like they are married. We just use a different terminology today than we used in the past.

Since the word usury has been replaced by interest, the word usury is now used a little differently. Today, usury is used to describe exorbitant rates of interest.

For example, if someone was lending money at an interest rate of 60% per year, that could be called usury.

When translating the Arabic word riba into English, this dual usage of the word usury and its similarity to the word interest can cause some confusion.

First, what is riba?

There are two types of riba:
1) Sales-based riba
2) Loan-based riba

Sales-based riba is unequal exchange of the same commodity. For example, if I traded a certain type of wheat for a different quality of wheat. I don’t know in what context this comes up, but in our modern lives, it’s not something that we have to worry about.

Loan-based riba is any excess beyond the principal that is stipulated in a loan-based contract. Note, that there isn’t a minimum amount of excess that qualifies something to be called riba. So even a 1% interest rate counts as riba.

The other thing to note is that it’s a stipulated excess. If the borrower decides to give the lender extra as a token of appreciation when he returns the loan, that’s not riba. That must be entirely voluntary and not something that the lender requests, though or else it fits into the definition of riba again.

So in summary, interest is riba. Usury is also riba. You can translate it either way.

Just don’t get confused and think that if riba is translated as usury, then it only refers to very high interest loans. That’s simply not true.

Riba refers to any excess beyond principal that is stipulated in a loan-based contract. Today, we refer to that excess as interest.