KSA عربي
KSA عربي
Global عربي
Islam is all about protecting human beings from unpleasant and unfortunate events. In mutual dealings, sometimes one suffers or faces losses.
To avoid such unfortunate situations, Islam has set certain limits and boundaries. In financial transactions, there are many challenges faced by different parties while executing a contract. To address these hurdles, Islam allows the use of Rahn (mortgage) to safeguard against adverse situations.
Nowadays, Rahn plays a crucial role in Islamic financial institutions. It makes it easier for the borrower to obtain a loan and gives the lender an advantage to recover his amount from the pledged asset.
From a Shariah perspective, there are different conditions for the mortgager, mortgagee, and mortgage, which should be taken into consideration while executing the Rahn contract.
- Mortgage: A mortgage (in Arabic known as a Rahn) is defined as tying a financial asset to a debt, so that in case of default, the lender can recover the loan amount from that asset.
- Mortgager: A mortgager, known as a Rahin, is the party (pledger) who pledges his asset for the loan.
- Mortgagee: A mortgagee, known as a Murtahin, is the party (pledgee) who receives the asset against the loan he has extended to the borrower.
Read more about: Rahn Financing as an Islamic Alternative to Conventional Loans
An Islamic mortgage is a Shariah-compliant way of providing a home or other property without charging interest, which is prohibited in Islam. Instead of entering into an interest-based contract, Islamic financial institutions offer Shariah-compliant modes of financing.
For example, if someone wants to purchase a car through a Murabaha contract with the bank on deferred payment, the bank sells the car under the specific terms and conditions of Murabaha and may pledge the documents as Rahn collateral.
In case of default by the buyer, the bank can recover its loss from the pledged asset.
- There are different terms and conditions about the Mortgage that should be fulfilled while executing the Rahn based contract. Some of them are related to the debt while some other are related with Mortgage asset. Following are some important terms and conditions:
- The mortgage should be a Shariah-complaint asset. It should be specified and possible to be delivered.
- In principle the mortgage should be a tangible asset, yet it can be a consumable commodity, cash and debt.
- One asset can be mortgage with more than one mortgagee.
- The pledged asset will be a trust in the hand of mortgagee.
- With the permission of the owner, the mortgager can keep the borrowed and rented asset as a mortgage with a mortgagee.
- In a sell contract, it is allowed for the seller to stipulate that after taking the actual or contructive possession of the commodity, the buyer will pledged the purchased commodity with seller as a collateral.
- Any income generated from the mortgage asset will be considered as a mortgaged with the principle unless agreed otherwise.
- The mortgager can benefit from the mortgage asset with the permission of the mortgagee, where as the mortgagee can not take any free of charge benefit from the mortgage asset with or without the permission of the mortgager.
- However, with the permission of the mortgager, the mortgagee can utilise the asset with the normal pay for the similar asset.
- The mortgager will bear all expenses associated with the mortgaged asset.
- The debt for which the mortgage is obtained should be a Shariah permissible debt, such as, sales income, istisnah commodity, owed usufruct and salam commodity.
- It is impermissible to stipulate the mortgage as a condition in a trust based contracts. Such as, Agency, Mudarabah, Musharakah, leased based contract.
- It is allowed from a Shariah perspective to mortgage the current account in any Islamic financial transaction for which mortgage is permissible.
- If it is mortgaged with the same institution where the account is opened, then the institution as a mortgagee cannot benefit from the current account unless both parties agree to transfer the account status from current to an investment account.
- In this case, the institution will act as a Mudarib and the account holder as a Rab-ul-Maal.
- It is also allowed from a Shariah perspective to mortgage Sukuks and financial papers in any Islamic financial transaction for which mortgage is permissible.
- However, this permissibility applies only when the Sukuks and financial papers are structured in a Shariah-compliant way; otherwise, Shariah non-compliant Sukuks and financial papers are not allowed to be mortgaged.
It is not allowed to accept or offer a conventional mortgage because the contract itself is impermissible, and therefore the mortgage will also be impermissible.
On the other hand, it is permissible to offer or accept a mortgage in any Islamic financial transaction for which mortgage is permissible.
According to Shariah rules related to the mortgage, the status of ownership remains with the mortgager through out the period of the loan.
If the mortgager default in the repayment, then the mortgagee is entitled to sell the mortgage asset and refund the loaned amount.
In deferred Murabaha, the institution pledges the documents of the sold asset. In case the buyer defaults, the institution sells the pledged asset and recovers the loaned amount.
Read more about: What Are The Main Differences Between Musawmah & Murabaha?
In this case, the asset remains in the possession of the institution. Therefore, it is not allowed for the institution to pledge any asset against a leased asset. In case of default by the lessee, the institution repossesses the asset, sells it to another party, and recovers its payment.
Read more about: How ijarah differs from conventional leasing?
From a Shariah perspective, it is not allowed to pledge any asset in a Musharaka contract because it is based on trust; therefore, pledging an asset in a trust-based contract is impermissible.
In case the mortgager (borrower) defaults on the payment due, Shariah allows the mortgagee (lender) to sell the pledged asset in the market and recover the loan amount from its price.
If the sale price of the asset exceeds the loan amount, the mortgagee will deduct the loaned amount and return the remaining balance to the mortgager.
However, if the sale price is less than the loaned amount, the mortgager will still be liable for the remaining balance.
References
https://aaoifi.com/ss-39-mortgage-and-its-contemporary-applications/?lang=en
bin Awang, A. B., bin Md Harun, A. S., bin Awang Hamat, M. A., & bin Sitiris, M. (2025). Al-Rahn from an Islamic Jurisprudential Perspective. AL-HIKMAH: INTERNATIONAL JOURNAL OF ISLAMIC STUDIES AND HUMAN SCIENCES, 8(1), 1-14.
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
