Diminishing musharaka (co-ownership) home financing

Assalamu-alaykum Shaykh!

Shaykh there is one issue that I hope you would clarify regarding Islamic finance. Here in the UK there are many banks claiming to provide Shariah compliant finance in which many Scholars approve, whilst some remain skeptical. The main scheme that is provided is known as ‘The Declining Balance Co-ownership Program (Diminishing Musharaka)’. This involves both the bank/customer purchasing the selected house and the customer paying back the exact initial investment from the bank over time. However, until the initial investment is paid-off the customer also pays rent for living in the house that is currently legally owned by the bank. Therefore the bank claim to make a legitimate profit from renting out the house that they legally own, and the customer apart from rent would pay the exact sum of money put in by the bank (no interest).

The point of confusion is in the payment of rent by the customer. Local Hanafi scholars say that once an agreement of purchase has been made the ownership of the house should be transferred to the customer; hence it would be against Islamic rulings to pay rent for something that one owns. They say for the bank to make a legitimate profit, an increased price should be agreed at the start and paid over time if the customer can’t pay it all at once.

(E.g. House price=£100,000. The revised price could be mutually agreed at £150,000 which is paid over time by the customer, however unlike the scheme mentioned above the customer becomes the complete owner of the house at the start of the agreement and would not pay rent.)

What is your opinion regarding the payment of rent by the customer? Is it justified as he/she would be hiring out the house legally owned by the bank? Would it still be considered an Islamic alternative considering current market conditions?

I look forward to hearing from you.

Jazak-Allah, Wasalaamu-alaykum.

In the Name of Allah, with blessings and peace on the Messenger of Allah

Walaikum assalam wa rahmatullah,

I pray this finds you in the best of health and spirits.

Leading Islamic jurists, such as Mufti Taqi Usmani and others, have explained that diminishing musharaka (lease-to-own) arrangements are permitted, if Shariah guidelines are followed in the arrangement.

For details, see the following answer:

Are Islamic alternatives for an interest-based mortgage: interest-based transactions in disguise?

And Allah alone gives success.

Faraz Rabbani