Understanding Islamic Finance #

Original Question: I would like to ask regarding the permissibility of taking a housing loan to upgrade from HDB to private. We are currently staying in a 26-year-old hdb flat which will depreciate over time and was advised by an agent to upgrade to a condo as a means of preserving wealth. However this would mean paying for the condo partly in cash (from selling hdb) and partly in loan. Is taking a new loan as a way to preserve wealth permissible? What if the quantum of the loan is similar as moving to another hdb flat?

Question answered by Ustaz Haron Masagoes of FAiWA.

For a home loan product, the majority of Scholars said in essence it is a Riba-based transaction that involves giving a loan (by the bank/institution) and the charging of interest (paid by the borrower). In the case of Islamic home financing, the transaction is structured differently, one of them is where a bank provides you with a house and charges you rent for its use, and agrees to transfer the ownership of the property after an agreed period. Although the economic result with conventional loans is the same (the buyer of the house paying monthly installments and finally owning the property), the structures underpinning both methods are different and may not be obvious to the untrained eye.

Unfortunately, at present, there is no Islamic HDB/private home financing in Singapore although various stakeholders within the space are discussing with the relevant authorities on making riba-free home financing a reality.

Meanwhile, until this becomes a reality, our view is that Muslims are allowed to use a conventional loan for their first primary residential home in Singapore under the Principle of Darurah or Hajah. The debate arises concerning a second conventional loan to buy a second property for investment. In our view, this is not permissible given that we can no longer apply the Principle of Darurah or Hajah in this case.