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Essays in Conveyancing and Property Law

 | 
Frankie McCarthy
, 
James Chalmers
, 
Stephen Bogle

The Future of Property Law

15. Islamic Mortgages

George Gretton

Texte intégral

A. Theory, Practice and Fun

1In most countries property law is, or at least is seen as being, dry and dull. And in most countries links between property law theorists and property law practitioners are weak. Not so here. Far from being dry and dull, property law in Scotland is, and is seen as being, exciting, fun and often – in a good sense – funny (thanks, Robert) funny. Strong links exist between theory and practice (thanks again, Robert). This paper has no laughs, but has something in it of practice and theory.

B. Introduction

  • 1 Variously transcribed into the Latin alphabet. Other forms are “Sharia,” “Shari’ah,” “Sharia’a” an (...)

2I hesitate to write on Islamic mortgages for a good reason: I am unqualified to do so. To be qualified one would need to unite three qualities: knowledge of property law, knowledge of Shari’a1 law, and knowledge of what is happening in practice. I have some of the first, but little of the second or third. So why this paper?

  • 2 W Clark (ed), Fisher and Lightwood’s Law of Mortgage, 13th edn (2011) (at the time of writing, a 1 (...)
  • 3 “Unveiling the Islamic Mortgage” 2005 JLSS Dec/58; “Islamic Finance: A Scottish Lead?” 2009 JLSS A (...)

3The main answer is that – as far as I can see – there is hardly anything published on the subject. There is a large literature on Islamic finance, all of which mentions the Islamic mortgage, but none of which seems to get down to brass tacks – at least as far as the legal systems of the UK are concerned. The two standard English texts on mortgage law pass over the subject in complete silence.2 The Scottish monographs are silent. If there is a periodical literature I have not found it, though there is one exception, and, to boot, a Scottish exception: Graham Burnside has written on the subject.3 I find this paucity of discussion odd. Someone needs to do something. Islamic mortgages are not common in Scotland (less common, I think, than in England) but they are not unknown.

  • 4 H Qureshi, “Sharia-compliant mortgages are here – and they’re not just for Muslims," available at (...)

4A subsidiary reason is that the internet is full of nonsense on the subject. Of course, the internet is full of nonsense on every subject, but with most subjects one can, with a bit of effort, navigate to reliable sources. Not so, as far as I can see, with Islamic mortgages in the UK context. Even seemingly respectable sites have dubious material. Here for instance is The Guardian on 29 June 2008:4

Imagine a mortgage lender who allows you to take all the increase in the price of your home when you sell, but is prepared to share any loss if the property has fallen in value. Such a deal may seem too good to be true in the current property market, but it is exactly what a handful of banks specialising in Islamic home loans are offering.

5Is that really true? I don’t want to target The Guardian, and quote it here precisely because it is usually a respectable source, but here it goes again, on 29 October 2013, under the intriguing heading “Facts are sacred”:5

Islamic finance is all about sharing risk between financial institutions and the individuals that use them. To do that, the two parties are tied into a longer-term relationship with each other that is supposed to shift incentives and avoid cut and run financial deals. So, for example, sharia-compliant mortgages mean that the bank and the borrower share the risks of repayment rather than charging any form of interest.

6Hmmm.

7So: despite my lack of qualifications for the subject, and conscious of the inadequacies of what follows, I offer some thoughts on the Islamic mortgage, mainly with reference to Scots law. Lastly by way of throat-clearing, the subject is larger than could be covered in a short paper such as the present. Indeed, it would be a good subject for a PhD. But half a loaf is better than no bread.

C. Prohibition of Interest

  • 6 There are also roots in Greek philosophy, especially Aristotle.
  • 7 For an illuminating history of the European position from Roman to modern times see R Zimmermann, (...)
  • 8 I know of no legislation lifting the ban. What happened at the Reformation was that a number of ca (...)
  • 9 Though in practice many Muslims do in fact borrow and lend at interest.

8Judaism forbade interest, and that prohibition was received into its two daughter religions, Christianity and Islam.6 In Christian countries the prohibition was generally accepted not only as a religious rule but also as a matter of positive law. Eventually, however, the legal ban was abandoned everywhere, though at different times in different countries.7 In Scotland the ban ended with the Reformation (1560).8 Turning to Islamic countries, in some (for example, Turkey) the law now permits interest: in those countries that accept Shari’a law as part of positive law, interest is legally impermissible. Pious Muslims, and Muslim organisations, seek to avoid interest, whether as debtors or as creditors.9 Some non-Islamic financial institutions also offer what they claim to be Shari’a-compliant financial products. Such products will usually have been given the approval of a Shari’a-compliance board composed of experts in Islamic theology.

  • 10 Legal limits on interest rates have been and remain common. For instance in the Roman Empire the m (...)
  • 11 The parallels are striking. In medieval Europe the ban on interest was circumvented easily, just a (...)
  • 12 There is a body of law (some of it common law and some of it statutory) whereby interest can run w (...)

9The question is not whether interest should be limited to reasonable levels.10 In Shari’a, all interest, reasonable or unreasonable, is forbidden. What is forbidden is not the lending of money, but interest: loans are permissible so long as they are at zero interest. Nor is there any objection, in the Islamic tradition, to security for a loan. For example, there would be no objection to X lending Y money, secured by standard security – so long as the loan is interest-free. And there’s the rub: whilst loans between friends and relatives are commonly interest-free, in the world of commerce no one will lend without a return. Indeed, to lend without a return is to transfer net value from lender to borrower: it is like a donation. Achieving a return without using interest is the challenge for Islamic finance, and various workarounds have been developed. (As they were in medieval Europe.11) How Muslims and Muslim organisations deal with the fact that interest often runs on debts by force of law,12 I do not know, but that is another story.

(1) Other rules

  • 13 Whether this is a separate principle, or an aspect of the previous principle, I do not know.

10Islamic theology imposes other restrictions, too, such as the prohibition of contracts involving uncertainty or speculation. Thus conventional insurance is forbidden, though as with interest there exist workarounds, which achieve by the back door what cannot be achieved through the front door. Another theological principle is that one transaction cannot be made conditional on another.13 I do not understand, and so cannot explain this principle, but its influence is evident.

D. Circumventing the Prohibition

  • 14 One comes across references to other Arabic terms, but it may be (I do not know) that all such oth (...)
  • 15 These three terms are variously transliterated.

11A workaround involves structuring the transaction as something other than a contract of loan. Some other type of contract has to be identified, to bring about the actual results of a loan contract. The three main workarounds14 are to structure the transaction as (i) a contract of lease, this being called ijara, or (ii) a contract of sale, this being called murabaha, or (iii) a contract partnership, this being called musharaka.15 Before looking at these, a few words on terminology.

(1) Terminology: “mortgage,” “debtor,” “lender”

  • 16 And for convenience in this context I use the term “mortgage” even though it is not the right term (...)

12Although the terms “Islamic mortgage” and, less commonly, “Halal mortgage” are in standard use, lenders offering these products tend to prefer the term “home purchase plan,” no doubt because the term “mortgage” suggests the existence of a contract of loan. (Still, the term “home purchase plan” does not work well, because it suggests that the finance is available only for house purchase. In fact it is also available where a person already owns property and wishes to raise money on the back of it.) For the same reason, the terms “debtor/borrower” and “creditor/lender” tend to be avoided. This is easily achieved, by using such terms as “the customer,” “the bank” etc. In this paper, however, this terminology is not adopted.16

(2) Workaround (i): ijara

  • 17 Hire purchase is itself a workaround, arising from a different cause, namely the inadequacy of cha (...)
  • 18 Except in the unusual case of a very short-term mortgage, where the lease term will be too short t (...)

13In the first type of workaround, ijara, the lender acquires the property and leases it to the borrower for the mortgage term, such as 25 years. The contract confers on the borrower a right to acquire ownership at the end of the term. In short, the arrangement is one that, for moveables, would be called hire-purchase, though this analogy seems never to be remarked upon.17 Whether this method has been used to any extent in Scotland I do not know, but it is common in England. The entry in HM Land Registry shows the lender as owner, and shows the borrower as holding a registered lease.18 The lease is usually charged to the lender by the borrower, but one may wonder how much this really adds to the lender’s security, given that the lender has in any event the fee simple, coupled with all the rights of a landlord if a tenant is failing to pay the rent.

  • 19 London Interbank Offered Rate.

14The “rent” covers both the interest and the capital payments. The rent does not relate to the value of the property, as would be the case in a genuine lease. For instance, a buyer who puts down a 50% deposit on the property would be paying less rent than a buyer of an identical property who puts down only a 30% deposit. The rent is reviewed periodically, but not in line with the changing value of the property, as would happen with a genuine rent, but in line with changing market interest rates. Typically the “rent” is linked either to LIBOR19 or to Bank of England lending rate. The aim is to achieve, as closely as possible, the effects of a conventional mortgage.

(3) Workaround (ii): murabaha

  • 20 Also transliterated as murabahah.
  • 21 This paper is about private law, not public law, but it may be noted that double tax is not payabl (...)

15In the second type of workaround, murabaha,20 the lender buys the property and then immediately resells it to the borrower at a higher price, the price to be paid in instalments over a period of years. (15 years seems to be a common period for this kind of mortgage.) For instance, the property is bought by the lender for £200,000, and immediately resold to the borrower for £300,000.21 (The difference depends partly on the length of the mortgage term and partly on market interest rates at the time of the transaction.) This latter price is paid in instalments. At the end of the mortgage term, the lender conveys title to the borrower. The “price” is in reality, though not in name, a mix of two elements: capital repayments and interest. One drawback to this scheme is that the interest rate is non-variable, for the re-sale price is fixed at the outset.

16I have said that there is first a transfer by the original seller to the lender, and a later transfer by the lender to the borrower. But one could imagine a modified structure, whereby there are at the outset two transfers, one by the original seller to the lender, followed (perhaps the next day) by the transfer by the lender to the borrower, coupled with a mortgage back to the lender by the borrower. But whether this happens at all in practice I do not know. Finally, while this type of mortgage is used in England, I am not aware that there has been any use of it in Scotland.

(4) Workaround (iii): musharaka

  • 22 Also transliterated as musharakah.
  • 23 I am most grateful to the Islamic Bank of Britain plc for providing me with its full style documen (...)

17The third type of workaround is the musharaka,22 and this is of particular importance because my impression is that it is the main form in use in Scotland.23 The word means “partnership,” and the broad idea is that borrower and lender own the property as partners. It is, however, not a partnership in any sense of that term known to Scots (or English) law. Thus it is not a partnership at common law, or under the Partnership Act 1890, the Limited Partnerships Act 1907, or the Limited Liability Partnerships Act 2000. In what sense it could be described as a partnership in any sense of that word is not easy to see. Nevertheless this arrangement is marketed as being a partnership.

18The only form that seems to be used in the UK is the “diminishing musharaka,” in which borrower and lender in some sense (see below) co-own the property, and the borrower buys the lender’s shares over a period of time, eventually ending up with 100%. In the meantime the borrower pays the lender interest on the diminishing balance, this interest taking the nominal form of rent. As in a conventional “repayment mortgage,” the borrower’s periodical payments to the lender include both capital and interest, the latter being named rent. As with the ijara mortgage, the rent is kept under regular review, and is linked to LIBOR or to Bank of England rate. The diminishing musharaka mortgage seems to be the main form of Islamic mortgage in use in Scotland.

19Transferring a slice of ownership from lender to borrower every month or quarter or year would be awkward and expensive, and whilst numerous websites say that that is what happens, I am sceptical. The diminishing musharaka is the only type of Islamic mortgage where I have been able to study the documentation in detail. I am very much obliged to the Islamic Bank of Britain plc, which seems to have the main share of this area of finance in Scotland, for providing me with that documentation. What happens (at least under the IBB’s Scottish documentation) is that the property is held by the debtor as trustee, and the borrower and lender have beneficial interests under the trust. As the borrower gradually repays the lender, the beneficial shares change, until eventually the borrower has a 100% share of the beneficial interest. As in the other types of Islamic mortgage, the regular payments are in substance payments of capital plus interest. The interest is called an “occupancy payment.” There is a standard security over the property in favour of the bank. Though this is granted by the debtor as trustee (for title is held as trustee) it secures the obligations owed by the debtor as an individual. Thus in property law terms, this has the same structure as a conventional standard security: ownership held by the borrower, and a subordinate real right of security is held by the lender. Once the borrower has acquired 100% of the beneficial interest, the bank discharges the standard security. Of the three types, the diminishing musharaka comes the nearest to being the same as a conventional mortgage in everything but name.

20In England, by contrast, it seems that title is usually vested in the lender, with the lender then granting a lease to the borrower in respect of the lender’s beneficial share of the property. The difference between this and ijara is perhaps not clear to those not expert in Islamic theology.

E. Shared Risk?

  • 24 See above.

21It is commonly said that in Islamic finance there must be risk-sharing. This statement as such is not very informative, since in all finance there is risk-sharing: in a conventional loan, the borrower runs the risk of not being able to pay, with unfortunate consequences, and the lender runs the risk of not being paid, also with unfortunate consequences. “Sharia-compliant mortgages mean that the bank and the borrower share the risks of repayment rather than charging any form of interest.”24 As far as I can see that is not true. If the borrower defaults, the bank sells the property and takes what is due. If there is a shortfall, the borrower remains liable. I cannot be sure that this is universally the position: that would require more research than I have been able to undertake. But it may be noted that the more a financial deal protects the borrower, the more expensive it is going to be.

  • 25 This is, at least, how I understand the documentation. The documentation is sometimes unclear to m (...)

22It seems that in an Islamic mortgage the lender and borrower are supposed to share the burden of maintenance, presumably on the basis of risk-sharing. But again this can be circumvented. For instance in the IBB documentation, the borrower is bound to maintain the property, and the bank the binds itself to pay the borrower the “service change amount” (defined as “the expenses incurred by you in providing the services” – that is, maintaining the property). But at the same time any such amount is automatically met by a “supplemental occupancy payment” due by the borrower to the bank, which is of precisely the same amount.25 There is also an obligation on the borrower to insure the property. (How that fits in with the prohibition of insurance in Shari’a law I do not know.)

F. The 20-Year Issue

  • 26 Sections 8-10. Some exceptions were introduced by the Housing (Scotland) Act 2010 s 138 but the ba (...)
  • 27 Street v Mountford [1985] AC 809.

23The Land Reform (Scotland) Act 1974 provided that residential leases could not be for longer than 20 years.26 That is a problem if an Islamic mortgage involves a lease, as in the ijara, and the term of the loan is over 20 years. How significant the problem is depends to some extent on how one interprets the rather complex provisions of the 1974 Act. It seems that the rule has in fact been a reason why there has (as it seems) been little attempt to use ijara mortgages in Scotland, though it should be noted that the rule in the 1974 Act does not affect non-residential property. In the IBB documentation for “diminishing musharaka” the interest is labelled not “rent” but an “occupancy payment” and one imagines that the 1974 Act is the reason for that terminology. Whether such words make any difference is perhaps open to debate: for instance in an English case in 1985 the House of Lords held that language designed to prevent an agreement being characterised as a lease will fail in its purpose if the agreement is in reality a lease.27 There is an irony here: in the 1985 case an arrangement that was in reality a lease was being dressed up in the documentation as not being a lease: in (some types of) Islamic mortgages what is in reality not a lease is being dressed up in the documentation as being a lease. Although one might speculate as to what would happen if a court were to say that “occupancy payment” means rent, with the result that the 1974 Act is engaged, that is surely unlikely since (unlike the 1985 case) the underlying intention of the parties is not a tenancy anyway.

  • 28 Land Tenure Reform (Scotland) Act 1974 s 11. The Housing (Scotland) Act 2014 s 93 confers power on (...)
  • 29 That is also the view of the Scottish Government. See Scottish Government, Consultation on Proposa (...)

24The period of 20 years crops up quite often in property law, and one such instance is the rule that a standard security is redeemable after 20 years regardless of the terms of the agreement.28 It is occasionally suggested that this rule might have negative consequences for Islamic mortgages, but in fact the rule has no greater significance for Islamic mortgages than it does for conventional mortgages,29 and accordingly nothing more will be said here.

G. The “Lease between Co-owners” Issue

  • 30 Clydesdale Bank v Davidson 1998 SC (HL) 51.

25If property is co-owned, it cannot be leased to one of the co-owners.30 Whilst this is a background issue worth noting, its importance for Islamic mortgages is probably limited. In the first place, in Islamic mortgages it does not seem that the property is in fact co-owned between borrower and lender (despite what one reads on the internet): as far as I can see title is always held (in Scotland at least) either by the borrower (solely) or by the lender (solely). In the second place, the rule does not prevent an arrangement whereby one co-owner has exclusive occupation, paying the others a periodical sum in return. That is perfectly possible: the rule merely says that such an arrangement is not a lease. Finally, it is perhaps open to debate how the rule would work out if something called a “lease” were to be entered into between those holding the beneficial interest under a trust. But as has been said, that seems to be rare or unknown in Scottish Islamic mortgages.

H. The “Only by Standard Security” Issue

26In the years before 1970, the usual way of securing a loan over heritable property was the “ex facie absolute disposition.” Here title was vested in the lender, and the debtor’s right was a contractual: to occupy the property, and, after paying off the loan, with interest, to have the property conveyed to him/her. In the language of Roman law, this was fiducia cum creditore. The arrangement could happen in either of two ways. In the first place, Donald Debtor might own the property and then convey it to a lender. In the second place, and this was commoner in practice, it was used as acquisition finance: Donald Debtor wanted to buy a house, and would conclude missives, but would direct the seller to convey, not to him, but to his lender.

  • 31 To speak of just “two things” is of course to oversimplify.
  • 32 Conveyancing and Feudal Reform (Scotland) Act 1970 s 9 (3) and part of (4). It is quoted here in i (...)

27There was thus a gap between substantive reality (debtor = in reality owner, bank = in reality merely secured lender) and legal reality (bank = owner, debtor = contractual occupier). This came to be seen as undesirable. The Conveyancing and Feudal Reform (Scotland) Act 1970 did two things.31 First, it created a new form of heritable security, the standard security. Secondly, it banned the ex facie absolute disposition. The reform took root. Standard securities remain with us to this day, and ex facie absolute dispositions are now just a memory for the old and not even a memory for the young. As a result, few today remember the prohibition. The prohibition is phrased briefly:32

  • 33 Though not pertinent to this paper, I cannot resist mentioning that these two words (“at law”) hav (...)

A grant of any right over land or a real right in land for the purpose of securing any debt by way of a heritable security shall only be capable of being effected at law33 if it is embodied in a standard security. Where for the purpose last-mentioned any deed which is not in the form of a standard security contains a disposition or assignation of land or of a real right in land, it shall to that extent be void and unenforceable...

  • 34 Discussion of section 9 would take a paper to itself. It is curious that, as far as I know, it has (...)

28This prohibition seems to strike at some types of Islamic mortgage, where heritable property is granted in security of a debt, otherwise than by standard security. An argument could be set up that the statutory prohibition affects only grants by debtor to creditor, and that grants by a third party to the creditor are unaffected, which would be the state of affairs, for the ijara and the murabaha, in acquisition finance, i.e. where Donald Debtor is seeking to buy property and asks the seller to convey to the bank. This is not the place to discuss that argument;34 I will only mention that in 1970 it was taken for granted that the statutory prohibition applied to both types of case, with the result that the ex facie absolute disposition wholly disappeared.

29The issue is most serious for the ijara: this seems to be exactly the sort of thing that the section 9 prohibition was aimed at. As for the murabaha, the argument is a good deal weaker, because although the property is conveyed to the creditor, it is then immediately conveyed to the debtor. What about the diminishing musharaka? If the typical English form were adopted, whereby title is vested in the bank, the section 9 prohibition would seem to apply, but, as mentioned, this form does not seem common in Scotland. Might the section 9 prohibition apply to the form described above, used in Scotland? The property itself is not granted to the bank in security of a debt, so probably the section 9 prohibition is not engaged. However, the wording of the section 9 prohibition is broad, and could be read as covering even the grant, by way of security, of even a beneficial share of property.

  • 35 Defined in the broadest way: s 9(8)(c).

30It might be said that the section 9 prohibition is irrelevant to Islamic finance, because the section 9 prohibition is about security for loan finance, and Islamic mortgages do not use the contract of loan. That argument does not work. Section 9 is not tied to loans but to “debt,”35 and all Islamic mortgages use debt.

31Finally on this subject, the section 9 prohibition is not some quirky fossil rule. There is a strong argument of public policy in its favour: that for the owner of heritable property to be the party that is in reality merely a lender, is an unacceptable subterfuge: the transaction should show its face.

I. The Consumer Protection Issue

  • 36 The quality of the protection is of course open to debate, but that cannot be discussed here.
  • 37 Structures that may fall foul of the section 9 prohibition (see above).
  • 38 Much the same is true I think in English law.

32Consumer protection is one of the themes of modern law. Consumers are protected36 in credit transactions, in tenancy agreements, in standard securities and in many other areas. In a conventional mortgage, consumers are protected in a number of ways, including the provisions of the Conveyancing and Feudal Reform (Scotland) 1970, as amended over the years. Are Islamic mortgages subject to the same level of consumer protection as conventional mortgages? In the case where title is vested in the debtor, and the creditor’s enforcement rights are based on a standard security, the answer would seem to be affirmative. But in those structures where title is held by the lender,37 consumer protection is weakened. The modern law on protecting mortgage debtors is based on the assumption that what is involved is a standard security.38 If there is no standard security, and title is held by the bank, the consumer protection provisions are not engaged. If the structure is that of an ijara mortgage, the creditor has title and the debtor has a lease; that may engage the consumer protection provisions of lease law, but the protections are not the same. In murabaha it is not apparent to me that there would be any protection at all, apart from generic consumer credit protection.

J. Second Mortgages

33Property can be encumbered by more than one standard security. Indeed, there is in theory no limit to the number that can be granted, though I do not recall ever having seen more than four. Subject to one or two qualifications, they rank by order of creation of the real right, which is to say by date of registration. There is no conceptual difficulty about multiple standard securities, for the groundwork lies in the theory of property law that we have inherited from the civilian tradition: the grant of a subordinate real right leaves ownership where it was. One of the drawbacks of the old ex facie absolute disposition was that second mortgages were problematic. A workaround was created whereby the debtor’s personal right to a future conveyance (after paying off the loan) was assigned by way of security.

  • 39 Given the problems with the old ex facie absolute disposition, it may be wondered why it was in su (...)

34The same problems, and indeed perhaps even more intractable, would arise for Islamic mortgages where title is held by the lender. Whether some workaround would be possible, I do not know. If it is not possible, that is a negative. If it is possible, it would inevitably be artificial and cumbersome, as was the case with the old ex facie absolute disposition.39 Even where title is not held by the lender, there would be problems. Thus in the IBB diminishing musharaka the registered owner is the debtor but qua trustee, the beneficial interest being divided between debtor and lender. How one could pin a second mortgage on to that I am is unclear to me.

K. Insolvency Risk

  • 40 Actually too good a name to waste of a mere bank, I’m sure you’ll agree, Robert. In future this wi (...)
  • 41 Which, however, is not the case for the IBB Scottish mortgage.

35In a conventional mortgage, the possible future insolvency of the creditor is not a risk for the debtor. If Donald Debtor borrows £100,000 from the Bank of Unst, Fetlar and Yell,40 secured by standard security, and in the next financial crisis the bank becomes insolvent, and, like Lehman Brothers, is allowed to collapse, Donald Debtor is not sucked into that collapse, because he owns his property. That is one of the benefits of the system of subordinate real rights. But if property is owned by Bank of Unst, Fetlar and Yell, Donald has a problem.41 The subject is complex, involving, among other things, the question of whether Donald can successfully argue that the bank owns the property as implied, or as constructive, trustee. That issue would require a whole paper to itself. I merely note it here as another example of the problems that may arise from adopting an artificial structure.

L. Impediments?

36Holyrood:

S2W-16368 Brian Adam (Aberdeen North) (SNP) (Date Lodged Tuesday, May 10, 2005):

To ask the Scottish Executive whether any impediments exist in Scots law to the provision of Islamic mortgages and, if so, what action it will take to remove these.

Answered by Hugh Henry (Thursday, May 19, 2005):

The Scottish Executive is not aware of any impediment in Scots law which prevents the provision of Islamic mortgages.

37An answer that has the merit of brevity. Given what has already been said in this paper, there is no need here to discuss the answer substantively, but something should be said about the question. “Impediment”? The word suggests something undesirable. Someone (such as myself) with the view that Islamic mortgages, when compared with conventional mortgages, might be undesirable, would not use such language.

M. Conclusion

38Islamic mortgages aim at the same practical reality as conventional mortgages. Different words are used, to conceal the reality. That, at least, is how it seems to me. If interest-bearing mortgages are a bad thing, then Islamic mortgages are a bad thing, for Islamic mortgages are, apart from the wrapping, interest-bearing mortgages. But if, on the other hand, interest-bearing mortgages are not a bad thing, then it is better that they should be done in an open manner, and not by artificial means, producing both complexity and pitfalls. And finally, whilst I am no expert in Islamic theology, I note that those who do have such expertise frequently criticise Islamic mortgages as being mere shams.42 What they say (albeit that I do not subscribe to Islam) makes more sense to me than the promotional brochures and videos of the institutions that offer what they call Shari’a-compliant finance, brochures and videos that the mainstream media and politicians should have a slightly more critical attitude towards.

Notes

1 Variously transcribed into the Latin alphabet. Other forms are “Sharia,” “Shari’ah,” “Sharia’a” and “Shariah,” where English is the destination language, and yet other forms for other destination languages, such as French Charia or Chari’a, or German Scharia or Schari’a.

2 W Clark (ed), Fisher and Lightwood’s Law of Mortgage, 13th edn (2011) (at the time of writing, a 14th edition is in the offing, but is not yet available to me); I Clarke (ed), Cousins on the Law of Mortgages, 3rd edn (2010).

3 “Unveiling the Islamic Mortgage” 2005 JLSS Dec/58; “Islamic Finance: A Scottish Lead?” 2009 JLSS Aug/56.

4 H Qureshi, “Sharia-compliant mortgages are here – and they’re not just for Muslims," available at http://www.theguardian.com/money/2008/jun/29/mortgages.islam

5 M Chalabi, “Islamic finance for beginners," available at http://www.theguardian.com/news/datablog/2013/oct/29/islamic-finance-for-beginners. “Facts are sacred” is a heading used in the Guardian’s “datablog," in reference to C P Snow’s aphorism “comment is free, but facts are sacred."

6 There are also roots in Greek philosophy, especially Aristotle.

7 For an illuminating history of the European position from Roman to modern times see R Zimmermann, The Law of Obligations (1996) 166-77.

8 I know of no legislation lifting the ban. What happened at the Reformation was that a number of canon law rules, which had been accepted as part of the common law, were simply abandoned, other examples being the celibacy of the clergy and the prohibition of divorce. The first statute on the law of interest that I know of was the Act 1587 c 52 (APS iii 451 c 35) providing that the maximum lawful rate of interest was to be 10%. The Act expressly said that its provisions were not applicable to transactions entered into before its date. Thus between 1560 and 1587 interest was permitted and there was no maximum lawful rate. As far as I know the history of the subject (in Scotland) has never been fully studied.

9 Though in practice many Muslims do in fact borrow and lend at interest.

10 Legal limits on interest rates have been and remain common. For instance in the Roman Empire the maximum permitted rate was 12%. For a study of the current situation, see U Reifner, S Clerc-Renaud, and R A M Knobloch, Study on Interest Rate Restrictions in the EU: Final Report (2010), available at http://ec.europa.eu/internal_market/finservices-retail/docs/credit/irr_report_en.pdf

11 The parallels are striking. In medieval Europe the ban on interest was circumvented easily, just as it is in the Islamic tradition.

12 There is a body of law (some of it common law and some of it statutory) whereby interest can run where a debt is not paid when due, including (but not limited to) such matters as judicial interest, interest on overdue tax, and the Late Payment of Commercial Debts (Interest) Act 1998.

13 Whether this is a separate principle, or an aspect of the previous principle, I do not know.

14 One comes across references to other Arabic terms, but it may be (I do not know) that all such other terms boil down to one of the three mentioned in the text.

15 These three terms are variously transliterated.

16 And for convenience in this context I use the term “mortgage” even though it is not the right term for Scots law. I beg forgiveness.

17 Hire purchase is itself a workaround, arising from a different cause, namely the inadequacy of chattel mortgage law in England, and its complete absence in Scotland.

18 Except in the unusual case of a very short-term mortgage, where the lease term will be too short to be registrable.

19 London Interbank Offered Rate.

20 Also transliterated as murabahah.

21 This paper is about private law, not public law, but it may be noted that double tax is not payable: Land and Buildings Transaction Tax (Scotland) Act 2013 sch 7. These provisions reproduce ss 71A-73AB of the Finance Act 2003, the latter remaining in force south of the border. The exemptions apply not only to murabaha mortgages but to any Islamic mortgage involving double transfer.

22 Also transliterated as musharakah.

23 I am most grateful to the Islamic Bank of Britain plc for providing me with its full style documentation for Islamic mortgages in Scotland.

24 See above.

25 This is, at least, how I understand the documentation. The documentation is sometimes unclear to me, but the same is true of the documentation for conventional secured loans.

26 Sections 8-10. Some exceptions were introduced by the Housing (Scotland) Act 2010 s 138 but the basic rule remains. It may be added that the 1974 Act did not apply to preexisting leases.

27 Street v Mountford [1985] AC 809.

28 Land Tenure Reform (Scotland) Act 1974 s 11. The Housing (Scotland) Act 2014 s 93 confers power on the Scottish Ministers to alter this period.

29 That is also the view of the Scottish Government. See Scottish Government, Consultation on Proposals to Exempt Certain Heritable Securities from the “20 Year Security Rule” (2014), available at http://www.scotland.gov.uk/Resource/0046/00461603.pdf

30 Clydesdale Bank v Davidson 1998 SC (HL) 51.

31 To speak of just “two things” is of course to oversimplify.

32 Conveyancing and Feudal Reform (Scotland) Act 1970 s 9 (3) and part of (4). It is quoted here in its amended form. The contrast between the brevity of this prohibition and the prolixity of the 1974 prohibition of long leases over residential property is striking.

33 Though not pertinent to this paper, I cannot resist mentioning that these two words (“at law”) have always puzzled me. Presumably they were included for some purpose. At law – as opposed to what? Equity? This is not entirely a joke. Note that the passage says “at law” not “in law.” English equity lawyers use the contrasting terms “at law” and “in equity.”

34 Discussion of section 9 would take a paper to itself. It is curious that, as far as I know, it has never been subject to any published examination in detail. Furthermore, the report that led to section 9 said rather little about it. (Report on Conveyancing Legislation and Practice (Cmnd 3118: 1966), chaired by Robert’s great predecessor, Jack Halliday.)

35 Defined in the broadest way: s 9(8)(c).

36 The quality of the protection is of course open to debate, but that cannot be discussed here.

37 Structures that may fall foul of the section 9 prohibition (see above).

38 Much the same is true I think in English law.

39 Given the problems with the old ex facie absolute disposition, it may be wondered why it was in such common use until 1970. The short answer is that although there were alternatives, whereby the creditor had a subordinate real right and the substantive owner was also the legal owner (as in a standard security), these alternatives had significant technical disadvantages.

40 Actually too good a name to waste of a mere bank, I’m sure you’ll agree, Robert. In future this will be a law firm. Everyone who knew them agrees that Messrs Unst, Fetlar and Yell (all LLB (Glas)) not only had a sound knowledge of the law of Scotland, but were shrewd men of business, whose success in legal practice was affected neither by Mr Unst’s occasional grumpiness, nor by Mr Yell’s excitable disposition.

41 Which, however, is not the case for the IBB Scottish mortgage.

42 Here is a sample: (i) http://www.islamicawakening.com/viewarticle.php?articleID=1291; (ii) http://sunnahonline.com/library/contemporary-issues/115-islamic-ijara-mortgagesby-hsbc-and-other-banks; (iii) http://www.islamicmortgages.co.uk/index.php?id=258; (iv) http://www.islamicparty.com/commonsense/hlmort.htm

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