Concentrating On the Investigation of the New Laws and Implementing Regulations of Mortgage in Saudi Arabia from the Shariah Point of View
According to Wood (42), mortgage remains one of the most contentious, but important factors in any country because it is not only linked to the health of a country`s economy, but also has a direct impact on the wellbeing of the society. All countries in the world have formulated their respective mortgage laws and regulations that direct property mortgages (Wood 41). Following the global financial crisis, which adversely affected many economies, the viability of mortgage laws, especially those of the United States were questioned on their capability to deliver the desired objectives (Jasper and Mavis 21). The Kingdom of Saudi Arabia is yet another country that suffered the effects of the global financial crisis (Jensen 185). However, owing to recent developments in Saudi`s economy, the mortgage laws in the kingdom have moved forward toward strengthening the rules and regulations that govern mortgage and real estate. The table below details the five new mortgage laws that have been introduced in the Arabian mortgage market and their provisions:
Source: Khan (4).
The author believes that one of the main causes of the global financial crisis was the inherent weaknesses in the mortgage laws and regulations in the U.S. mortgage market. He argues that the new mortgage laws and implementing regulations in Saudi Arabia from the sharia point of view is a significant tool in addressing the causes of the 2007/08 financial crisis, and preventing such crises from happening in the future.
The main distinguishing characteristic Saudi Arabia`s mortgage laws is that these laws are based on shariah (rahn) principles. Mortgage laws in the Arabian market must comply with the ten “rahn” principles. According to Hassan and Mahlknecht (19), these principles provide the logical framework for mortgage agreements between the mortgagee and the mortgagor. The ten principles are: the mortgagor`s debt is closely linked to the mortgaged property; the mortgagee is entitled to withhold and retain the mortgaged property; the mortgagee has a duty to protect and maintain the mortgaged property on the mortgagor`s behalf; the mortgagee has an obligation to pay the obligations and dues relating to the mortgaged property; principle number five bars both the mortgagee-creditor and the mortgagor-debtor from selling, lending, leasing, mortgaging, selling, pledging, donating, or placing in trust the mortgaged property when the mortgage agreement is still in force; the sixth principle of “rahn” legally bars the mortgagee-creditor from using the mortgaged property; principle number seven states that the mortgaged property `s value must be guaranteed to be equal to the value of the mortgagor`s debt; the eighth principle is that the mortgagee is barred by law from selling the mortgaged property or compelling to creditors to sell the mortgaged property to repay the debt (Hassan and Mahlknecht 22). Principle number nine recognizes the mortgagee-creditor (who has the right to possession of the property) as a priority creditor who should be paid first before other creditors; the last “rahn” principle is that the mortgagee-creditor has a legal obligation to give back the mortgaged property at the moment when the mortgagor-debtor fully pays the debt or obligation (Hassan and Mahlknecht 35).
The author is to conduct a research study to investigate the suitability of new laws and implementing regulations of mortgage in Saudi Arabia from the sharia point of view. The focus will be on comparing and contrasting Shariah compliant new mortgage laws, and implementing regulations in Saudi Arabia with its counterparts in the United States, highlighting the strengths and weaknesses of both and assessing whether Saudi Arabia’s mortgage laws are a better alternative to the conventional mortgage system.
The Islamic mortgage is a type of mortgage based on shariah that bans paying or receiving interest (Amin 217). Scholars have defined Islamic mortgage as a type of financing secured using real property and provides payment schedules of profit rate and principal repayment to the bank (Amin 217). Instead of paying interest rates, Islamic mortgage allows the customer and the bank to set a fixed profit rate at the beginning of the contract, and the rate will remain the same even during inflationary periods (Amin 218). Interest payments are not permitted in Islamic mortgage because it is considered to cause unfair income distribution within the society. This explains why Islamic banks promote equity in mortgage pricing to customers.
Despite the growing interest in Islamic mortgage and Islamic banking in general, there is a huge research gap. From the literature review conducted by the author, the researcher found that very few scholars have considered the issues of Islamic mortgage and conventional mortgage from a legal perspective. According to a study by Masood, Aktan and Amin (265), prior to 2002, customers chose their mortgagers by examining loan availability, interest rates, product quality, and past relationship with the bank. In addition, the study noted that in contrast to western mortgages (conventional), Islamic mortgages tend to be more costly due to funds obtained from investments in non shariah industries (Kouser 55). Similarly, the study pointed that the nature of Islamic banking makes Islamic mortgages expensive – shariah compliant mortgage and risk sharing (Hanafi 11).
Khanafar (9) gives an in-depth discussion of the Islamic mortgage contract, and notes that since the Quran does not explicitly talk about mortgage contract, the Islamic mortgage contract, therefore, draws its origin from the general elements of Islamic contracts. The holy Quran sets forth regulations and strict rules relating to contracts. It is these rules and regulations that are applied in constructing a mortgage contract premised on the Islamic principles. According to Khanfar (10), the Quran allows many types of contracts provided the terms of the contract do not contravene the basic rules of the Quran, especially about riba (interest), which is strictly banned according to the Quran. Furthermore, in terms of comparison, the Islamic mortgage contract has some similarities with the conventional western mortgage contracts. The elements of offer, acceptance, consent between the contracting parties, and mutual fulfillment are all present in both Islamic and conventional mortgage contracts. One of the primary differences between Islamic mortgage and conventional English mortgage contracts is that in the Islamic mortgage contract, the client is free to repay the full amount to the bank at any time without attracting penalties. The same is not allowed in conventional mortgage contracts (Hijazi, Tahir and Muhammad 15).
Hassan and Mahlknecht (41) note that the mortgage laws in the Kingdom of Saudi Arabia have embraced Shariah principles of “rahn” and execution law. The principles incorporated in the Saudi mortgage laws are in line with Shariah teachings and the Board of Grievances is charged with the responsibility of enforcing these laws. The local jurisdictional enforcement agencies are charged with the responsibility of monitoring both the execution law and mortgage law Hassan and Mahlknecht (44). A different Shariah court is charged with the responsibility of enforcing mortgage agreements in Saudi Arabia. However, the boundaries and jurisdictional limitations of the Shariah court are not explicitly defined in the Mortgage Law, the Execution Law, and other financing laws in the kingdom (Hassan and Mahlknecht 45). According to Iqbal (83), the Saudi Arabian Monetary Agency (SAMA) has the following powers: Firstly, the agency can allow banks to possess real estate as a way of targeting real estate finance. This will permit real estate finance companies to offer real estate funding to persons interested in buying properties. Secondly, the agency can allow one or more joint stock companies to be involved in mortgage refinance, and meet the present needs of the market. This will allow the secondary market participants to purchase real estate finance assets from banking institutions and other companies involved in real estate (Masood 370). Thirdly, the agency is authorized to license cooperative insurance companies to extend any risks associated with the real estate financing basing on the current Cooperative Insurance Companies Control Law (Nili 175). As a matter of fact, SAMA is legally mandated to formulate procedures and standards that relate to real estate financing matters. This includes reviewing existing legal forms, for example, the real estate lease agreements. The enactment of new mortgage laws in Saudi Arabia has created numerous provisions that are intended to enhance the real estate market by delivering enhanced flow of information (Ayub 180). Some industry players will be in a better financial position owing to the new mortgage regulations that considers real estate market as a public activity. The expansion of real estate law now permits financiers of real estate to have access to court records and attorneys public books of registry. Nili (175) notes that it is within the mandate of SAMA`s jurisdiction to set the governing principles that will guide institutions in disclosing the costs and financing of real estate finance products offered to members of the public .
From the foregoing literature review, it is evident that other researchers have focused on the different features of Islamic mortgage contracts without analyzing the inherent legal background. Furthermore, the new mortgage laws in Saudi have just been enacted, which explains why research in this area is limited. There is a need for a comprehensive study to analyze the merits of the new mortgage laws and implementing regulations in Saudi Arabia from a Shariah point of view, and compare it with the conventional mortgage contract law. The present study hopes to bridge this gap.
The major question for this study is can the new shariah compliant mortgage laws and implementing regulations in the Arabian market be a viable alternative to the U.S. mortgage system?
This question has various sub questions listed below:
To respond to the identified questions, this study is set to achieve the following objectives:
In the first stage of this research, the author will conduct a comprehensive literature review that will cover the shariah compliant mortgage laws and implementing regulations. This will enable the researcher to understand the philosophy and underlying concept of this school of thought. Similarly, it will help the author to identify the inherent strengths and weaknesses to have a strong foundation for assessing and comparing the Arabian mortgage law to that of the United States. This phase offers a theoretical framework on which the investigation phase will rely on.
The investigation stage will begin with semi-structured interviews with the mortgage market practitioners in the Kingdom of Saudi Arabia. The interviews are intended to support and augment the findings from the previous stage by enhancing the author`s understanding of the attitudes, perceptions, and perspectives of mortgage market practitioners in relation to the research questions and objectives.
The subsequent phase is the investigation stage, which will involve developing a questionnaire and distributing the survey questions in order to determine the viability and generalizability of the ideas generated from the interviews conducted. The study will adopt a mixed method approach involving the use of both quantitative and qualitative research. This will permit the researcher to capitalize on the strengths of both approaches and produce better results. The qualitative segment will offer a strong theoretical foundation by securing the theoretical generalization. On the other hand, the quantitative segment will build on the qualitative part and produce the statistical generalization. Consequently, the research findings will not only be reliable, but also representative, generalizable, and applicable.
The researcher contends that the theoretical validation for the results produced can be secured by taking the literature review into consideration, and the insights received from interviews. The researcher seeks to interview market experts and senior practitioners in the Arabian mortgage industry to get their insights on the generated findings and recommended solutions. The objective is to evaluate the suitability of the new Shariah compliant laws and implementing regulations, their applicability to the Arabian market, and the extent to which they can be applicable to western economies, such as the United States.
Summary and Conclusion
This study is a scientific research concentrating on the investigation of the new laws and implementing regulations of mortgage in Saudi Arabia from the Shariah point of view. The study also examines the likelihood of applying the same mortgage principles in non-Islamic countries, such as the United States. The researcher believes that this study will be a significant challenge and the findings may be contentious. That notwithstanding, the 2007 mortgage crisis that later resulted in the financial crisis should act as motivation to researchers to search for long lasting solutions, even if they may appear odd.
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Hijazi, Syed Tahir, and Muhammad Hanif. ‘Islamic House Financing: A Critical Analysis and Comparison with Conventional Mortgage’. Middle Eastern Finance and Economics 6 (2010).Print.
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