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One example of legal trickery (hila) in an Islamic finance/banking mortgage contract, which claims to be riba interest-free:

“Islamic law also forbids hila (legal trickery) that could result in a usurious loan originating from otherwise permissible contracts. For instance, within Islam, a loan without interest, a promise, and a gift are all individually permissible. Nevertheless, if Person A offers Person B a usury-free loan of £100 on the condition that Person B pledges / promises to give Person A a gift of £10 upon loan repayment, this arrangement is clearly considered a usurious loan when assessed as a whole. Consequently, it is prohibited by all recognized schools of Islamic thought. In simpler terms, combinations of Islamically acceptable contracts cannot be exploited to bypass the prohibition against usury. In E`lam al-Muwaqi`in, Ibn Qayyim al-Jawziyyah remarks, “What holds significance in contracts is substance, not just words and structure.”

Contract combinations have become quite common in modern Islamic finance / banking. For instance, in the murabahah model, Person A (the bank) might purchase a property for £100,000 from Person B (the property seller) and promptly resell it to Person C (the homebuyer) for £150,000, payable in equal installments over 10 years. Person C initiates the process by providing a written promise that if Person A buys the property from Person B, then Person C will promptly purchase the property from Person A. The minority of Shari`ah scholars who endorse this transaction argue that it constitutes trading (property buying and selling) rather than the lending or borrowing of money with interest, and as such, it is deemed halal. However, from the bank’s standpoint, as soon as the bank transfers £100,000 to Person B, the agreement with Person C automatically becomes effective, obligating Person C to repay £150,000 to the bank at a later date. This transaction is referred to as “murabahah to the purchase orderer” in Islamic banking literature.

The contractual documentation utilized in a murabahah-to-the-purchase-orderer transaction typically comprises an offer letter. This letter states that the bank will not proceed with any individual aspect of the transaction unless all aspects have received agreement from the relevant parties. This approach allows the bank to prevent owning the property for an extended period. From the bank’s perspective, the transaction represents a case of “money now for more money later.” Essentially, the property functions as a medium for lending money with interest. The potential use of sales contracts in such a manner was well acknowledged by Ibn `Abbas RA. When questioned about a piece of silk sold for a deferred price of 100 and later repurchased for a cash payment of 50, Ibn `Abbas remarked: “dirhams for dirhams, with a piece of silk in between.”

The use of an offer letter may maintain the appearance that the transactions (property purchase followed by property sale) are independent and therefore not similar in analogy to the combination of contracts described above as “hila.” However, we are not convinced by this structuring of documents, since the legal effect is identical to including all legs of the transaction in a single contract. For example, a United Bank of Kuwait murabahah mortgage offer letter in 1998 states, “We [UBK] will not buy the Property from the Vendor or sell it to you [the Client] until all the matters set out in the Schedule of Offer Conditions have been completed to our satisfaction.”

We believe that if the obligations of the parties involved in a specific financial product are to be distributed across multiple contracts, it is imperative for jurists to examine the entire scheme as a whole rather than its individual components before forming an opinion on its permissibility.”

Shaykh Haitham al-Haddad