Real estate is an ever-growing sector, with many individuals investing immensely to gain revenue and secure their future. While this is commendable, it is important to thoroughly research the particular investment, especially considering whether it is Shariah-compliant or not.
Being Muslims, it is our duty to stay away from non-Shariah-compliant investments and avoid investments, including interest (Riba). But first, it is essential to understand what are the real estate shariah compliance guidelines and why we should ensure it when dealing with real estate investments.
What is meant by Shariah compliance in real estate?
Shariah compliance in real estate refers to the adherence to Islamic ethical and legal principles when investing, developing, or transacting in real estate assets. It ensures that real estate investments remain per Islamic values and do not involve prohibited activities such as interest (riba) and unethical business practices.
Deciding factors on Shariah compliance
The property’s intended use is the most crucial deciding factor in Shariah compliance. Islam prohibits using certain things, such as pork, alcohol, weapons, and specific activities, such as gambling and traditional banking. As a result, it would be prohibited to invest in a casino or a pork factory.
The situation is less straightforward regarding a multi-let property, such as a small commercial building that might, for instance, include a tiny branch of a traditional bank. Even if they are forbidden, such activities are not the primary use of the building.
Shariah experts have generally agreed that Islamic financing can be used for multi-let properties if the percentage of prohibited activities is less than 5%. However, it is necessary to purge the money made from these operations. Such money may be given to a good cause and shouldn’t be included in the profit given to investors.
What are some investment rules for Shariah compliance?
Here are the key investment rules you must ensure before buying or selling a property:
- Invest in properties used for Shariah-compliant purposes and activities.
- Ensure that all agreements are Shariah-compliant.
- Keep liquid cash in Shariah-compliant investment accounts.
- If you need to borrow money to buy properties, use Shariah-compliant financing methods.
- All investment, deposits, and financing instruments must follow Shariah principles.
What to avoid in investments?
Don’t invest in properties connected to:
- Alcohol, pork, pornography, or gambling products.
- Companies running casinos or movie theaters.
- Insurance companies and regular banks.
- Any other forbidden products or services.
In short, avoid investments related to prohibited businesses and avoid financial tools involving interest.
What are some critical real estate shariah compliance guidelines?
Understanding the various real estate shariah compliance guidelines is vital to ensure interest-free, risk-free, and halal investments. We have curated the essential key points so you can invest in the next project wisely.
“Sale” in Shariah means exchanging something valuable for something else valuable, and both parties agree. Islamic rules have a lot of guidelines for sales.
- A “Buyer” is the person who buys something.
- A “Seller” is the person who sells something.
For a sale to be valid, these important things must be present:
- There must be an agreement or contract.
- There should be a buyer and a seller involved.
- There must be something being sold.
- A price for the thing being sold must be agreed upon.
For example, you want to sell your house to a buyer, let’s say, for PKR 1,000,00.
- Contract or Transaction: You and the buyer agree to a contract where you will sell your house to them for a specific price.
- Buyer & Seller: You are the seller because you are selling the house, and the person buying it is the buyer.
- Subject Matter: The subject matter is your house, which is what you are selling.
- Price: You both agree on a specific price for the house, such as PKR 1,000,00.
In this real estate transaction:
- You are the seller.
- The buyer is the buyer.
- The subject matter is the house.
- The price is the agreed-upon amount, like PKR 1,000,00.
These elements together make for a valid sale according to the basics and rules of sale in Islamic jurisprudence.
Offer & Acceptance (Ijab-o-Qobool):
- Offer: This is when someone suggests selling something to another person or buying something from them.
- Acceptance: It’s when the person who received the offer agrees to it. They say “yes” to the proposal.
Offer and acceptance are always done using words like “I will” or “I am” (past or present tense). Talking about a sale happening in the future is not allowed.
For example, you’re interested in buying a house, and there’s a seller who wants to sell their property.
- Offer: The seller says, “I am offering to sell my house to you for PKR 10,0000.
- Acceptance: If you respond, “Yes, I accept your offer to buy your house for PKR 10,0000,” that’s your acceptance.
In this scenario:
- Offer: The seller’s proposal to sell their house.
- Acceptance: Your agreement to buy the house for the specified price.
Like in the previous example, the conversation about buying or selling the house should use words like “I am” or “I will,” which should be in the present or past tense. Saying something like “I will buy it from you in a month” would not be considered a valid acceptance in this context, as it’s referring to a future sale.
Buyer and Seller
For a buyer and seller to make a valid contract:
- Sane: Both must be mentally sound when agreeing. They should be of sound mind.
- Mature: Both should be adults. However, if one of them is a minor, they must still understand what they are doing in the deal.
For example, let’s say a young adult who is 18 years old wants to buy a house from a seller. In this case:
- Sane: The young adult and the seller must be mentally sound when they agree on the house sale.
- Mature: The young adult is already an adult, so they meet this requirement. If the seller were also an adult, there would be no issues. However, if the seller were a minor, they must understand the nature of selling the house for the contract to be valid.
Existence: Whatever is being sold must actually exist at the time of the sale. If it doesn’t exist, even if both parties agree, the sale is invalid according to Islamic law (shari’ah).
- Ownership: The person buying something must have the right to own it.
- Seller’s Possession: The thing being sold must be in the physical or constructive possession of the seller when they sell it to someone else.
For example, you want to buy a house from a seller:
- Existence: The house you’re buying must actually exist; it can’t be something imaginary.
- Ownership: You should have the right to own property, like being an adult and having the financial means to buy a house.
- Seller’s Possession: The seller should have control of the house, either physically or legally (like having the legal right to sell it).
Types of Possession
- Physical (Haqiqi): The seller physically has the item, like having the house keys.
- Constructive (Hukmi): This is when the seller controls the item in a way that makes them responsible. For example, they might have transferred the risk to you (meaning you’re responsible for the house once the sale is agreed upon).
- Shariah Compliant:** The thing being sold should not be something only used for forbidden (haram) purposes, and it should not be something unlawful.
In a real estate context, this means you can’t buy or sell a property if it’s intended for an unlawful purpose, like selling a house to be used as an illegal gambling den. It must be for lawful and proper use according to Islamic law.
The price of sale is
- Quantified (Maloom): You should know how to measure the price. In other words, you should clearly know how much something costs.
- Specified & Certain (Muta’aiyan): For a sale to be valid, the price should be clearly defined and specific. It shouldn’t be vague or uncertain.
For example, you’re buying a house:
- Quantified (Maloom): You should know exactly how much money you’re paying for the house. It’s not a mystery; it’s a specific amount, like PKR 1,000,00.
- Specified & Certain (Muta’aiyan): The price for the house should be clearly stated in the contract, like “PKR 1,000,00.” It shouldn’t be left open-ended or uncertain.
10 Rules of Sale
There are ten rules of sale you must know and adhere to when making transactions. These are
Rule 1: Existing Items Only
The thing being sold must already exist when the sale happens. If it doesn’t exist yet, even if both people agree, the sale is not valid in Shariah.
Suppose someone wants to sell a piece of land that they plan to buy in the future but hasn’t acquired yet. They enter into a contract to sell this land to a buyer. However, since the land doesn’t exist in their ownership at the time of the sale, this would violate Rule 1. This sale would be void, according to Shariah.
Rule 2: Seller Must Own It
The seller must own the thing they’re selling at the time of the sale. If they sell something they don’t own yet, the sale is not valid.
Imagine a situation where a person wants to sell a house they currently live in, but they are still paying off their mortgage. They enter into a contract to sell this house to a buyer even though they don’t yet fully own it, as they are still paying the bank. Since the seller doesn’t fully own the house at the time of the sale, this would violate Rule 2, and the sale would be void according to Shariah.
Rule 3: Seller Must Have Control
The thing being sold must be either physically with the seller or under their control, even if they haven’t physically received it yet.
Let’s say someone wants to sell their house, and they have a signed agreement with a buyer. However, they still live in the house and haven’t moved out yet. Even though the buyer doesn’t have physical possession of the house yet, the seller has given them control and responsibility for it. This includes the risk of damage or destruction to the house. This situation follows Rule 3 because the seller still has control over the property even though they haven’t physically handed it over to the buyer.
Rules for a Valid Sale:
To make a real sale, three things must be true:
- The thing being sold must exist.
- The seller must own it.
- The seller must either have it physically or under their control.
An actual sale is different from just promising to sell something. All three of the above conditions must be met for a real sale to happen. However, someone can make a promise to sell something even if they don’t own it or have it yet. This promise creates a moral obligation to fulfil it, but it’s not usually enforceable in court. Yet, in some cases, especially if there’s some responsibility involved, a court can make the person fulfil their promise or pay for any losses caused by not keeping the promise.
But a real sale can only happen after the seller actually has the thing they’re selling. It requires a separate agreement with offer and acceptance, and without this, the legal consequences of a sale won’t apply.
There are two types of sales where these rules are relaxed:
- Bai’ Salam
In these types of sales, some of these rules are not as strict, and the sale can be made even before the item exists or is in the seller’s possession.
Rule 4: Sale Must Be Immediate and Certain
A sale must happen right away and without any conditions related to the future. If you agree to sell something in the future or make the sale depend on something that might happen later, that sale is not valid. You’ll need to make a new agreement when the future date arrives or when the event actually happens.
For example, you want to sell your house to someone, but you say, “I’ll sell it to you in six months when I find a new place to live.” According to this rule, this sale is invalid because it’s not immediate. Instead, you need to make a fresh agreement when you’re ready to sell the house, and all the conditions are met.
Rule 5: Saleable Items Must Have Value
In a sale, what’s being bought or sold must be something that has value according to common trade practices. If it has no value in the market, it can’t be sold or bought.
For example, someone wants to sell a piece of land in the middle of a desert without access to water, utilities, or any potential use. Since this land has no value for any practical purpose, it wouldn’t be a valid sale.
Rule 6: Forbidden Items Cannot Be Sold
You can’t sell things that are only used for unlawful purposes, like selling pork or wine, which are prohibited in Islam.
For example, if someone tries to sell a building that is specifically designed and used for illegal activities like gambling or producing alcohol, this sale would not be allowed because it involves something that is used for unlawful purposes.
Rule 7: Buyers Must Know Exactly What They’re Getting
In a sale, the thing being sold must be clearly and specifically known to the buyer. It should be described in a way that makes it different from other things that are not being sold.
For example, you’re selling a house to someone. To follow this rule, you must ensure the buyer knows exactly which house they’re getting. You can do this by providing the address or clear descriptions that distinguish it from other houses in the area. This way, the buyer is certain about what they are purchasing.
Rule 8: Certain Delivery to Buyer
When you sell something, you must ensure it will be delivered to the buyer without any uncertainty, reliance on chance, or unpredictable events.
For example, you’re selling a house to someone and promise to deliver it to them once you find a new place to live. If the sale depends on you finding another house (which is uncertain and relies on chance), it violates Rule 8. Instead, you should sell the house with a specific date for the handover.
Rule 9: Price Must Be Certain
The price for what you’re selling must be definite and not subject to change or uncertainty.
For example, you agree to sell your property for PKR 1,000,00, and both parties confirm this price. However, later on, you decide to change the price without the buyer’s consent. This change makes the price uncertain and violates Rule 9. The agreed-upon price must remain certain and fixed for the sale to be valid.
Rule 10: Sale Must Be Unconditional
When you sell something, it must be a straightforward agreement without any conditions attached. If there are conditions, the sale is not valid unless those conditions are commonly accepted in the trade.
For example, you’re selling your house to a buyer, telling them, “I’ll sell you the house, but only if I find a better one first.” This condition makes the sale conditional and uncertain. In most cases, such conditions wouldn’t be recognized as a valid part of a real estate transaction. A valid sale of the house should be unconditional, meaning you sell it without such conditions attached.
What are some Shariah compliance guidelines for selling and purchasing?
Here are some of the key Islamic guidelines on selling and purchasing properties:
- You can book a plot based on a “Promise to Sale.”
- Selling plots or plot files is prohibited before the plot is officially allocated.
- After the plot is allocated, you can sell it, and standard sale rules will apply.
- You can book a flat/apartment using an “Istisna” contract (a make-to-order contract).
- During the construction phase, before you take possession, you can’t sell the flat according to Shariah rules.
- You can book a house using an “Istisna” contract.
- If the house already exists, you can purchase it with a “Sale Agreement.”
In summary, for plots, the key is not selling before allocation; for flats, it’s not selling before possession; and for houses, it depends on whether the house is already built or being constructed.
What are the Shariah guidelines for real estate marketing?
You must follow the key Shariah guidelines on real estate marketing, including:
- Avoid appealing to base desires that can’t be satisfied and focus on ethical advertising.
- Always tell the truth and provide complete information about the property.
- Encourage responsible consumption and moderation as an act of worship.
- Use marketing platforms that comply with Shariah principles.
- Follow Shariah guidelines for female workers involved in marketing.
- Don’t encourage wasteful spending or excessive consumption.
- Avoid using women or nudity to suggest sexual attraction for marketing.
- Don’t show celebrities or models pretending to use a product they don’t use.
- Always be honest and don’t hide important information from customers.
- Don’t make false claims, baseless accusations, fake testimonials, or promises that won’t be kept.
- Advertising should be truthful respectful, and avoid deceptive practices according to Islamic principles.
How do you do Islamic advertising?
Here’s how you can ensure Shariah-compliant advertising:
- Use natural elements like landscapes, animals, and birds in ads. Avoid showing humans unless necessary, and if needed, show males.
- Promote modesty respect, and avoid themes like sexuality, nudity, indulgence, hatred, or racism.
- Use Islamic channels for advertising to reach the right audience.
- Include religious terms to show the ad’s Islamic character. Thoughtfully use Quranic references to connect with Muslim viewers.
- If your ad includes pledges or promises, begin them with “Bismillah” (In the name of Allah) to show sincerity.
In summary, Islamic advertising should use natural elements, be respectful, utilize Islamic channels, incorporate religious terms, and begin with “Bismillah” for sincerity.
The Bottom Line
Shariah-compliant real estate investment represents a bridge between financial prosperity and ethical integrity. By adhering to the principles of Shariah law, investors can confidently navigate the world of real estate, knowing that their investments align with their religious and ethical convictions.
As you embark on your journey into Shariah-compliant real estate, conduct diligent research, seek expert advice, and remain committed to the principles that guide your investments, ultimately leading to a prosperous and ethically sound future.
What is Shariah compliant investment guidelines?
Shariah-compliant investment is the one which is free of interest (Riba) and deception. These guidelines state that you must not invest in alcohol, pork, and drug-related businesses.
What is the Sharia compliant policy?
Shariah Compliant policy forbids investment in the business that profits depend on the selling of tobacco, alcohol, weapons, pork, pornography, gambling, and other military equipment
Are property funds Shariah compliant?
Property is generally deemed Shariah-compliant because it increases in value simply through market growth without exploiting another individual for personal gain.
What is a Shariah compliant REIT?
REITs provides a way for investors to invest in a property portfolio without having to buy these properties directly.
What are Shariah compliant assets?
Shariah compliant investment or also known as halal investment is an investment that is based on the principles of Islam and according to the shariah law.
What business activities are Shariah compliant?
Financial services that comply with Shariah principles include Islamic banking, Islamic insurance (Takaful), Islamic mutual funds (Sukuks), and Islamic microfinance. These services are without interest