Why Does it Matter Who Owns a Halal Mortgage Company?

If you're shopping for halal financing, you may have heard a lot of opinions about who you can trust. Some argue that halal financing companies must be Muslim-owned. Others point to the structure of the financing. As a consumer, how do you decide who is right, and who gets to decide which mortgage company is halal?  

For homebuyers trying to make a faith-conscious financial decision, it can be difficult to know what to believe. When you're financing your home, you should have complete transparency knowing that the company you're working with genuinely follows the principles it claims to follow. 

But there's an important distinction that often gets lost in the conversation: Being Muslim-owned and being Sharia-compliant are not the same thing. 

In fact, the standards of Islamic finance don't make Muslim ownership the test for whether a financial product is halal. The more important questions are about how the financing is structured, how the company is governed, where the funds are used, who provides Sharia oversight, and whether the institution follows recognized Islamic finance standards. 

So instead of asking "Who owns this company?", it may be more useful to ask: "What makes its financing halal?" 

What Does AAOIFI Have to Say About It? 

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is one of the leading international standard-setting organizations for Islamic finance. Its standards address areas including Sharia requirements, accounting, auditing, governance and ethics for Islamic financial institutions. At UIF, we consider AAOIFI to be the 'North Star' for determining our Sharia Compliance and ensure that all our products have been approved by AAOIFI. 

Importantly, AAOIFI's framework does not establish a requirement that an Islamic financial institution must be owned by Muslims. Instead, the focus is on the substance of the financial activity. That means the important question isn't what religion are the shareholders. The meaningful questions are:  

• How is the financing structured? 

• Does it avoid interest (riba) and excessive uncertainty (gharar)? 

• Are the underlying transactions and investments Sharia-compliant? 

• Is there appropriate (and qualified) Sharia governance and oversight? 

These are the kinds of questions that get to the heart of Islamic finance. 

A Muslim-Owned Company Isn't Automatically a Halal Company 

This distinction is important because ownership can sometimes be used as a shortcut for evaluating whether something is halal. But ownership and compliance are two different things.

A Muslim-owned business can offer products or services that aren't Sharia-compliant. Conversely, a business owned by non-Muslims can offer products that are Sharia-compliant.

Consider two restaurants:

Restaurant A is Muslim-owned but serves pork and alcohol.

Restaurant B is not Muslim-owned but uses halal-certified ingredients and follows halal preparation requirements.

Which restaurant serves halal food? The answer isn't determined by who owns the restaurant. It depends on the ingredients, preparation and handling of the food.

The same logic applies to your local grocery store. If you buy halal chicken at Kroger, the chicken doesn't become non-halal simply because Kroger isn't Muslim-owned. The ownership of the store doesn't change the halal status of the product. What matters is whether the chicken meets halal requirements.

Islamic finance follows the same fundamental principle: ownership alone doesn't determine whether a financial product is Sharia-compliant. A financial institution doesn't have to be Muslim-owned to offer halal financing, just as a grocery store doesn't have to be Muslim-owned to sell halal food.

Instead, the important questions are how the financing is structured, where the funds come from, how profits are generated, and whether the institution follows appropriate Sharia standards and oversight.

So What Makes a Halal Mortgage Company Sharia-Compliant? 

For an Islamic financial institution, Sharia compliance is much more than putting the word "halal" on a website. A credible Islamic financial institution needs a framework that addresses Sharia, governance, and financial practices. 

AAOIFI has developed standards covering Sharia-compliant financial products and mechanisms as well as governance, auditing and Sharia compliance and supervision processes. 

One important component is the Sharia Supervisory Board. Under AAOIFI's governance framework, the Sharia Supervisory Board is an independent body responsible for providing direction, review and supervision concerning the institution's activities from a Sharia perspective. AAOIFI's Governance Standard No. 1 calls for a minimum of three members on the Sharia Supervisory Board (page 23 in the provided link); these Board Members should be "competent" Sharia scholars to evaluate the structures, contracts and operations and provide ongoing oversight. 

In other words, halal finance is a system of standards and oversight, not an ownership label. 

There are Non-Muslim-Owned Institutions Offering Legitimate Halal Financing 

This isn't a theoretical distinction. AAOIFI does not require a Sharia-compliant financial institution to be Muslim-owned; AAOIFI's standards focus on Sharia compliance of the institution's financial activities, structures and governance, not the religion of its owners. And there are already established financial institutions around the world that are not Muslim-owned but operate legitimate Islamic finance businesses, demonstrating that Muslim ownership is not a prerequisite for providing Sharia-compliant financial services. 

For example, HSBC Amanah in Malaysia is a fully fledged Islamic bank wholly owned by HSBC Bank Malaysia Berhad and is part of the HSBC Group. HSBC Amanah states that it has offered Islamic financial services since 1994, and its Islamic banking operations are supported by a dedicated Sharia Committee. Similarly, Citi Islamic Investment Bank in Bahrain is a subsidiary of Citigroup and operates as a wholesale Islamic bank, stating that its activities are conducted in Sharia compliance. Its financial statements also describe a three-member Sharia Supervisory Board and has AAOIFI approval.  

UIF Corp is owned by University Bank, a federally insured bank. But that doesn't mean UIF's halal financing is simply conventional financing with a different label. UIF operates its halal financing business within its own Sharia framework, with funds designated for the halal financing portfolio kept separate from activities that would not be part of that portfolio or involved with haram activities. 

These examples demonstrate an important point: Muslim ownership is not the defining characteristic of an Islamic financial product. At the same time, being organized as or owned by a conventional banking institution does not de-legitimize a faith-based financing business. Instead, Halal Financing is dependent on whether the institution has the appropriate structures, controls, contracts, oversight and standards in place to support Sharia compliance. 

If They're Secularly Owned, Where Does the Money Come From? 

Asking where the money to fund financing or profit rates come from is an important part of the conversation because halal financing isn't just about what the customer pays. The funding, profits and underlying financial activities supporting the financing also need to comply with Sharia principles. 

In other words, it isn't enough to structure a mortgage contract in a way that avoids interest – especially if the financial activity supporting that transaction is itself tied to prohibited activities. 

Islamic finance prohibits involvement in certain activities and sources of income, including businesses centered on alcohol, gambling, adult entertainment and other activities that are inconsistent with Sharia principles. It also prohibits interest (riba) and requires financial transactions to avoid excessive uncertainty and other prohibited elements. 

That means a halal financing provider should be able to answer questions such as: 

• Where does the capital used for halal financing come from? 

• How are the company's profits generated? 

• Are the funds supporting the financing tied to interest-based or otherwise prohibited activities? 

• Are halal financing funds appropriately separated from activities that do not meet those requirements? 

This is one reason the source and use of funds matter when evaluating an Islamic financial institution. 

Take, for instance, UIF. UIF is owned by University Bank, a conventional, non-Muslim-owned financial institution. However, UIF's halal financing funds are segregated from the parent company's other activities and are not used for prohibited activities. UIF's funding is generated through halal means, and the profit rates earned through UIF's halal financing come from those Sharia-compliant financing activities and the community we serve. In other words, the source of UIF's funding and the profits generated through its halal financing are tied to its own Sharia-compliant business, not to prohibited activities conducted elsewhere within the financial system. 

The relevant question here isn't whether a company providing Islamic Financing is Muslim-owned, but should be "are the funds supporting my halal financing and the activities generating its profit consistent with Sharia principles?" 

What Should You Ask Instead? 

If ownership isn't the deciding factor, what should you look for when evaluating a halal mortgage company? Here are some questions worth asking. 

1. Who oversees Sharia compliance?

Does the company have an independent Sharia Supervisory Board (with a minimum of three members) or qualified Sharia scholars overseeing its products and activities? And importantly, are those scholars involved in more than simply approving a marketing claim? 

A meaningful Sharia governance process should involve review and supervision of the institution's products and operations. 

2. What standards does the company follow?

Ask whether the institution follows recognized Islamic finance standards, including applicable AAOIFI standards. AAOIFI maintains standards covering Sharia, accounting, auditing and governance for Islamic financial institutions. 

A company should be able to explain what standards guide its financing structures and how compliance is maintained. 

3. How is the financing structured?

Is the financing structured around an Islamic contract? How are ownership, rent, profit and risk handled? What happens if the customer pays early? How are late payments treated? What happens if something goes wrong? 

Understanding the transaction tells you much more than the ownership of the company. 

4. What happens to the funds?

Ask whether funds associated with the Islamic financing portfolio are appropriately segregated and whether they are used for activities that comply with the institution's Sharia framework. 

5. Is there ongoing Sharia review?

Sharia compliance shouldn't be a one-time exercise performed when a product is launched. A strong governance framework includes ongoing review and supervision. That kind of ongoing oversight is much more informative than simply asking whether a company is Muslim-owned. 

What About Risk? 

Another question people sometimes have about halal home financing is whether the financing company shares risk with the homeowner. This is an important question in context of Sharia compliance, but it can get complicated because there are several different kinds of risk involved in owning a home. 

For example, consider a natural disaster. A house can be damaged by a fire, storm or other covered event. In the United States, financiers generally require homeowners' insurance because the property securing the financing needs to be protected. The Consumer Financial Protection Bureau notes that lenders generally require proof of homeowners' insurance and may purchase insurance on the borrower's behalf if required coverage isn't maintained. That requirement isn't unique to Islamic financing. 

Similarly, property can be affected by circumstances such as eminent domain, in which the government acquires private property for public use subject to applicable legal requirements. These situations raise questions about property ownership, insurance, compensation and the contractual rights of the parties, not simply whether a company is Muslim-owned. That's why evaluating an Islamic home financing product requires looking at the structure rather than relying on a single characteristic such as ownership. 

So, Does It Matter Who Owns a Halal Mortgage Company? 

Yes . . . but perhaps not in the way you might think. Ownership can tell you something about a company's corporate structure, leadership and financial relationships. It's perfectly reasonable for a customer to want to know who owns the company and where its capital comes from. 

But Muslim ownership is not what makes a mortgage halal. 

The better question is whether the institution has the structures and safeguards necessary to provide Sharia-compliant financing. A non-Muslim-owned institution can offer legitimate Islamic financial products when those products are structured and governed according to applicable Sharia principles and standards. For UIF, being owned by University Bank does not change the Sharia principles governing UIF's halal financing. 

So when you're evaluating a halal mortgage company, don't stop at "who owns it?"  

Ask the bigger questions: 

"How does it operate?" 

"Who oversees its Sharia compliance?" 

"What standards does it follow?" 

"How are its funds handled?" 

Those answers can tell you far more about a halal mortgage company than the religion of its owners ever could.