Short answer
It can be. Islamic home finance built on murabaha (a sale at cost plus profit), ijarah (a lease) or diminishing musharakah (shared ownership) is halal in principle, because the provider earns from a sale or rent rather than from lending. Whether a particular product meets the conditions is a question for a mufti or the provider's Shariah board.
Murabaha and diminishing musharakah with a lease are valid contracts when their conditions are met: the financier really owns the property or its share, the price or rent is agreed, the sale and lease are not tied into one conditional contract, and no late payment charge adds to the financier's profit. Many Deobandi scholars endorse these structures, while some criticise how banks apply them.
The four schools agree on this.
Explanation
A common objection is that the monthly payment looks just like a mortgage. Islamic law judges the contract, not the number. Selling a house at a profit on deferred payment is trade, which Allah made lawful; lending money and charging for time is riba. Many scholars accept an interest benchmark used only to set a sale price or rent, though they would prefer an independent one.
The main structures:
- Murabaha. The provider buys the house, then sells it to you at a marked-up price paid in instalments. The price is fixed once agreed.
- Diminishing musharakah. You and the provider buy the house together, say 20% and 80%. You rent its share and buy it unit by unit, so your rent falls as your share grows.
- Ijarah. The provider owns the house and leases it to you, with a separate promise to sell it at the end.
What a scholar checks:
- The provider truly owns the property, or its share, before selling or renting it, and carries the risks of ownership.
- The sale, lease and purchase promises are separate, not one sale made conditional on another.
- Late payment does not increase the provider's profit. Any late charge goes to charity.
- Building insurance is takaful, or is the owner's responsibility.
Some respected Hanafi scholars argue that many Islamic banks follow conventional practice too closely and advise caution. The four schools agree on the underlying rules of sale, lease and partnership. Read the contract, ask the provider for its Shariah board's fatwa, and ask a qualified mufti about the specific product.
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Profit from a genuine sale is lawful.
Quran, Surah An-Nisaa 4:29
يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَٰطِلِ إِلَّآ أَن تَكُونَ تِجَٰرَةً عَن تَرَاضٍۢ مِّنكُمْ ۚ وَلَا تَقْتُلُوٓا۟ أَنفُسَكُمْ ۚ إِنَّ ٱللَّهَ كَانَ بِكُمْ رَحِيمًۭا ﴿٢٩﴾
O you who have believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful.
Wealth may be gained through lawful trade agreed by both sides.
Jami' at-Tirmidhi 1231
Graded sahih... نهى رسول الله صلى الله عليه وسلم عن بيعتين في بيعة ...
"The Messenger of Allah forbade two sales in one sale."
Contracts must be kept separate, not made conditional on each other.
Jami' at-Tirmidhi 1234
Graded hasan sahih... ولا ربح ما لم يضمن ولا بيع ما ليس عندك ...
"Nor profit on what you do not bear the risk of, nor selling what you do not have."
The financier must own and carry the risk of the property it sells or rents.
Where the ruling is recorded
- al-Hidaya, Kitab al-Buyu', Bab al-Murabaha wa al-Tawliya. The conditions of a cost-plus sale.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapters on murabaha and diminishing musharakah. Sets out how home finance can be structured on these contracts.
- AAOIFI Shari'ah Standards, Standards on murabaha and on musharakah. Industry rules for these contracts.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.