Banks and financial institutions are a part of everyone’s life. The financial relationship between a person and his bank is government by documents and agreements. In the event of loans, especially mortgages, this relationship is beneficial but can become complicated, especially when issue arises of default. If An individual with a mortgage is a salaried employee who no longer retains his job, he is forced in a situation where the bank seeks payment regardless of his employment status. The financial institution can persue this matter in 2 ways:
Firstly, the commercial route. In this case the financial institution starts commercial proceedings in court to try and enforce specific performance of the contract. It usually means that the individual has to hire legal representation to defend themselves in court. This process takes 12-30 months and involved the appointment of experts by the court to view the viability and enforceability of that contract.
Secondly, the criminal route. The financial institution can, and mostly does, bank the guarantee cheque of the individual due to their failure to clear installment payments. The financial institutions, at the time of offering loans, credit cards or financing, take up to 3 blank cheques, signed by the person, for such events of default. When the cheque is returned for non payment, they banks can go ahead a file a criminal case of a bounced cheque. In the UAE, a bounced cheque is one of the strictest and least flexible laws, with very little room for defense. In such cases, the person’s only defense is to file a civil claim against the institution based on the contract signed between the bank and the customer.
Mortgage and Ijarah
Mortgage and Ijarah are based on 2 different principles. Mortgage is based on an interest charged to the client for borrowing of the money for the payment of the property. Ijari is based on the Financial institution buying the property and holding it for the client, whilst the client lives in the property and pays rent, which counts as their profit. The interesting points in both these finances are the persons legal recourse in the event of a default. Mostly, shariah compliant contracts do not require any installment payment until the property is complete and handed over. Whereas in conventional finance, the individual is required to pay interest payments towards the property since the property is transferred to the customer’s name and monies have been released. However, in cases of Ijarah, it all comes down to the contract. The Ijarah contracts vary widely in the degree to which they bind the individual to pay in the event of a default or in the event that the property is not constructed.