SS 39 · Guarantees, documentary credit and Rahn

SS 39: Mortgage and its Contemporary Applications

What this standard is about

A mortgage (rahn) means tying an asset to a debt: if the debtor defaults, the asset or its value is used to repay what is owed. It is one of the oldest forms of security in Islamic law, confirmed by the Quran, the Sunnah, and scholarly consensus.

The standard covers mortgages that an Islamic bank takes from clients to secure debts owed to it, mortgages the bank itself gives to others, and mortgages the bank holds as a neutral third party (notary). Its contemporary applications include mortgaging shares and sukuk, bank accounts and cash, investment units, and even assets the debtor will own in the future.

Why it exists

Islamic banks finance homes, cars, and businesses on deferred payment. They need security against default, just like conventional banks. This standard shows how to take that security in a way that follows Islamic rules — including modern assets like shares and bank balances that did not exist in classical times.

The key rules, simply put

A mortgage is permissible. The Quran allows pledges to secure debts, and the Prophet himself once mortgaged his armor for food.
Once concluded, the mortgage binds the debtor (mortgagor): he cannot cancel it on his own. The creditor (mortgagee) may release it.
Possession of the mortgaged asset can be physical (seizure) or legal — through registration and documents, as with a house mortgage. Both count.
The asset can be held by the creditor, by his agent, or by an agreed neutral third party.
The creditor may require the debtor to authorize him to sell the asset and repay the debt from its value if default happens — without going to court.
The mortgaged asset stays owned by the debtor. It is a trust in the creditor's hands. If it is destroyed without anyone's fault, the debt still stands.
The asset must be halal, clearly identified, and deliverable. It can be tangible property, cash, shares, sukuk, a bank balance, or future income from a specified asset.
The same asset can be mortgaged to more than one creditor, with rights shared in proportion to each debt.
The mortgage ends when the debt is paid, when the creditor releases it, or when the asset perishes without compensation.
The debtor must still pay zakah on the mortgaged asset, since he still owns it.

An everyday example

A customer buys a house through an Islamic bank's deferred-payment home financing and still owes $200,000. The house is registered as mortgaged to the bank. The customer owns and lives in the house, but if he stops paying and no solution is found, the bank can sell the house and recover its $200,000 from the sale price.

Words to know

Rahn — mortgage or pledge: tying an asset to a debt as security.
Mortgagor — the debtor who pledges the asset.
Mortgagee — the creditor in whose favor the asset is pledged.
Halal — permissible under Islamic rules.
Zakah — the obligatory annual charity on qualifying wealth.
Sukuk — certificates giving ownership in a real asset, earning returns from what the asset produces.

Source

AAOIFI Shariah Standard No. 39 — https://aaoifi.com/wp-content/uploads/2020/08/SS-39-Mortgage-and-its-Contemporary-Applications.pdf