concluding the sale” (Ibn Abi Shayba).
Practical applications: A person
wants to buy dentures from their
dentist which costs $3,000 when
paid upfront and in full. The dentist
also gives the option to pay for the
dentures in installments over five
years for a total of $4,000. Using this
finance scheme would be permissible
and would not constitute as interest.
It is important to note that this is only
in the case the financing is provided
by the seller and the final price is
settled at the time of the sale (i.e. the
price does not fluctuate depending on
time of repayment). If the financing is
provided by a third-party, this would
not be permissible. The reasoning
for this is that the third-party is only
providing a loan and charging extra
renumeration for the loan provided
(which constitutes as interest).
Whereas when the seller is providing
financing, the profit earned is through
the actual sale of the commodity.
Principle #3: Using other schemes to
avoid interest while earning a profit is
permissible.
Scenario: Fatima wants to borrow
$100,000 from Zaynab to buy her
dream house. However, Zaynab wants
to make some money from this transaction
as well. So, instead of loaning
Fatima the money, she decided to buy
the house herself and sell it to Fatima
the next day for $ 150,000 which is to
be paid in installments.
Ruling: permissible
Explanation: The scenario above is a
basic example of how certain Islamic
financing schemes work. The idea is
that instead of earning profit through
a loan, a financial institution would
earn profit through a sale. The key
difference between both approaches
is that in the former, the institution
does not assume any risk associated
with the product being sold at
any time. Whereas in the latter, the
financial institution assumes risks
associated with the product being sold
(e.g. the house burns down before the
institution sells it to the interested
party).
Although this principle could be
understood from the previous two
principles, the reason I chose to have
this as a separate principle is due to a
common objection raised: what is the
difference between Islamic finance
and conventional finance if both are
making similar amount of profit? The
difference is the method of earning
and the risk involved.
Proof: Abu Hurayra g narrates that
the Messenger of Allah a appointed
another companion as the governor
of Khaybar. One day, the companion
brought one saa’ of fresh dates
upon which the Messenger of Allah a
asked, “Are all of the dates in Khaybar
of such quality?” The companion responded,
“O Messenger of Allah, surely
not! Rather we exchange two saa’ of
normal dates in exchange for one saa’
of these fresh dates.” The Messenger
of Allah a said to the companion, “Do
not exchange in this manner (since it
is interest in Islam). Rather, sell the
normal dates for cash and then buy
the fresh dates” (Bukhari).
Practical applications: All legitimate
Islamic Financial Institutions use such
schemes to finance homes and cars.
Such schemes may also be used by
individuals in private sales as well.
Test Your Comprehension: Ahmad
wants to buy a 2021 Honda Civic from
his friend Asim’s Honda dealership.
The vehicle costs $20,000 USD. The
dealership also has a partnership
with Honda Finance to help provide
financing for customers. Honda
Finance has a deal of 0% APR (no
interest) but charges a flat 2,000-dollar
service fee for providing the
financing. In total, Ahmad would pay
22,000 dollars over 5 years with no
interest charges. Would such financing
be permissible?
Answer: Learn the answer in the next
issue of al-Madinah magazine.
24 July – August 2021 | AL-MADINAH