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A large number of Muslims live in foreign countries. Is it permissible for them to take or give interest on loans? PDF Print E-mail

Q: A large number of Muslims live in foreign countries. Is it permissible for them to take or give interest on loans?

A: For Muslims living in foreign countries, taking of interest is not permissible just as indulging in alcoholic drinks is not permissible for them. Being in a Muslim or non-Muslim country makes no difference. May Allah keep us under His protection wherever we are. Unfortunately, the whole set-up of our living has undergone a major change - ideas, values, concepts - everything is affected. Seen from this angle, the question my friend has posed becomes all the more important.

Let us go to the root. The question is: Under what conditions is it permissible to take a loan? If some one goes to some one else and asks for a loan, it means that the former faces a situation in which the taking of loan has become the only alternative open to him. This will be a situation in which it would be permissible for him to ask for a loan. But, should a person, who is well-to-do, go out seeking a loan on the plea that he already has two factories running successfully and now he wants to set up a third factory, that is, he wants Qarz-e-Hasana, a loan without interest. Then, the very seeking of this loan is not permissible. Asking for money, asking for a loan to line up a third factory on top of the two flourishing ones is a concept which is totally alien to Islam. However, what you can do is that you can ask for finances on the basis of Mudaraba. You say to the other party, here is a business share in whatever the profit or loss may be. This is all right. This is not loan. This is a partnership of the two parties in a business venture on the basis of Musharakah and Mudaraba. So, a loan is permissible only when someone seeks it for personal need.

Contemporary fatawaa



Q: 21- It is becoming common for Muslim retail businessmen in South Africa to enter into the so-called consumer credit scheme. The retailer concerned concludes a written agreement with a third party Company ("the Company). A copy of the specimen agreement is enclosed herewith. In terms of the scheme:

a) the customer wishes to purchase such goods on credit over 6 months;

b) the customer wishes to purchase such goods on credit over 6 months;

c) the customer is informed that the Company may sell him such goods on credit and, for that purpose, the customer fills in a prescribed application containing details relating to his credit-worthiness;

d) that application form is immediately faxed by the retailer to the Company for approval;

e) the Company responds very shortly thereafter (within half hour);

f) if the Company approves such application, it authorises the retailer to supply the goods so selected to the customer on credit;

g) the customer then signs an agreement in the form prescribed by the company in terms of which he undertakes to pay the Company for the price of such good in 6 monthly installments plus agreed interest. The installments may be paid directly to the Company or to the retailer concerned who as the agent of the Company pays the money so collected directly to the Company;

h) the goods so selected are then handed over to the customer and the relevant completed documentation is then delivered to the Company;

i) the company thereafter within a week or the agreed time period pays the retailer the invoiced price of the goods less the agreed discount as set out in the specimen agreement between the Company and the retailer which is binding in law. The agreed discount presently is 171/2%. It is apparent from the scheme that two separate contracts are concluded, namely:

(i) a contract of sale between the retailer and the Company in terms of which the company purchases the goods selected by the customer at an agreed price (invoice price less discount) which is paid effectively in cash;

(ii) a contract of sale between the Company and the customer in terms of which the Company resells such goods to the customer at the invoice price plus interest in 6 monthly installments.

In the conclusion of both contracts, the retailer acts as an agent and a principal. The retailer acts as a principal in concluding his separate contract of sale with the Company in terms of the overriding specimen agreement which governs his relationship with the Company; and he acts as an agent in delivering the goods selected by the customer who is liable to the Company only for the agreed price plus interest which is payable in 6 monthly instalments as aforesaid.

In the result; the retailer benefits in that:

a) he does not have to carry the financial risk of granting credit to the ordinary consumer;

b) he makes a profit although at a lower margin;

c) he does not have to borrow money on overdraft to fund the granting of credit.

The Company which is wholly non-Muslim and financially sound, benefits by making a profit in terms of its instalment sale with the customer concerned.

The scheme appear to be an application of the Murabahah principles and your considered fatwa is urgently appreciated by the Jamiatul Ulema, Natal. (MS. Omar, South Africa)
A: I carefully studied the question concerning the consumer credit card and the annexed documents.

The question you have formed does not reflect the correct position as emerges from the agreement forms annexed to the question. A careful study of the agreement forms reveals that this transaction is totally different from the Murabahah transactions of the Islamic banks. In case of Murabahah, the financier purchases a commodity, and after having its constructive or physical possession, sells it to his customer on deferred payment basis.

On the contrary, the 'Company" in the case of consumer credit card, does not purchase the commodity. It simply gives a loan to the customer / consumer on interest, but instead of giving the loan to the customer himself, it settles the invoice value of the commodities purchased by him from the merchant, the retailer. In other words, the company pays to the merchant the price owed by the customer/consumer. This is clear from the very first sentence found in the "merchant agreement" form which reads as follows:

"Consumer Credit Corporation Ltd. (CCC) undertakes to provide finance to the merchant's customers and settle the Merchant's invoice value less the discount due to CCC directly to the Merchant..

Thus the relationship between the Company and the customer / consumer is one of creditor and borrower. There is no sale affected between them. That is why the customer has been named a "borrower" in form I side B, which is a form of agreement between the company and the customer. It is then evident from both of the forms that the company advances a loan to the customer and charges interest thereon (see clause 5 of form I side B). However, the company has made the retailer liable for collecting the installments of repayment from the customer and for paying the same to the company within twenty four hours. The retailer has also been made liable for interest if he delays in payment after receiving the amount from the customer. But all these conditions do not change the relationship of a borrower and lender between the company and the customer.

As for the relationship between the Company and the merchant, it is a complex relationship according to the agreement which includes the relationship of agency indemnity and, in certain situations, of money lending on the basis of fixed interest. Such a complex relationship is totally against the parameters of Shariah. Moreover, the provision of interest in case of late payment renders the whole transaction invalid according to Shariah.

Therefore, the scheme of the Consumer Credit Card, as envisaged in the annexed agreement forms in undoubtedly an interest bearing scheme which cannot be held as valid according to Shariah, nor can it be validated on the analogy of the Murabahah transaction, because there are a number of basic differences between the two transaction. So, I have no doubt in my mind that it is not permissible in Shariah to become a party to this transaction.

This "Consumer Credit Card" is substantially different from the general credit cards issued by several companies like American Express, Visa etc, where no interest is charged by the company from the card - holder. So, the "Consumer Credit Card' in question should not be confused with the general credit cards issued by American Express etc. which can be permissible subject to certain condition.

Contemporary fatawaa



Q: 19- "Thank you for your answer to my question which appeared in November 1991 issue, concerning the adjustment of the interest amount to the loss of principal in the BCCI. Please clarify whether the interest received from another source other than BCCI can be adjusted against loss of capital in BCCI? (M. S. Desai, Saudi Arabia)

A: No, the interest received from any other source cannot be adjusted against loss of capital in BCCI. The principle underlying my former reply is that any amount received from a debtor is always taken in Shariah as part payment of the principal, even though the debtor has paid it in the name of interest. This principle will apply only so far as an equivalent of the principal amount is not received by the creditor. But after the payment of principal is complete, any excess shall be treated as interest and it will no longer be valid in Shariah to claim it from the bank.

But this principle is applicable only where the interest is paid by the same debtor who owes the principal. If the principal is deposited in the bank A and the interest is paid by the bank B, the interest, in that case, cannot be adjusted against the loss of principal deposited with bank A.

Contemporary fatawaa



Q: 20- I received your answer to the question on the consumer credit scheme for which I thank you.

I have, as a humble student reservations on the correctness of your conclusion: I would be obliged if you would urgently respond to the following:

1. It is correct that on the basis of written documentation the relationship between the company and the customer is shown as one of the lender and borrower. The amount of the loan which is inserted by the merchant on the 'Acceptance note" (Form 2), designated as the Invoice amount" is the price of the goods. If for example, a customer purchases goods for Rs. 10,000 then the amount of the loan purportedly advanced by the company to him is reflected as Rs. 10,000 which is paid in 6 monthly instalments together with interest thereon at the present rate of 9.5%. In fact, the amount lent is not the price of the goods (Rs. 10,000) but the price less the agreed discount of 20% to the merchant (Rs. 8,000). If the transaction between the Company and the customer was one of pure loan, then the principal amount of the loan should equal the actual payment by the Company to the merchant and not the price of the goods. On your view, the difference between the price of the goods and the actual amount paid to the merchant (Rs. 10,000 less Rs. 8,000) must be ascribed to additional interest but this does not accord with the terms of the written documentation on which your opinion is based.

Furthermore, in some cases, the customer as "the borrower" is required to pay a deposit of 30% to the Company upon conclusion of the transaction and this payment also is contrary to the essence of a pure loan transaction. Hence, your statement that "the Company pays to the merchant the price owed by the customer / consumer" is not strictly correct
because what is paid is the price less the agreed discount (presently 18%).

2. On the assumption that the transaction between the company and the customer is a loan, that transaction is separate from the sale between the merchant and the customer. On your view the merchant has sold goods to the customer at the marked selling price. The sale viewed separately is valid according to Shari'ah and the principle does not appear to apply here. The fact that as agent the merchant is obliged to pay interest in case of default in accounting to the company does not affect the customer, (non-Muslim), just as the payment of interest by the (non-Muslim) customer to the company does not affect the merchant. In South Africa, in any event a debtor who fails to pay a debt timeously is automatically by law under the prescribed Rate of Interest Act 1975 obliged to pay interest thereon at a rate prescribed by the minister in the official gazette from time to time.

3. As regards the agreement between the company and the merchant, you are of the view that agreement amounts to a "complex relationship which is totally against the parameters of the Shari'ah". The provision relating to payment of interest in case of late payment operates as deterrent. In the absence of such a provision, some merchants would deliberately use the company's money in their own business as working capital for periods of time to the financial prejudice of the company. In any event the company will agree to delete that provision (clause 4) in the case of Muslim merchants, but the provisions of the prescribed Rate of Interest Act 1975 would in any event apply by operation of law. Consideration should also be given to the question as to whether that provision (clause 4) is void in itself and therefore severable from the rest of the contract because it does not appear to be contrary to the essence of the contract as to render the whole contract void.

Consideration should be given to the real nature of the transactions concerned without placing undue emphasis on the literal wording of the documents. On this view the transactions are analogous to Murabahah on the basis set out in the initial question, although not satisfying all the requirements of Murabahah, such as possession in the light of the foregoing, then please give us your suggestions as to how to validate the transactions concerned according to Shariah. The majority of black people in South Africa, being the underprivileged, purchase their goods in instalments over 6 months. The overwhelming majority of Muslim merchants do not have the financial resources to sell goods on credit over 6 months. The effect of your opinion would be that Muslim business, which funds the religious and educational institutions of the community would be even further weakened, and Muslims would continue to be dominated by white conglomerates. In an endeavor to avoid interest some Muslim merchants have agreed to grant the company a bigger discount (e.g. from 18% to 25%), so that the company in turn has agreed not to charge the customer any interest.

6. Your statement that American Express does not charge interest in its cards is incorrect. All companies throughout the world charge interest to card holders in case of late payment. Hence, applying the interest principle which appears to be the basis of your FATWA, most transactions would be rendered null and void causing great hardship to Muslims living

You have laid much emphasis on the discount the CCC charges from the Mei-chant. You insist that this discount indicates that the CCC has purchased the commodity from the Merchant on a discounted rate, then has sold it to the customer for its full price on which the CCC charges interest. But, I am afraid, this is not the intention of the parties. The discount is not charged by the CCC because the CCC has purchased the commodity. Rather this discount may be interpreted in two different ways:

(a) This is a discount analogous to the discount normally charged by a bank while accepting a bill of exchange. However, it is an extra-ordinary situation where the CCC charges interest from two different persons for the same amount of money and the same period of time, because it charges discount from the Merchant and at the same time it charges interest from the Customer.

(b) There may be another interpretation of this discount. It is possible that it is similar to the commission normally charged by the brokers from the merchants. This brokerage may be justified on the ground that the facility provided by the CCC to the card-holders attracts them to those merchants only who accept such cards. In this way the CCC works for increasing the number of customers dealing with the Merchant, and thus claims a discount / commission from him.

In my humble view, no other interpretation can be ascribed to this discount, and I am sure that no court would interpret it to mean that the CCC has purchased the commodity on a discounted rate.

There is another reason for not treating this transaction a Murabahah. The agreements clearly prove that they are not restricted to the purchase of goods only. They are used for the services rendered by the Merchants as well. How can a Murabahah work in the case of services?

Now, there are three parties involved in this transaction:

(i) The CCC (the company who issues the card)

(ii) The Customer (the person who holds the card)

(iii) The Merchant (who accepts the card and sells the goods and services to the customer)

As for the relationship between the CCC and the customer, it is clearly a relationship of borrowing on the basis of interest. Hence, it is not allowed for a Muslim to become a party to this relationship.

But the case of the third party i.e. the Merchant is different. When a Merchant accepts this card, it means that he has accepted the hawalah (transfer) of the debt of his customer which the customer has owed to him by virtue of the sale concluded between them. The price of the goods will now be paid to him by the CCC. There is no violence of any principle of Shariah so far. The discount allowed by him to the CCC can also be treated as a commission to the broker, as explained earlier. Therefore, the discount can also be justified on this ground, just as it has been justified in that case of ordinary credit-cards issued by the American Express etc. But the problem arises when the merchant agrees to become an agent of the CCC for the collection of all the amounts owed by the customer to the CCC, including the amount of interest. It is established in Shariah that agency in a transaction of interest is also not allowed. This is the sole reason, in my humble opinion, for which it does not seem permissible for a Muslim Merchant to sign this agreement with the .CCC. However, if the Muslim merchants can avoid the element of agency through a special arrangement with the CCC, it seems to be lawful for them to accept such cards, and to sell the commodities to such card-holders, because the Merchant is not a party to the agreement between the card-holder and the CCC.

You have also asked as to what measures can be adopted in order to bring this transaction within the parameters of Shariah. Coming to this question I would suggest two alternatives:

Firstly, the contract can be modified so as to make it a clear Murabahah transaction with all its implications. This will require radical changes in all the forms and agreements, but, at the same time it will validate the whole transaction and the Muslim will be at liberty to issue such cards, to use them and to accept them However, it seems difficult that the CCC will accept the implications of Murabahah.

Secondly, the element of agency for the collection of the dues from the Customer may be eliminated from the agreement signed by the Merchant. It may, however, be provided in the agreement that the Customer either pays his dues directly to the CCC, in which case the Merchant will not be involved in the payment, or he deposits the amount with the Merchant wherefrom the CCC will arrange to collect it. In this case the Merchant will act as a trustee for the Customer, and not as an agent of the CCC.

Another alternative may be that the Merchant sells the goods to the Customer at a higher rate which may be equal to the amount he has to pay to the CCC over a period of six months. But it should be a fixed amount finally settled at the time of sale and should not be increased later on. Then the CCC may also claim a brokerage commission from the Merchant on the increased price at a higher rate. In this case the CCC advances a loan to the Customer which is free of interest, and a Muslim Merchant can work as an agent for the CCC to collect the amount of loan.

I think that if the CCC is not agreeable to the first alternatives, this method can be adopted as a last resort. But before applying this method other Ulama should also be consulted because I am not fully confident about it.

Before concluding this discussion, I would like to clarify another point you have raised in the last paragraph of your question. You say,

"Your statement that American Express does not charge interest on its cards is incorrect. All companies throughout the world charge interest to card-holders in case of late payment..."

Actually, I was aware that the Credit Card Companies do charge interest in the case of late payment, but the major difference between normal credit-cards (like American Express etc.) and the Consummer Credit Card (under question) is that the former ones do not charge any interest for the initial period which extends in some cases to three or four months. It is only in case of default after the prescribed period that they charge a penalty interest. Therefore, their basic transaction per se does not have an element of interest. The penalty-interest is an additional condition imposed by them which does not render the whole transaction invalid. Therefore, if a Muslim subscribes to such credit cards with a clear intention that he will always pay the bills of the company promptly and he has good reason to believe that he will never become a defaulter, and will never have to pay interest, it will be permissible for him
to use such Cards.

The case of Consumers Credit Card is totally different. Here every card-holder is bound to pay interest from the very beginning. He has to pay interest for each and every day. So, the whole transaction is based on interest. It was this major difference for which I had distinguished the case of normal-credit cards from the Consumer Credit Card under discussion.

This will clarify another misconception also. It was not the clause of penalty-interest that formed the basis of my opinion. In fact, the nature of the transaction is such that it cannot be distinguished from an interest-bearing loan, and I  have already elaborated the basic reasons for its  impermissibility for each one of the three parties.

Contemporary fatawaa



Q: 18: "The Fiqh Academy has also allowed installment sales. Does this mean that I can now buy a house in UK on USA on installments bearing in mind that each installment includes repayment of principal" and "interest".

A: Sale on installment should never be confused with a transaction of interest bearing loan. In a sale transaction subject matter of contract is a commodity which should necessarily be owned by the seller at the time of sale and should be in his possession. But in the case of loan the subject matter of the transaction is money which is advanced to the borrower. The house financing schemes generally practiced in the Western countries are based purely on interest. The banks advance money for the purchase of the house and charge interest on it. The house is mortgaged as a security for the repayment of loan. This transaction has nothing to do with a transaction of sale on installments. The house is never purchased by the bank, nor does the bank sell the house to the customer. The customer purchases the house from a third party and owes its price to him. The bank comes in only to finance the buyer on the basis of interest. Therefore, this transaction is a riba transaction which is strictly forbidden and cannot be justified on the presumption that it is a transaction of sale on installments.

However, if the seller himself sells the house on installments and charges a price higher than the cash price, or the bank itself purchases the house from the seller, and after having its ownership and possession resells it at a higher price to the customer on installments, the transaction may be valid in Shariah, if the necessary conditions of sale are fully observed as mentioned in the resolution of the Fiqh Academy. But the transaction generally in vogue in the Western countries is not based on the concept of sale. It is an interest transaction pure and simple, and a Muslim is not allowed to enter into such transactions.

It is thus clear that your understanding of the resolution of the Fiqh Academy is not correct.

Contemporary fatawaa


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