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Can I take a loan on my 401K Investment?

Answered as per Hanafi Fiqh by Askimam.org

Assalam Alikum

I would like to know is it permitted to take loan on my 401K investment. I have chosen my 401K investments in mutual funds which don’t work on Riba. I am planning to take this loan for my first time home purchase. When I take this loan, i have to pay interest, but the money will be back into my account itself with interest. So, I want to check with scholars to make sure that I am doing the right thing. 

Please guide me.

 

 

 

Answer

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Brother,

There are two parts to your query:

  • Investing 401K in mutual funds; and
  • Taking a loan on one’s 401K

 

1)    The 401K plan is a voluntary tax advantaged retirement plan offered to the employee from the employer where an employee is given permission to divert a portion of his or her salary into a long-term investment.

 

You have chosen mutual funds as your investment instrument.

Mutual funds are defined as a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments and other assets.[i]

Investing in mutual funds will be permissible if the mutual fund invests only in stocks in which the company one is investing in is in compliance with the following conditions pointed out by Mufti Taqi Saheb (Hafidhahullah):[ii]

 

1.     The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the company’s manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities etc.

 

2.     If the main business of the companies is halal, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the shareholder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

 

3.     If some income from interest-bearing accounts is included in the income of the company, the proportion of such income should be given in charity and must not be retained by him. For example, if 4% of the whole income of a company is accrued from interest-bearing deposits, then 4% of the dividend should be given in charity. Note: One should ask the mutual fund manager to source the appropriate financial statements in order to determine how much interest was earned by the company in which the stocks were invested.

 

4.     The shares of a company can be purchased only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money, then that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par value.

 

It will be permissible for you to take out a 401K investment scheme in mutual funds provided that it is Shariah compliant. We advise you to consult with a local reputable scholar in your area who is well versed with these issues to help you choose one which is Shariah compliant.

 

2)    When you are taking the loan for your home purchase, it will be required of you to pay back the loan you took with a rate of interest. Outwardly, it would seem that this is interest hence deeming this transaction haram. However, since you are the full owner of the funds, you are essentially paying back an additional amount to yourself and not to another person or entity. This is because you are taking out money you placed in the fund and returning the money you took out with “interest” to yourself. The definition of interest according to Shariah is where the lender charges the borrower excess from the principal borrowed.[iii] By you taking out this loan from your fund and paying the access amount to yourself, it will not fall under this definition despite it being called interest in the conventional world.

 

In this instance as well, since you are the owner of the funds, you took out a loan of say $50K. You have $100K in your fund. So, you now paying back the $50K with a rate of say 5% “interest”. Essentially, you are paying money in the account you have full ownership of.[iv]

 

It will also be permissible for you to take out this loan on your home purchase based on the reasoning mentioned above.

And Allah Ta’āla Knows Best

Mahmood Suliman

Student Darul Iftaa
Gaborone, Botswana

Checked and Approved by,
Mufti Ebrahim Desai.

 

 


[i] https://www.investopedia.com/terms/m/mutualfund.asp

 

[ii] An Introduction To Islamic Finance – Maktaba Ma’ariful Quran Pg: 207

 

[iii] أحكام القرآن للجصاص ت قمحاوي (2/ 184) 

وَالرِّبَا الَّذِي كَانَتْ الْعَرَبُ تعرفه وتفعله إنما كان قرض والدراهم وَالدَّنَانِيرِ إلَى أَجَلٍ بِزِيَادَةٍ عَلَى مِقْدَارِ مَا اُسْتُقْرِضَ عَلَى مَا يَتَرَاضَوْنَ بِهِ

 

[iv] البناية شرح الهداية (8/ 298)

قال: ولا ربا بين المولى وعبده؛ لأن العبد وما في يده ملك لمولاه، فلا يتحقق الربا

 

البحر الرائق شرح كنز الدقائق ومنحة الخالق وتكملة الطوري (6/ 147)

(وَلَا رِبَا بَيْنَ الْمَوْلَى وَعَبْدِهِ) لِأَنَّهُ، وَمَا فِي يَدِهِ مِلْكُهُ أَطْلَقَهُ وَهُوَ مُقَيَّدٌ بِمَا إذَا لَمْ يَكُنْ عَلَيْهِ دَيْنٌ مُسْتَغْرِقٌ لِرَقَبَتِهِ وَكَسْبِهِ

 

تبيين الحقائق شرح كنز الدقائق وحاشية الشلبي (4/ 97)

وَلَا رِبَا بَيْنَ الْمَوْلَى وَعَبْدِهِ)؛ لِأَنَّهُ وَمَا فِي يَدِهِ مِلْكُهُ فَلَا يَتَحَقَّقُ الرِّبَا هَذَا إذَا لَمْ يَكُنْ عَلَيْهِ دَيْنٌ مُسْتَغْرَقٌ بِرَقَبَتِهِ وَمَا فِي يَدِهِ وَإِنْ كَانَ عَلَيْهِ دَيْنٌ لَا يَجُوزُ؛

 

اللباب في شرح الكتاب (2/ 41)

(ولا ربا بين المولى وعبده) : لأن العبد وما في يده ملك لمولاه فلا يتحقق الربا، (ولا بين المسلم والحربي في دار الحرب) ، لأن مالهم مباح في دارهم؛ فبأي طريق أخذه المسلم مالا مباحاً إذا لم يكن فيه غدر. بخلاف المستأمن منهم، لأن ماله صار محظوراً بعقد الأمان. هداية

 

الجوهرة النيرة على مختصر القدوري (1/ 215)

 (وَلَا رِبَا بَيْنَ الْمَوْلَى وَعَبْدِهِ) لِأَنَّ الْعَبْدَ وَمَا فِي يَدِهِ مِلْكٌ لِلْمَوْلَى وَمَعْنَاهُ إذَا كَانَ مَأْذُونًا وَلَمْ يَكُنْ مَدْيُونًا فَإِنْ كَانَ مَدْيُونًا لَا يَجُوزُ؛ لِأَنَّ مَا فِي يَدِهِ لَيْسَ بِمِلْكٍ لِلْمَوْلَى عِنْدَ أَبِي حَنِيفَةَ وَعِنْدَهُمَا

 

فتاوى عثمانى 3308

 

امداد الفتاوى 3152

 

 

This answer was collected from Askimam.org, which is operated under the supervision of Mufti Ebrahim Desai from South Africa.

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