IslamQA

Controversy surrounding “No Cost” EMI schemes in India. Permissible or impermissible?

Answered according to Hanafi Fiqh by Askimam.org

Why does the Darul Iftaa hold a view that No Cost EMI is impermissible? Darul Uloom Deoband has issued a fatwa on zero cost EMI and has deemed it permissible. Going against this fatwa by issuing a new ruling of impermissibility only creates difficulty for the general mass and is against the public interest. More so, the amount that is paid back to the bank is equivalent to the MRP of the product sold on Amazon, Flipkart etc. Why is it then considered impermissible? This has been a matter of discussion amongst the Ulama in India since a while. Kindly, explain in detail why such stance is adopted by Mufti Ebrahim Desai (db) and end this confusion once and for all.

Answer

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

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

We cannot comment on the fatwa issued by Darul Uloom Deoband. However, we are more than willing to discuss and shed light on why we have adopted the stance that “No Cost” EMI (Equated Monthly Installments) is impermissible. While we strive to put in our effort to ease the life of people by bringing legal norms close to social norms and issuing rulings that are practical in everyday life, seeing the public interest as our utmost priority, we cannot compromise on issues which go beyond the limits of Shariah. NO COST EMI comprises of clear interest transactions making it impermissible.

Commercial banks are all about businesses. They make money by giving loans to people. Earning interest income by charging different rates to different customers is central for banks. They don’t lend money to people out of good will or as a charity, their ulterior motive is to get more than what they have invested. In fact, lending money to those in need makes up a large portion of their operations.

The name “No Cost EMI” gives the initial impression that it is free from the elements of riba (interest). However, according to RBI (Reserve Bank of India), No Cost Emi does not exist. In other words, it is illegalbanned for banks to provide such a service to customers. Thus, this scheme is just yet another marketing gimmick adopted by the retailers to push sales of their products.

For a clearer picture, it is vital that we discuss the framework according to which such schemes operate. It is of extreme importance that we know the actual cost of the product in such “no cost emi” “zero-cost emi schemes”. Knowing the same will ease in comprehending the issue in hand.

The Reserve Bank of India (RBI) in its circular in 2013, has mentioned that the concept of zero percent interest is non-existent. The interest is as usual charged by the bank.[i] The only difference is that the exact interest amount is rewarded to the customer as an upfront discount from the retailer. This discount is equivalent to the total amount of interest that the customer will be paying. In a nutshell, the interest is passed on to the customer with the fancy name of an upfront discount, only for it to be paid to the bank to cover the interest cost.

World’s largest online retailer “Amazon” displays the same note on its website. On visiting the “No Cost EMI” options of a product on the said retail website, the following notice can be seen:

“For products bought using no cost EMI on credit and debit cards, the bank will continue to charge interest on EMI as per existing rates. However, the interest to be charged by the bank will be passed on to you as an upfront discount.”

The above statement might seem technical to many. Therefore, in order to illustrate the above statement, let us take the example of Galaxy S10 (White, 8GB RAM, 128GB Storage) with No Cost EMI as a payment option, which is being sold on Amazon at the cost of Rs 61900 as on today, the 8th of November 2019. You may click the link to check the accuracy of what is being said:

https://www.amazon.in/Samsung-Galaxy-0Storage-Additional-Exchange/dp/B07KXBVLRJ/ref=sr_1_1?keywords=s10&qid=1573133134&sr=8-1

Apparently, the interest rate has also been mentioned for each product. The rate varies from 12% p.a. to 14% p.a. depending on the bank the credit card is linked to and the number of months selected to pay the total amount in instalments. The total interest amount is also clearly mentioned. The details of the available No Cost EMI options are as follows:

a) Rs 20633 for 3 months @ 13% interest p.a. The total interest amount equates to Rs 1317.

b) Rs 10317 for 6 months @ 13% interest p.a. The total interest amount equates to Rs 2281.

c) Rs 6878 for 9 months @ 14% interest p.a. The total interest amount equates to Rs 3462.

For now, let us look at the product with the no cost EMI option at a 9-month tenure (Option C). The sum of the interest in this case is Rs 3462. The customer will be paying Rs 6878 for 9 months. The total payable amount equates to Rs 61902. For the sake of expounding on the topic, we will regard the access amount of Rs 2 as insignificant for now. Thus far, it seems that the transaction is interest free as the actual MRP (Rs 61900) of the product is being paid back to the bank. Nothing extra is being charged. So where is the upfront discount and where is the interest amount that RBI and Amazon were speaking of? To answer this, consider the following chart:






Actual cost of the Phone (MRP)

Rs 61900

Upfront discount provided by the retailer

Rs 3462

Cost of the mobile phone post discount

Rs 58438

Total interest to be paid to the bank on EMI purchase

Rs 3462

Total cost to be paid by the customer

Rs 61900

 

The above chart illustrates that the bank is charging interest equivalent to Rs 3462 to the customer. One may still be confused as in the end, the amount that is paid to the bank is Rs 61900, the same as the cost of the phone. The root cause of this confusion stems due to the false assumption that the bank had loaned the exact MRP (Maximum retail price); Rs 61900, to the customer. This however cannot be true because the banks are making money out of the loan. Of what benefit would it be if they take back the same amount from the customer?

Therefore, the crucial part to understand here is that the loaned amount on which this interest of Rs 3462 is being charged is not Rs 61900. Rather the bank is charging this interest on Rs 58438 (the cost of the phone post discount). This amount was loaned by the bank to the customer in order to make the purchase of the phone. The payment increased to Rs 61900 after adding the interest of Rs 3462. This access amount to the principle is undoubtedly Riba.

We will hereunder expound further on the above transaction by summarizing and analysing the whole process right from the start until the end so that it becomes evidently clear that such a transaction is Haram in Shariah:

1. Amazon displays the phone on their website for sale at the cost of Rs 61900.

2. When the Customer approaches the retailer and swipes his credit card, the bank pays the retailer on behalf of him. However, bank will only pay Rs 58438 since the retailer has rewarded the customer with an upfront discount of Rs 3462 as he opted for a no cost emi.

3. Bank pays Amazon Rs 58438 and the credit card company automatically adds the purchase price to the card account’s outstanding balance. Besides Rs 58438, a surplus of Rs 3462 will also be charged to the customer as interest. In short, the bank charges the customer Rs 61900.

4. The customer will pay the amount of Rs 61900 as per the agreed upon monthly installments of Rs 6878 for 9 months.

Now, this whole process has two aspects to it:

a) The relation between the customer and Amazon. This is undoubtedly permissible as it has no aspects of riba associated to it. Once the deal is complete between both parties, Amazon comes out of the picture. Amazon will not be held legally accountable if the customer fails to repay the loan plus interest to the bank and neither can a claim be made against Amazon for a customer’s failure to repay the bank. The transaction between the customer and Amazon concluded the moment they received payment and the phone was delivered to the customer. Thereafter, the monthly installment is an agreement between the bank and the customer.

b) The relation between the bank and the customer is of a lender and a borrower. The customer borrowed Rs 58438 from the bank which is in the hukm of Qardh. Accordingly, reimbursement of the same amount should have been obligatory on him. However, the total amount that he is charged with is Rs 61900 which is inclusive of interests. If the customer does not repay the total amount, he will be regarded as a loan defaulter. This transaction unquestionably constitutes riba.

If merely changing names or the process through which interest is acquired were enough to deem a transaction permissible, then it will further open doors to Riba. Each day, business dealings are evolving and are coming up with new deceptive tactics to lure customers, putting an impression forward that the transactions are free of any elements of interests. Playing around with words has become a norm. From the apparent advertisements of “no cost” EMI, an ordinary person will not be able to understand the technical terms used by such retailers in describing the charges incurred, nor will he be able to breakdown these charges. Adopting such a method does not change Haram into Halal.

The above was a demonstration for the products offered on Amazon with No Cost EMI schemes. Amazon is pretty much transparent in informing their customers about the interest involved in the transaction. However, there are a few online retailers which do not display any interest rate. Neither can the idea of bank charging the usual interest be seen anywhere unless one visits the terms and conditions section. They simply put the monthly instalment figure under the EMI scheme displaying it as “no cost”. This deceives the customer into believing that the transaction is free of interest. But as we already know that no cost EMI is not allowed for banks in India. Therefore, it is not appropriate to believe that this transaction is interest-free.

Flipkart; another well-known online retailer, also display their products as “no cost”. Unlike Amazon, Flipkart gives no mention of the interests involved. This makes people believe that the transaction is interest-free. Thus, we find it appropriate that we explain the “no cost” emi offered by them and prove that interest is still being charged, despite them not displaying the interest amount.

The terms and conditions section from the website have the following clauses attached to it:

7. The discount applicable on opting for this offer is being offered exclusively by sellers/brands and does not amount to EMI/interest waiver extended by the bank

8. I understand and confirm that I will need to pay applicable EMI and interest on total value of the order at the time of payment to the bank in accordance with the terms applicable to the debit card. The interest cost charged by the bank over time is being given back to me upfront at the time of this purchase and netted off in the Invoice amount.

10. The Bank charges annual interest rates according to the reducing monthly balance. In the monthly reducing cycle, the principal is reduced with every EMI and the interest is calculated on the outstanding balance.

This proves to show that the interest amount is not waived by the bank, rather it is passed on to the customer as an upfront discount. But how do we calculate the interest cost charged by the bank since no interest rate is specified by Flipkart? How is it possible to know the discount provided by the retailer when the interest amount is not known? Let us determine this by choosing a product with a no cost EMI option on Flipkart.

For this, we selected Apple MacBook Air Core i5 5th Gen, which is available on Flipkart for Rs 61990 with a no cost EMI of Rs 20664 for 3 months and Rs 10332 for 6 months. (Click here to go to the flipkart page)

Essentially, the Credit card will be charged with a certain amount at a fixed percentage per annum in such a way that the EMI will be Rs 20664 for a 3-month tenure and Rs 10332 for a 6-month tenure.

Let us do the maths taking the 3 months EMI into consideration and try to break it down to identify an estimate of the interest amount that is charged by the bank. As we have seen in the case of S10 smartphone, banks normally charge interest rate in between 12%-15%. This is the standard interest rate charged by banks in India for such schemes. Let us assume that the 3 months EMI here is based on the interest rate of 12% p.a., since that is the case with other EMI options on various sites with the least duration for repayment. Now if we use the PV method, the interest amount can easily be figured out. It comes down to Rs 1218 (since the present value comes out as Rs 60772). We also know that the upfront discount will always be equivalent to the interest charged. This means that the upfront discount given by the retailer is also Rs 1218. Consider the following chart so that it may be easy to understand:

 






Actual cost of the laptop (MRP)

Rs 61990

Upfront discount provided by the retailer

Rs 1218

Cost of the laptop post discount

Rs 60772

Total interest to be paid to the bank on the EMI purchase

Rs 1218

Total cost to be paid by the customer

Rs 61990

 

Similar to Amazon, this laptop, if bought on an EMI scheme from Flipkart, will involve an interest, which in this case is Rs 1218. It goes without saying, that the bank is making a profit of Rs 1218 by taking back Rs 61990, whilst it has only loaned an amount of Rs 60772 (and not Rs 61990) to the customer. This is also a clear form of Riba and hence forbidden in Shariah.

Although, the retailer gives back a discount of the same interest amount to the consumer, yet it should not put us in doubt because the customer is not at liberty to keep the amount for himself or benefit from it in any kind. He should have been the sole owner of the discounted price. Despite this, he is bound to pay it as an interest to the bank. To be more precise, the total price that the customer pays for the product gets divided into two parts. A certain amount of the price is paid in lieu of the product and a certain amount as an interest that is to be paid to the bank to cover the interest cost of the amount that was loaned to him.

Since the above discussion revolves around the RBI rule of No Cost EMI being impermissible, what we have said will only apply to cards issued by banks. Besides that, the ruling may vary on cards issued by private independent financial institutions in India. As a broad principle, if it is known about such a card that it won’t be charged with any interest and neither does it pass on the interest in the form of extravagant processing fee (which is nothing else but a twisted version of interest), then using such a service will be permissible. Similarly, if the dealer or the brand directly deals with the finance company in paying them their profit, without involving the customer, then it will also be permissible. Merely labelling interest as no cost or making a change in the process through which interest is acquired, will not change the ruling of it being prohibited. This is based on the fiqh maxim:

“الأمور بمقاصدها”

“Affairs are determined by their motives.”

To conclude, the ruling of something will be based on its outcome, irrespective of how it is named and displayed.

 

And Allah Ta’āla Knows Best

Naved Akhtar Ibn Shabbir.

Student – Darul Iftaa

Shillong, India. 

Checked and Approved by,

Mufti Ebrahim Desai with the following comment:

 

Hereunder is a simplified Shariah analysis of the issue:

 

1. The transaction between the client and Amazon is Purchase & Sale. This is permissible.

2. Bank pays Amazon on behalf of the client. This is a loan transaction. The principle of a loan is to pay the exact amount back to the lender. However, in the enquired situation, that is not the case. The Bank charges the client interest.

3. Amazon gives upfront discount to facilitate paying the interest. This does not undo the interest charged by the bank to the client. It merely relieves the client from paying the surplus amount. That alone does not convert the Haram transaction into Halal. It will remain an interest-bearing loan and will be regarded as such.

 

11-03-1441| 08-11-2019

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

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