Answered by: Alimah Siddiqa al-Farsiyyah
Assalamu’alaikum Mufti Sahib,
Please kindly explain to me why a conventional loan annuity interest that is originally Haram due to Riba can change to Halal after the said interest is converted to Ujrah and the said Loan Transaction is converted to the ‘Aqad Ijarah. Jazakallah khair.
بِسْمِ اللهِ الرَّحْمنِ الرَّحِيْم
In the name of Allah, the Most Gracious, the Most Merciful
As you have mentioned, taking a conventional loan annuity interest is mainly haram due to the involvement of interest (riba). In Islamic banks, although it may seem as if only the terms have been changed, the reality is that this whole method has been replaced by a halal alternative in order to avoid interest.
The way ‘Aqd Ijarah works is as follows: when a customer intends to buy something because of which he is in need of a loan, he approaches the Islamic bank and enters into the agreement of leasing (ijarah). During the contract, everything is clearly mentioned from how long the lessee wants to lease the item out for, to the number of predetermined rentals (‘ujrah) he’s required to pay to the lessor in intervals. This is due to the obvious reason that the leased item is owned by the bank and not the lessee himself, and in the contract of ijarah, the leased item stays in the ownership of the bank at all times.
Through such a method, every detail of the contract is clearly mentioned in the beginning. The rentals are predetermined and fixated and cannot be changed or increased by the lessor in the possible cases where the lessee pays the rent late.
If the lessee continues to pay late, and in order to avoid the adverse consequences that may result from the misuse of this method, it is permissible for the bank to charge a charity fee that would be given in charity on behalf of the lessee who delayed the payment of the rent. This charity fee can by no means become a part of the income of the bank (lessor) as this would be identical to the charging of interest. Due to these main reasons that make this method different from the method of conventional banks, the ‘Aqd Ijarah and ‘ujrah is a permissible method of transaction.
Only Allah Ta’ala knows best
Answered by Alimah Siddiqa al-Farsiyyah
Checked and approved by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham
 An Introduction to Islamic Finance 114-120