Assalamu aleikum wa rahmatullahi wa barakatuh!
In my country prevails a credit system, with bank interest. I know it’s haram. But some companies offer real estate and other products by installment. But in their contracts there’s an item that if I delay the installment payment, I have to pay the back interest. If I have an intention to pay in time is it haram for me to enter into and sign such a contract with the bank?
Jazakumullahu khairan!
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
There are two issues related to the query. The procedure of the transaction and the procedure of the payment. While you have enquired about the procedure of payment, we wish to briefly comment on the procedure of the transaction itself.
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 the loan.
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
However, if the seller himself sells the house on fixed instalments 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 instalments, the transaction may be valid in Shari’ah, if the necessary conditions of sale are fully observed[1]. In the enquired case, if the purchased item, for example the house, is financed by the bank, that is clearly an interest bearing transaction. Merely making timeous payments does not render the transaction permissible.
And Allah Ta’āla Knows Best
Mufti Arshad Ali
Darul Iftaa, Jaamia Madinatul Uloom (Trinidad)
[1] In principle, it is permissible to sell or purchase a commodity on fixed instalments at higher price than the cash price on condition that the deferred date of payment and price is predetermined and agreed upon at the time of contracting the sale.
If upon the delaying of payment, the client is required to pay interest, it would be permissible for him to enter into such a contract on condition-
- a) He has a clear intention that he will always pay the instalments promptly.
- b) He has a good reason to believe he will never become a defaulter and never have to pay interest )Contemporary Fatawaa (Mufti Muhammad Taqi Usmani) pg 200,211)