Aw. Respected mufti sb are you aware of any car financing/leasing that is Shariah compliant within the UK? Jzk. Look forward to hearing from you soon.
The best option would always be to try to buy a car with cash, possibly with a small personal loan if necessary. This ensures one stays within their means and avoid dabbling in finance. However, I appreciate that this might not be possible for everyone, especially if they require a vehicle for business purposes.
There are some companies that offer second-hand cars through 0% financing. Herein, the vehicle is sold outright to the customer on instalments. The seller would often increase the price of the car to cover what would usually be received through interest payments. Beyond this, the price is fixed apart from late fees. https://www.interestfree4cars.com offers this arrangement. The difference between this 0% finance product and those provided by other retailers is that the customer becomes the owner of the car. Thus, it is a pure and simple sale.
The late fees have perturbed some scholars as an invalid and sharia non-compliant condition. However, as per the ruling of the majority of scholars in credit cards, if one is certain that they will not default on any payments, it would be permissible for them to take up this.[1]
However, I have been informed by the company that they do have a resident scholar who has approved of their product as Sharia-compliant. So, it is advised to show the contract to a scholar if you decide to take this option.
Leasing
With leasing a car, there are a few pitfalls that put a question mark on its sharia compliance. Fundamentally, it relates to liabilities. In the laws of ijara (hiring/leasing) in Islamic law, the lessee is only liable for the damages to the asset if it results from negligence or wrongdoing on his part. Wear and tear should be excused. In most leasing contracts, the lessee is liable to pay damages on anything beyond their restricted acceptance of wear and tear as per their guidelines.
Moreover, as insurance relates to the ownership of the product, the lessor should be liable to take on the responsibility of the insurance of the car. Leasing contracts almost exclusively mandate the lessee to take out comprehensive car insurance.
These are invalid conditions and invite question marks on the sharia compliance of car leases.
In the acceptability of wear and tear, almost all lessors have very restricted guidelines. Thus, one may argue that there is a custom of levelling these guidelines upon the lessee, and thus this condition is acceptable according to custom (‘urf).[2] As for the insurance, one should negotiate this with the lessor and get their commitment to pay for insurance. This might mean that your quote will go up, and that is acceptable.
However, abstinence from these contracts is advised.
Hire-Purchase or Personal-Contract-Purchase
These are two common forms of car financing.
In Hire-Purchase, one leases the car for a set duration at a fixed rate. Once the term is finished, the ownership of the car is transferred to the lessee. This type of arrangement has been ruled as impermissible and invalid according to shari’a by leading scholars of Islamic Finance, namely Mufti Taqi ‘Uthmani.[3]
Most major retailers offer 0% finance on newer vehicles through a PCP contract. In simple terms, one pays a deposit and agrees to a monthly payment for a fixed duration. At the end of the term, one has the option of paying a balloon payment to own the car outright or return the car back to the retailer.
There are a few matters in these schemes which have been questioned by contemporary scholars. An important clarification to make is that one should always review the contract itself, as HP and PCP contracts vary from retailer to retailer.
Firstly, as the PCP involves leasing the car for the specified term, the sharia-compliancy issues raised in the previous section about leasing the car is applicable to PCP.
Scholars have also raised the issue that PCP amounts to a transaction within a transaction, whereby one is hiring and purchasing the car through one transaction. This understanding is valid if it is such that one pays a monthly payment for a specified term throughout which they are leasing the car, whereupon the transaction becomes a sale once the term is complete. However, conventional PCP contracts on the market do not operate like this.
When financing a car through a conventional PCP scheme, one is leasing the car during their specified term. The sale is enacted when/if the balloon payment is made. Again, one must look at the legal details of their contract, but conventionally, the option to transition from hire to purchase is made by the customer. Thus, assuming that during the term of payments, one is leasing the car and there is a clear option one must exercise to buy the car with the balloon payment, a PCP scheme should be permissible in principle. This would not amount to a transaction within a transaction, but rather a single transaction, with the possibility of another transaction in the future. Crucially, this second transaction (the transaction to buy the car) is optional!
Another issue some scholars raise is that as the car is owned by the lender (not the customer until the balloon payment), the owner should bear the liabilities of ownership such as insurance. Most 0% finance schemes on newer vehicles offer free insurance for a period of the term. If one can get the lender to make the insurance payments through the term, this would be acceptable.
Based on these three assumptions that: i) the contract specifies that the payments during the term are for leasing the car, and ii) one has the option to buy the car with a balloon payment or opt out entirely, iii) the sharia-compliancy issues of leasing are mitigated, then 0% PCP schemes have the scope of being deemed permissible.
And Allah knows best.
[1] Mufti Taqi ‘Uthmani, Contemporary Fatawa, 117.
[2] مجلة الأحكام العدلية (ص: 39) (الْمَادَّةُ 188) : الْبَيْعُ بِشَرْطٍ مُتَعَارَفٍ يَعْنِي الْمَرْعِيَّ فِي عُرْفِ الْبَلَدِ صَحِيحٌ وَالشَّرْطُ مُعْتَبَرٌ , مَثَلًا: لَوْ بَاعَ الْفَرْوَةَ عَلَى أَنْ يَخِيطَ بِهَا الظِّهَارَةَ , أَوْ الْقُفْلَ عَلَى أَنْ يُسَمِّرَهُ فِي الْبَابِ أَوْ الثَّوْبَ عَلَى أَنْ يُرَقِّعَهُ يَصِحُّ الْبَيْعُ وَيَلْزَمُ عَلَى الْبَائِعِ الْوَفَاءُ بِهَذِهِ الشُّرُوطِ.
[3] Mufti Taqi ‘Uthmani, Fiqh al-buyu’, 1:523-4.
Answered by:
Maulana Ikramul Hoque Miah
Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel