Answered by Shaykh Muhammad ibn Adam al-Kawthari
I own a consulting business and need to draw a large sum of money for the purchase of my home. The Tax laws in Canada allow for one to draw money out of their own company at an interest rate comparable in the market. In essence, I would be taking a personal loan from my own company and expected to return the money back over a span of years at an agreed upon interest rate. Will it be lawful for me take a loan from my own company and pay interest back into my company? Ultimately, would I be paying interest to myself?
In the name of Allah, Most Compassionate, Most Merciful,
According to what you have stated, if you are the sole owner of the business with the rest of the people merely working as employees, then it would be permitted for you to take out money from your own company and then return it with an additional amount.
The juristic principle (qa’ida al-fiqhiyya) states:
“Consideration is given to the substance of the transaction and not the terms used.” (See: Majallat al-Ahkam al-Adliyya, item no 3, explained in detail by Ali Haydar in Durrar al-Hukkam Sharh Majallat al-Ahkam, 1/21)
Thus, regardless of whether you term this as taking out a loan from your own company and repaying it with interest or something else, in essence it is not considered taking out a loan, for it is your own money. One cannot take a loan from one’s self, hence, this is not considered a loan and neither will you be paying interest on a loan. You will merely be setting aside some amount of your own money and using it to purchase a house, after which you will put some money back into your savings.
However, you must remember that the above ruling is when you are the sole owner of the business, as mentioned earlier. If you jointly own the business with others, then it would not be permitted for you to take out an interest bearing loan. The reason being is quite clear, in that there are other people involved, hence it will be as though you are using some amount of your own money and taking out a loan for the remainder from your partner/s in order to purchase the house. When you return the money back to the company, you will be paying interest to the other owners of the company; hence it will not be permitted.
And Allah knows best
Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK