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Taking Interest Based Loan from Banks

Answered as per Hanafi Fiqh by ShariahBoard.org

Assalamualaikum Warahmatullah

My question is regarding taking loan from an American bank instead of an Islamic Financing bank as the actual interest and the tax implications are exactly the same in both systems of loans. Please review the example below:

Both the banks charge us the same amount of interest e.g. 500 dollars for 12 months which will equal 6000 dollars at the end of the year.

If my total income in a year is 80,000 dollars then I can deduct this interest from my income. In other words, the government will not charge me tax on the 6000 dollars that I have paid as interest in the whole year. The formula we use for tax deductions is as follows:

Interest paid in the whole year (in mortgage) minus Interest money getting back from Tax deduction. This amount results in a 0 being returned in Interest based income. Since the interest based income is equal to 0, can we just take the loan from an American bank instead of an Islamic financing scheme? My humble request to Mufti sahib is to please take a look at this matter very seriously and take some time to analyze the above calculation.

Please note that I am paying $1240 in rent and If I add $500 dollars more on top of this rent (which I will have to pay in interest every month), I will be able to have my own home. I am confused regarding what I should do as this is the first time I am trying to buy a home.

 

Wassalam

الجواب و باللہ التوفیق

Assalamualaikum Warahmatullah Wabarakatuh

1- Interest based loan, regardless of which bank or financial institution it was taken from, is impermissible unless the circumstances are of true and dire need. For example a provision for permissibility of such loan will become available if one’s life, wealth or shelter is absolutely dependent upon taking interest based loan. However, the situation described in your question does not fulfill the definition of such dire need instead it is for one’s ease, thus taking such loan is impermissible for you.

2- The second thing to keep in mind, just as earning interest is haram, paying interest is also considered haram. Since in the situation mentioned in your question you have to pay interset every month, this transaction is impermissible. It has been considered as impermissible as per the ahadith of Rasulullah Sallallaho Alyhi Wasallam, to even perform or support a task related to an interest based transaction, let alone earning or giving interest.

3- If you need to buy a house, the ulamah kiram have provided the detailed method of doing so i.e. the bank buys the house (which you want to buy) and then sells it to you. There should be a contract between the bank and the buyer about an elevated price of this house which will be paid on an installment basis. (Reference taken from Fatawah-Darululoom, Answer Number 9055, Fiqahi-Muqalat, Pg 262, Vol1, Fatawah Usmani).

فقط واللہ اعلم بالصواب

This answer was collected from Shariahboard.org. It was established under the supervision of the eminent faqih of our era, Hazrat Shah Mufti Mohammed Navalur Rahman damat barakatuhum.

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