BUYING ON INTEREST

QUESTION:

As Salaamu Alaikum,

I would like to know if financing directly from the manufacturer/owner is halal? No banks involved. Eg a company is offering their products for sale under a 5year financing term with a 5% interest rate. Although they are calling it interest they are the manufacturer and seller of the product. You as the buyer will be getting a opportunity to own the item and pay off for it over the 5 year period at a higher price.

ANSWER:

Wa Alaikum As Salaam,

It is not permissible for you to enter a sale agreement in which you have to pay interest. The act of paying interest or receiving it, is not permissible whether the transaction is done with a bank, a credit union, a company, an appliance store or even another individual.

Therefore, the transaction which you have mentioned involves interest, and it will not be permissible.

In a situation like this (where a company offers products for sale under a 5 year financing term with a 5 % interest rate), you can negotiate with them and change it to a  complete sale transaction, instead of one which is ‘financing’. In a sale transaction, the company can fix the whole complete price from the beginning, with a markup (which they want to make on the product), and then sell it to you (for that price). The total amount to be paid can now be divided over a period of 5 years (60 months) and you can pay them a monthly installment.

Seeing that the company is the manufacturer/owner/seller of the product, they can sell it at any price they wish. Therefore, by way of an example, if the sale price of the product is $100,000 and the interest they want to make on it is $5,000, you can speak to the company and inform them that you are willing to purchase the product at a fixed and final price of $105,000 which you will pay over a period of 5 years. In this manner of doing the sale, there will be no agreement to pay interest, and it will not be an interest-based transaction. The reason they wish to charge an interest is only to make a markup on the product. Therefore, when both you and the company agree that the fixed and final price is $105,000, the total price (to be paid) will be solely against the commodity and will include the original value of the product as well as an added markup. In this revised transaction, you will avoid the payment of interest. However, the terms of your contract with them must be that of a sale transaction and not that of a ‘financing’ transaction.

And Allah Knows best

Mufti Waseem Khan

15/12/2021