Question Summary:
Buying through the banks by instalments Question Detail:
What is the ruling on buying through the banks by instalments in return for paying an additional amount on the price of the item being sold? The bank does not own the item; I take it after signing the contract with the bank and agreeing to pay the instalments. I buy the item and they give it to me. If the bank makes a condition that if I change my mind, I have to pay whatever the bank loses as a result of that. Would this be permissible?
Answer :
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
It appears that you are referring to the Murābahah mode of financing which is offered by Islamic banks/financial institutions. In simple terms, Murābahah is the sale of a commodity for a deferred price which includes an agreed profit added to the cost.[1] One of the key points of consideration is that the financier must have ownership and possession, physical or constructive, of the commodity before selling it to the client. Many complex procedures must be adhered to in order for the Murābahah to be Shari'ah compliant, theoretically and practically.
For example: Person A wants to purchase a house and does not have the finance. He presents his situation to an Islamic bank/financial institution. The financier (Islamic bank) agrees to enter into a Murābahah with Person A. The following steps will be followed[2]:
Person A and the financier sign an over-all agreement whereby the financier promises to sell, and the client promises to buy the house.
The financier appoints Person A as an agent for purchasing the commodity on its behalf and an agreement of agency is signed by both the parties. The financier may also buy the house directly.
Person A purchases the commodity on behalf of the financier and takes its possession as an agent of the financier, if the financier does not buy directly. (The commodity is in the risk of the bank/financial institution at this point).
Person A informs the financier that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it from him.
The financier accepts the offer and the sale is concluded whereby the ownership as well as the risk of the house is transferred to Person A.
As per the condition of "promise to purchase," the court may force Person A to purchase the commodity or pay actual damages to the financier. The actual damages will include the actual monetary loss suffered by the financier, but will not include the opportunity cost.[3]
And Allah Ta’āla Knows Best
Hisham Dawood
Student, Darul Iftaa
Chicago,U.S.A.
Checked and Approved by,
Mufti Ebrahim Desai.
[1] An Introduction to Islamic Finance by Mufti Taqi Usmani pg. 105
[2] Taken from An Introduction to Islamic Finance by Mufti Taqi Usmani pg. 107
[3] An Introduction to Islamic Finance pg. 126
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