Mark-UP and Riba
Question:
I am confused with the real life practice of the prohibition on interest and would like your clarification. Interest is haram, but selling product at one price for cash and another higher price in instalments is allowed. If such is the case, when we go to a car dealership and agree on the price for the car in cash or payment right away; then agree on the higher price for the car in 6 month payments this seems to be allowed?
The same situation can be said for buying houses- you have your cash price, then your instalment payment price- over 30 years? But this 30 year price is loaded with interest? One added factor is that there is usually a third party that pays for the product (car or house) right away for the buyer and then the seller becomes some one else. Is the prohibition of interest only on money and not on products?
Whereas when one goes to get a loan of money from a seller (bank), then they mark-up the loan to be paid over time, which is clearly haram. But explain the ruling when it comes to products, even visa credit cards (as a third party) allows the buyer to pay over instalments after both buyer and seller agreed on the cash price of the item.
Answer:
Your question was discussed earlier in a recent post. Please check the archives on the website.
The crux of the matter is that increasing the price due to time is not always unlawful and Riba. Thus, all the four Sunni schools of Islamic law permit increasing the price when the payment is deferred. The seller has a right to sell his commodity at whatever price he wishes, and for whatever reason he wants. He may increase the price because he just wants to, saw his friend selling at an increased price, or due to deferred payment. This is totally up to him. However, what is necessary is that he must fix the price and an agreement must be made before the customer departs.
The seller may also have two prices. One price for paying on the spot and the other for deferred payment. If the buyer agrees on one of the two options and the price is fixed, then this is not considered Riba.
For example, I proposed to sell my car to you and said: “If you pay cash, then the price is £2000. However, if you pay in instalments, the price will be £2500. Now, after giving thought to the two options, you decided to pay £2500 in instalments over the period of five months.
This is permissible and not considered to be Riba, for firstly, it is not giving a usurious loan. Secondly, it does not entail exchanging of usurious commodities in which similarity, etc is necessary. It is merely a sale, and the seller has a right to sell his commodity at whatever price he wishes. If I was to sell my car at £2500 for cash payment, wouldn’t that be permissible? Then there should be no bar in me selling the car for the same price on deferred payment.
However, it should be remembered that once the price is fixed, then it must not increase or decrease. For example, if the buyer was unable to pay the instalments on time, then the seller can not increase the price, for that is considered Riba. Here, once the price is fixed in the session of contract (majlis), it never changes.
I hope to have been able to clear the confusion you have had on this issue.
And Allah Knows Best
[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK