Hidden Interest and Confusion
Question:
The answer that Shaykh Muhammad ibn Adam al-Kawthari, UK, gave (on the Hanafi Fiqh forum) is confusing me. He said:
“If at the time of agreement, a price is fixed in a way that it does not change during the course of the payment period, then this is’ permissible. The car-dealer has a right to sell his car at whatever price he wishes. This also includes him considering the interest rate and charging the combined price. This is not regarded Riba, as the price has been fixed. What is ‘not permissible is that the price of the car is not determined, and the debtor is charged an excess amount due to late payment.”
My question is:
A traditional loan stipulates a fixed amount to be borrowed (principal) for a fix amount of time (term) and a fixed amount of interest. They do however have a penalty for not paying the loan. However the Islamically approved institute will also eventually put a penalty on someone who doesn’t pay. What’s the difference here?
Does this mean that I can go to a bank….tell them to hide the interest payments in the monthly payment therefore making everything is ok?
e.g.: borrow 10000 for 1 year at 10% interest—-haram
Borrow 10000 for 1 year. 10 equal payments of 1100—ok?
Answer:
What I mentioned was NOT regarding taking a loan with interest. Taking an interest loan is decisively unlawful in Islam.
What I am talking about is when a person purchases something on deferred payment. Now, the seller may have two prices. One for paying on spot, and the other for differed payment. If the customer chooses one of the two options, and agreement is made on it before departing, then this will not be considered Riba, and will thus be lawful.
| EXAMPLE: | Total Price | Payment | |
| Choice 1 | 1,000 | Upfront | |
| Choice 2 | 1,500 | 5 monthly payments of $300 | Customer chooses this offer, and purchases the item on these terms. Not riba. |
However, if the options were put before him and they departed before agreeing on one, and the item was sold, and left it to the convenience of the customer, then this will be Riba and unlawful.
Example:
| Terms of contract:td> | Total Price | Payment | |
| Pay within 30 days: | 1,000 | Within 30 days | |
| If you fail to pay within 30 days: | 1,500 | 5 monthly payments of $300 | This is a ribawi (usurious) contract. |
With the above, it is evident that to charge a fix amount of interest is by no means permissible. Any excess amount charged for giving a loan falls into the category of interest. However, if a particular commodity is sold, the seller has a right to sell it at any price, as long as the price is fixed and agreed upon before departing from the client.
And Allah Knows Best
[Mufti] Muhammad ibn Adam
Darul Iftaa
Leicester , UK