House & Car Purchase with Deferred Price Payable on Installments
(This was published as video on April 4, 2019 as blog. We publish here the relevant text)
We hear many opinions about the sale with installments where the deferred price is higher than the present price. We know the scholars differed and they gave three rulings for this transaction:
- The first is to forbid it, on the base that it is not permitted to increase the price in exchange for delaying the payment, this was the view of Abu Bakr al-Razi al-Jassas al-Hanafi, and is the view of a few contemporary scholars.
- The second said that it is permitted to sell with deferred payment, at a higher deferred price than the present price. This is the view of the majority of scholars from the Sahaabah, Taabi’een and the four Sunnah schools: Hanafis, Malikis, Shaafa’is and Hanabalis. This view was also preferred by Ibn Timiah and most contemporary scholars such as Mohammed Rashid reda, Abdul Wahab Khallaf and Badr Metwally Abdul Basit.
- Third view approved this transaction reluctantly, one who took this view is Professor Dr Rafik al-Masri, as in his book “Islamic Development Bank.
The main reason for the differences between scholars rulings with regard to this transaction, that they considered the buyer owns the purchased item in full ownership – title & possession – upon receipt of the item on the time of sale, i.e., on exchange of the contract, and that the price becomes a debt payable in the future at the end of the term. Accordingly, the increase in the price is in exchange for the delay in making the payment, and this is riba / usury. That is why some disallowed it, and whoever allowed it reluctantly, they did so because we know this transaction was permitted by the early scholars. It was called “al Bai3 Al Mo’ajel fehi Al Thaman” which translate The Sale on which the payment of the price is deferred or delayed.
If this transaction is executed the way mentioned above, and the buyer acquired the asset with full ownership at the time of exchange, accordingly, the price of the item will become due now, and as it is agreed that the price will be paid in the future, then the price become a debit due for payment at some time in the future, or a loan. If the buyer pays in the future more than the present price, then such increase can only be construed as riba. Which will make this transaction to be definitely not permitted under the sharia laws.
The issue here is the ownership, if the ownership transferred to the buyer at the time of exchange, then the increase in the deferred price, will not be lawful. But if the ownership is transferred to the buyer after he pays the price at the end of the deferred term, i.e., after completion of the sale or completion of the contract, even if what he paid is higher than the present price, it will become lawful and in compliance with the Shari3a, provided that the sold asset has Manfa3a or use or utility which could be used by the buyer and could be quantified.
Let me explain, the buyer immediately receive the purchased asset, although he have possession, but he does not fully own it. Because the contract of sale is not completed until after the seller has received the price. Therefore, the ownership becomes complete (title ownership/ deed & possession) only after the seller has received the money. Until then the ownership is incomplete (possession only). So the item purchased stays owned by the seller –although it is in the possession of the buyer- until the buyer pays the price at the contracted time.
According to this arrangement, this transaction is no longer treated as a transaction in which the sale is completed and the ownership is transferred to the buyer when the sold item is delivered or handed over, which made the deferred price to become a loan payable in due time, and accordingly, any increase in the price will be construed as riba. No it is not like this now, actually the Seller will keep ownership of the sold item till the buyer pays for it, and thus the delay payment is countered with the delayed transfer of the ownership deed.
How this makes this transaction lawful? The answer requires us first to define and explain the meaning of two terms in Islamic economy, the first is Al Manfa3a, the second is AlKharaju Bel Dhamani or Alghonmu bel ghormi.
Al Manfa3at, is the utility, the benefit or the usefulness of an asset, for example a house, its Manfa’ah is living in it and the value of this house’s Manfaah is the rent payable each month, same with car, its manfa3a is the use of this car and its value is the rent per month. We can rent a house or a car for a particular period for a specific amount of money, during the rental period, we receive the rent on monthly basis, and at the end of the rental period, we get back our car and house. So in essence a rental agreement is actually a sale of manfa3at the car or the house for a specific period. During the rental period we still own the house and the car and at the end we get our asset back and we keep it. So, the asset goes back to its owner, If during the rent period, the car stopped working for any reason other than default or negligence by the party renting it. We the owner are responsible to repair or replace it. Same with a house, if it become not suitable for living, then we have either to make it fit or refund the rent.
The second term or principal is “al Kharaju Bel Dhamani” or “Al ghonmu bel ghormi”, which simply says that the income is for the party guaranteeing the asset, in other words, the income goes to the party who will lose if the asset is damaged.
So if the seller kept the ownership and he is the party who will lose if the car was damaged during the rental period (for reasons not attributable to the buyer, i.e., other than infringement or default or negligence by the buyer). And as the buyer is using the car which he doesn’t own, then the buyer is responsible to pay the seller a rent for using of the car during the period till he pays its price and own it.
Accordingly, this transaction will be arranged as a sale which will be completed at the end of the transaction, and as the buyer took possession of the asset (car or house) before he actually paid for it and owned it, then the value of the manfa3a during the period he used the car before he owns it belongs to the seller, who still owns the asset.
Accordingly the increase in the deferred price above the present price is the value of the manfa3at which the buyer used before he become the owner of the asset. The rent of the house which he occupied, or the rent of the car which he used, before he paid and owned the asset, such rents belong to the Seller, so such rents if added to the present price will make the deferred price higher, this increase is fully justified being the price of the manfa3a or utility the buyer received during the deferred period. And under this arrangement, the transaction becomes in compliance with the sharia principals, and accordingly halal.
Considering the above, such transactions are only permitted for the sale of assets which have manfa3a and the asset which will not change or be consumed during the transaction duration. So this transaction is only permitted for sale of assets such as a car, vehicles, equipment, houses, office building, stores, …etc., and in general terms, any item which is able to provide manfa’at or a useful usage or utility while the asset itself stays reasonably intact. This transaction is not good for an item which has no manfa3a other than consuming the asset itself, such as food, money, fabric, materials, wood, agricultural products, etc., because all these items have no manafa3 which the buyer can use and the price of such manfa3a can be added to the present price, as there are no added value, the deferred price should not be higher than the present price.
The other condition we must state in this transaction, as explained before, the full ownership of the asset, being a house, vehicle or a machine, can only be transferred to the buyer at the end of the transaction, after he pays the seller the deferred price.
The difference between the deferred price minus the present price must equal the estimated value of the manfa3a which the buyers received before he pays the seller and complete the purchase contract.
Following are the calculations of a transaction, where the buyer bought a car on 24 months installments:
Present Price of the car £24,000
Payable on 24 monthly instalments £1000 each
Monthly rent of the car £350
At the start of the first month after the buyer pays the first installment £1000 he already purchased 4.17% of the car, and the seller still owns 95.83% of the car; on which the buyer is due to pay rent on that part which is owned by the seller = monthly rent £350 x 95.83% = £335 payable at the end of the month.
At the start of the 2nd month after the buyer pays the second installment of £1000 he already purchased 8.33% of the car, and the seller still owns 91.67% of the car; on which the buyer is due to pay rent on that part which is owned by the seller = monthly rent £350 x 91.67% = £321 payable at the end of the month.
And so on, every month the buyer make a payment on the price installments and owns more of the car, seller owns less, and the buyer pays rent on the part owned by the seller, which goes down every month till it become zero on the last month.
The calculations showed us that:
The Present Price £24,000
The deferred Sale Price £28,025
The difference is the value of Manfa3at the asset or part of the asset which is still owned by the seller but used by the buyer.
This transaction (and principal) can also apply to residential houses with installments running up to 10 years or more.