Halal Financing
The Question
I need your advice on this matter. I was gonna buy a car, a friend of mine suggested I could use halal financing available in our town. I was wondering if anyone can advise me if this looks permissible in the first place. www.ansargroup.com is offering interest free car financing. Also, I found another Islamic organization in Toronto that's offering interest free Home Financing at www.umfinancial.com
Your advise and suggestion on this matter would be highly appreciated.
The Answer
I apologize for the delay ... actually I was waiting to get a chance to go to the two links you provided and study the terms of the contracts they provide. I guess since this may not happen anytime soon, let me state some rules which I hope everybody will benefit from regarding those transactions.
The first rule is: determine the nature of the deal, does it look like a loan or like a purchase? See one problem with the intervention of a bank for example, is the fact that it turns a purchase into a loan. Instead of paying money in exchange for a house, now you are paying money for money ( i.e. loan) involving a third party (bank).
Islamically, if you take a loan from any person or institution, you have to pay the exact same amount back no matter how long a period the loan is for. E.G. If you lend me $20,000 for 10 years, I have to pay you $20,000 after 10 years. Off course I can be generous and pay you more, but this cannot be a condition in the contract. If you put a condition that I have to pay you $20,000 + $1, then it becomes interest. On top of that, this loan should not bring you benefit from me in any indirect way. Like you expect me to give you gifts throughout those 10 years. In fact this is how the bank makes its money. It takes loans from you [ i.e. when you deposit money in the bank] and it pays you interest at a certain rate. Then it gives loans to others [businesses, etc.] and it takes interest from them at a higher rate. And the difference between the two interest rates is the profit they make.
On the other hand, purchasing has more flexibilities. It's totally ok that I buy a car from you, which is worth $20,000 currently, but since I'm going to pay it over 10 years, you ask for $21,000. This in fact is studied in the books of Fiqh under special chapters such as al-Bay' al-Mu'ajjal and Bay' as-Salam. As long as both parties agree on a price before the purchase, the transaction is sound and Allah knows best. Keep in mind that interest is also possible in purchasing, but it's limited to certain items which are described in a Hadith. In fact, the hadith only mentions 6 items, gold, silver, wheat, barley, dates, and salt. Within those types, interest can happen in two ways, Riba al-Fadl and Riba an-Nasee'ah. And the scholars have differed quite a bit on what other items are analogeous to those types. This might take long to explain, but I don't think this is very common today, except for maybe exchanging gold for gold or gold for silver, or money for money [if we make money analogeous to gold or silver].