INSTALLMENT LOAN

To lay a claim against a business transaction, there must be explicit and distinctive evidence to prove it. The default Islamic ruling as regard business transaction is permissibility until proven otherwise. As it is the right of mankind to innovate any form of business transaction they deemed beneficial to them and the society – in accordance with the principles of Islam as regard business.

Installment loan is another form of loan that helps the seller to develop his business, helps the buyer to stretch the cost of his purchases over a certain period of time.

A typical example of an installment loan is: “A car which worth is $5000 in cash, a man wants to buy it in installment for a year – to be paying back on a monthly basis, for $6000. The extra $1000 dollar on it will be the profit of the seller”.

If the company you are transacting with on installment deals with interest, e.g. A bank; that will not make a ruling on your own transaction. Your specific transaction with the company on the installment will be what should be judged.

As for the ruling of installment business, Ibn Hajar mentioned in his Fathu Barri Volume 4 page 302 that there is an unanimous consensus among the scholars on its permissibility. We will not hold to this; we should rather say the vast majority of past and present scholars (including all the madhaa’ib) are of the permissibility, because Ibn Hazm in his Mahalla volume 9 page 15 recorded that the Zahiriyyah only are of the view that it is impermissible. Sheikh Al-Albaani also held this Zahiriyyah view. Imam Shawkaani in his نيل الأوطار volume 5 page 152 also recorded that vast majority of the scholars are of the permissibility.

The Zohiriyyah who regard this kind of business as Haram based their conclusion on analogy(qiyaas). They analogise the case of collecting interest on ordinary loan to installment loan and say the two are the same since interest are involved. This definitely is an incorrect analogy. A reason Ibn Hajar recorded there is an Ijmaa’u(consensus) on the permissibility.

Evidences that permit this form of transaction:

1: The hadeeth of Ibn Abbas recorded by Imam Bukhari and Muslim, when the Prophet got to Madeenah, the people of Madeenah would sell crops of the next season/next 2 season before the season comes. And the prophet did not go against this act. He rather laid down a condition by saying “whoever will make a pre-sell of goods, he and the buyer should do so in a known kilo, an agreed upon period”.

This however is what we call pre-selling of goods for a lower price certainly. This may seems selling what is not in your care which is prohibited, but the permission of this kind of transaction is mainly on farm produce.

An example is buying a ton of maize of the next season now. I said to the seller “I want to buy a ton of maize of the next season now; how much will you sell it for me, then he say his price, he accepts because he needs money to purchase a tractor or irrigation machinery for his farming business for example, that is the seller’s benefit; my own benefit is that I will not buy the ton of maize at the present market value, I will have to buy it in a lower price because I am taking a business risk and we are both compromising something”. This was the form of transaction the people of Madeenah were doing which the Prophet did not prohibit.

Then, scholars analogise this form of transaction to installment and deem it permissible also.

2: The hadeeth of Abdullah bn Amru bn Al-‘Aas, the Prophet ordered him to prepare an army, and instructed him to buy a ba’eer for 2 ba’eer on installment, and 2 ba’eer for 3 ba’eer on installment. Ba’eer is a type of camel that is rode and used in lifting loads.

This is another clear evidence that permits installment business.

3: The story of the slave girl Bareerah in Saheeh Bukhari and Muslim; when Aaisha freed her, her owner agreed her price to be 9 uwaaq of silver, every year Aaisha radiya Allahu anhaa will be paying 1 uuqiyah, uuqiyah is a unit of weight of one sixteenth of a pound avoirdupois(approximately 28 grams). And the prophet was aware of this and did not go against it.

Certainly, Bareerah did not worth 9 uwaaq; maybe 6 uwaaq or so, but because Aaisha couldn’t afford paying at once and want an installment plan, they made the price 9 uwaaq to be paid for 9 years.

4: The hadeeth of Aaisha in Saheeh Bukhari that the Prophet purchased a food from a jew and he couldn’t pay at once, he deposited his Armour as down payment and the debt was paid later on installment.

5: There is no difficulty in this kind of transaction; the two parties benefit.

Conditions that must be met:

1: The decision of the actual price and installment plan must be agreed upon at the point of purchase.

2: There must not be late penalty fee. If the buyer couldn’t finish up the payment at the decided time, the seller must not charge extra; else it becomes haram.

3: The installment plan must be fixed and not based on Annual Percentage Rate(APR).

It is not a condition that the seller must tell his gain. Options are so many and prices are so varied. So the transaction will be based on your agreement.