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Are all Islamic Loans actually Halal?

Answered by Shaykh Abdurrahmann Murad

Jazaak Allah Khairan for this great question. We will not be able to cover every transaction, every type of Islamic loan, but what I can do is speak on one of the most common forms of 'Islamic loans'. This form can be viewed as a long term lease at the end of which one becomes the owner of the object in question outright, or that he becomes the owner after taking up the option to buy out (the price would usually be an amount agreed to upon the initial offering of the contract). 

The Ruling

If the two parties agree to an initial contract of leasing an item with a promise to buy at the end of the lease term and the option to buy is brought independently of the initial contract. This would be lawful. In reality, there are two contracts; one for the lease and one that will be drafted afterwards for the sale of the item. This is lawful because there is a distinction between the two contracts. 

A lease with an option to buy would be Halal as long as three conditions are met: 

1. The owner must guarantee the item in question.  

2. Maintenance and up-keeping services during this form of contract be upon the owner. 

3. It is not lawful for the owner to force the opposite side to taking an insurance policy. 

These three matters have been mentioned in detail in the decree of the International Islamic Fiqh Council. The key issue here, is this transaction a sale or a lease? It definitely cannot be both!

For those interested in an "Islamic" loan, they should ask the cardinal question - what happens if one defaults on a monthly payment?

Usually these ‘Halal’ alternatives will not be in favour of the buyer and most certainly they heavily will favour the seller. With the mixup of two forms of contracts into one…the issue becomes muddled and the rights can be easily lost. If a late fee/penalty is stipulated, this is absolutely unlawful as well, for it would be considered outright Riba (interest)! The Prophetic narration states: "Every loan that generates profit is a form of Riba (interest)."  

Shaykh Muhammad bin Muhammad al-Mukhtar ash-Shinqiti, may Allah preserve him, summarizes this issue in a nutshell, he says:

"Transactions that inlcude two forms of transactions (a lease and a sale combined into one) are unlawful. There definitely lies in schemes of this nature a great degree of obscurity. Lease/rental agreements have their distinct principles and rules in Islam as well outright sales have their distinct rulings and principles. If a contract is drawn up, that includes a rental agreement between two parties, and then after that period of time the sale would be concluded; we don’t know what the condition of the item will be in after that period, would it be fault free, would it be working…etc. So in essence, it would be like selling something obscure, which is forbidden. The Prophet (sallallahu alayhi wasallam) forbade the sale of what was in the wombs of animals…why? We would not be sure if what would be born would be sellable or not, would it live or die."

May Allah bless us all and grant us success in this life and in the next. Ameen