Wa `alaykum As-Salamu wa Rahmatullahi wa Barakatuh
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
2- The Shari `ah allows financing but prohibits interest.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
Financing may be done on the basis of a sale contract or ijarah (leasing) contract. In ijarah, the financier owns the property and collects rentals on the part he or she owns while also offering to sell its share in the property on installments to the occupant.
There is nothing forbidden in this, especially when the contract itself is reviewed by respected Shari’ah experts as what Islamic banks usually do.
The same thing happens with sale financing, usually called murabahah. The bank purchases with you the property and sells you its share in it on installments at a higher price.
This sale with a higher price is permissible as it is included in the implication of the text of the Qur’an itself:
“And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.” (Al-Baqarah 2:279)
You need to notice that the Shari`ah prohibits increments in loans but does not prohibit financing itself. Therefore, once financing is done by means of sale and/or ijarah, it becomes permissible.
The problem arises from similarities of both approaches in house financing. But to understand the purpose of the prohibition, you really need to look at cases of dissimilarities such as debt rescheduling or debt discounting.
Almighty Allah knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.