I need some clarification on Interest (money). I usually buy from a muslim retailer who sells furniture,appliances etc. He has a cash price on each item. Sometimes i wouldn’tt have the cash to take the item at once so i decide to take it and pay him an amount for lets say three months. The item was needed immedaitely (refrigerator) so i couldn’t save for three months and take it at the advertised price..He then uses this three months and works a price i have to pay each month. The price i pay at the end of three months is significantly higher than the cash or advertised price. Is the difference in prices interest on his behalf?
simple interest = (Principal x Rate x Time) / 100
he has the principal which is the cash price
he has the time since it is three months
and he must have the rate since the price after is higher than the advertised price
Reason for asking is that he would argue that he is not involved in interest etc. and is very ignorant in his answers when asked about the difference in prices. I would like to educate him if what he is doing is wrong and would like to have the islamic evidence to support.
Answer: Wa Alaikum As Salaam,
When selling an item, it is permissible to have two prices from which a person can chose from. A person can sell an item on a cash basis for a certain price, and can offer the same item on a credit basis (delayed payment basis) for a price higher than the cash price.
For example, a person can sell a refrigerator at $8,000.00 to one who pays immediately, and can sell it for $8,500.00 to one who wishes to pay after three months. This increase on account of a delayed payment is permissible and is not interest, since there are valid reasons to show the difference in price at a later time. In fact, the value of the item itself increases on the market on account of demand, and the change of the value of the item which will have a direct effect on the market price. Hence, the increase in the price due to a delayed payment is permissible and is not considered as interest. However, there are a few conditions attached to conducting transactions in this manner. These are:
- Both prices must be fixed and known to the buyer and seller at the time of the sale of the item. That is, the price for the item if one is paying immediately must be fixed and known, and the price for delayed payment must be fixed and known.
- Time must not be the determining factor for the increase in price. Hence, with the continuous increase in time, the price of the item cannot keep on increasing. It is well known and accepted that a commodity purchased at present would be cheaper than the same item purchased after three months. Hence, taking the changes in market value, a person can fix a price for an item which is to be ‘paid-out’ for, after three months. However, if one does not pay at the end of three months, then the price cannot increase if it is paid for in the fourth month or fifth month. This will be interest and will not be allowed.
As such, in your case, it will not be permissible for the seller to calculate the total price of the item by using a rate of interest and time.
In the case of the credit payment basis, the price must be fixed before the sale is concluded, and the amount you must pay each month must be fixed and known to both parties (i.e the buyer and seller).
- While negotiating the price and the method of payment, it must be agreed to by both parties as to what price you are taking the items at, and when will you pay for it. The price which you have both agreed on, cannot change due to the increase in time taken to pay for the items.
And Allah Knows Best.
Mufti Waseem Khan.