Markups and riba

I am confused with the real life practice of the prohibition on interest and would like your clarification. Interest is haram, but selling product at one price for cash and another higher price in installments is allowed. If such is the case, when we go to a car dealership and agree on the price for the car in cash or payment right away; then agree on the higher price for the car in 60 month payments this seems to be allowed? The same situation can be said for buying houses- you have your cash price, then your installment payment price- over 30 years? But this 30 year price is loaded with interest? One added factor is that there is usually a third party that pays for the product (car or house) right away for the buyer and then the seller becomes someone else. Is the prohibition of interest only on money and not on products? Whereas when one goes to get a loan of money from a seller (bank) then they markup the loan to be paid over time, that is clearly haram. But explain the ruling when it comes to products, even visa credit cards (as a third party) allows the buyer to pay over installments after both buyer and seller agreed on the cash price of the item.
 

In the name of Allah, Most Compassionate, Most Merciful,

Your question was discussed earlier on the Hanafi list [see archives at www.sunnipath.com  ].

The crux of the matter is that, increasing the price due to time is not always unlawful and Riba. Thus, all the four Sunni schools of Islamic law permit increasing the price when the payment is deferred. The seller has a right to sell his commodity at whatever price he wishes, and for whatever reason he wants. He may increase the price because he just wanted to; saw his friend selling at an increased price or due to deferred payment. This is totally up to him. However, what is necessary is that he must fix the price and an agreement must be made before the customer departs.

The seller may also have two prices. One price for paying on the spot and the other for deferred payment. If the buyer agrees on one of the two options and the price is fixed, then this will not be considered to be Riba.

For example, I proposed to sell my car to you and said: “If you pay cash, then the price is £2000. However, if you paid in installments, the price will be £2500. Now, after giving thought to the two options, you decided to pay £2500 in installments over the period of five months.

This is permissible and not considered to be Riba, for firstly, it is not giving a usurious loan. Secondly, it does not entail exchanging of usurious commodities in which similarity, etc is necessary. It is merely a sale, and the seller has a right to sell his commodity at whatever price he wishes. If I was to sell my car at £2500 for cash payment, wouldn’t that be permissible? Then there should be no bar in me selling the car for the same price on deferred payment.

However, it should be remembered here, that once the price is fixed, then it does not increase or decrease. For example, if the buyer was unable to pay the installments on time, then the seller can not increase the price, for that is considered to be Riba. Here, once the price is fixed in the session of contract (majlis), it never changes.

I hope to have been able to clear the confusion you have had on this issue.

And Allah knows best

Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK
www.daruliftaa.org