Taking loans on the condition of adding an interest to them upon repayment
have become accustomed to buying things from banks on installment plans in return for an interest that is added to the original price.
It is to be noted that the bank does not possess the purchased commodity, like a car or a building. The process takes place by the buyers asking the bank to buy commodities for them from their rightful owners. At that point, the bank pays the prices of the commodities in cash and delivers them to the buyers, who pay the price on an installment plan. A contract of sale is signed between the bank and the buyer. It is only after the buyers sign their acceptance to meet the required conditions that the bank delivers the commodities to them.The question is: Is this type of sale lawful? As far as we know, it is unlawful for a person to sell something which they do not possess, which is the case with the issue under discussion. The bank does not possess the car or the building; rather, it purchases them for the buyers upon their request to buy it. Those who deem such type of sale permissible argue that the purchases are not binding on the buyers in case they decline to conclude them. However, they are aware of the fact that the buyers really intend to buy them, otherwise they would not have bought them.The second question is: The bank makes a provision that if the buyer declines to buy the commodity, they will be obligated to pay for the damage which the bank suffers as a result of his decline. (Part No. 11; Page No. 114) Is that provision permissible? The bank claims to have a Fatwa (legal opinion issued by a qualified Muslim scholar) supporting the lawfulness of similar transactions. Is that Fatwa considered valid or is it an act of fraud? This type of transaction falls under the category of exchanging cash for cash with an additional interest. The commodity, whether it is a car or a building, is used as a deceptive means to legitimize Riba (interest). May Allah reward you for issuing your Fatwa in this regard. Such transactions are spreading like wildfire.
The transaction mentioned above is unlawful because it falls under the category of taking loans on the condition of adding an interest to them upon repay. This form of transaction involves the element of deceit that leads to Riba, which has been declared prohibited by the Qur'an, the Sunnah (whatever reported from the Prophet) and Ijma` (consensus of scholars). Moreover, the bank sells the commodity before it comes into its possession, which is also prohibited. The Messenger (peace be upon him) said:
Do not sell what you do not possess
Accordingly, these transactions must be relinquished in obedience to Allah (Exalted be He) and His Messenger (peace be upon him).May Allah grant us success. May peace and blessings be upon our Prophet Muhammad, his family, and Companions.