Ethica Institute of Islamic Finance™

How can I convert a conventional interest-based sale into one acceptable in Shariah?

When a good or service (not cash, gold, silver, securities or similar tradable instruments) is offered for sale through an interest-based transaction (e.g. car loan, property mortgage, education loan, etc.), it is permissible for the buyer to propose to the vendor the following: that the vendor combine all future principal and interest payments into one lump-sum amount and divide this new amount into installments, provided any late payment charges go to a designated charity rather than to the vendor (e.g. a house sells for $150,000 with a 7% interest payment payable in monthly installments over a 20 year period; the buyer proposes that the bank negotiating the transaction add the $150,000 principal to all future interest payments, and divide the new amount into monthly installments); it would be permissible to vary the installments (i.e. flat, increasing or decreasing installment sizes) provided all the amounts are pre-agreed; such a transaction avoids the riba created by interest payments and penalty charges, allows the seller to sell at any price he chooses, and permits the buyer to pay in installments.

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