Interest on insurance accounts and student loans : lease purchase and student loans in Islam

Fatawa Question

Dear Br. Dr. Monzer, Assalamu Alaikum. I hope you are well. Please see below two important questions on lease purchase and Shari’ah compliant student loans. I will appreciate your views on the query. Best regards, Habib Lease purchase : my husband wanted to take advantage of the 50 % tax rebate on new cars for small businesses and we wanted to ask if it was haram if we purchased a vehicle for his business this way. After extensive research with the car buying companies they said the only way we could purchase this vehicle is through a \ 'hire purchase \ ' agreement where they do not charge us any interest except only if we default on repayments. In Sha Allah we will not be defaulting because the money is available but we wanted to be able to claim back 50 % of expenses through the tax offset available to us. They said that this was the only way available that the Australian consumer law would allow. So therefore no interest would be charged if payments were made on time. I would like your opinion on this matter before we go ahead and do anything. Please reply as soon as possible. SalamAlaikum Purpose A Hire Purchase arrangement is an agreement to purchase a vehicle subject to payment terms to the finance company. You will automatically own the goods when you pay the final payment, different to a lease. How it works Term : the term of finance agreement can be from 1-5 years. Deposits : deposits are not required. You might choose to trade in an existing vehicle in order to put in a deposit to reduce the amount to be financed. Residual / balloon : you can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10 %-40 % of the cost price, but may be as low as one dollar, dependent upon the equipment. This decision is usually influenced by the level of monthly payments you are comfortable with. Owner of the goods : the financier retains legal title (i.e. : owns the goods) during the term of the agreement. You automatically secure ownership upon payment of the final installment. Accounting benefits : for income tax and GST purposes, a hire purchase agreement is treated very differently to a finance or operating lease. Under GST, a hire purchase agreement is treated as a "taxable supply" on the commencement of the arrangement between the hirer and the financier. With a hire purchase arrangement, there deemed to be a sale of the equipment from the financier to the hirer, the GST liability arises at the commencement of the arrangement. Even though the total amount payable under the agreement will be paid by periodic installments and ownership of the equipment will not pass to the hirer until the final repayment. The financier, being the supplier, is responsible for the payment of the GST liability. Therefore the amount financed is inclusive of GST, and your monthly repayments are not subject to GST unless you are on a cash basis for GST. (Seek advice from your accountant). You can claim the interest component of all repayments. The depreciation of the goods is fully tax deductible providing goods are used 100 % for business purposes. The goods you purchase become an asset that shows on your balance sheet for your business. The goods will also be a contingent liability until the end of the finance agreement. You may be liable to pay fringe benefits tax and should refer to the ATO at : www.ato.gov.au / businesses for further information) You should always seek advice from your accountant on the rules and how they apply to your particular business and equipment. Please get back to me as soon as possible because this offer is only available in Australia until the end of the calendar year. Thank you for your email. Though I can give you my views, I do not feel comfortable to give a Fatwa (as I do not feel qualified to do so). The transaction you mention is very similar to the one used by Islamic banks (Ijarah Wa Iqtinah), but of course the contract that will be used is not going to be Islamic. However, some scholars have permitted use of conventional finance if you need the car for business and Islamic option is not available. To confirm this, I am copying this email to Dr. Monzer Kahf (monzer@kahf.com), who may be in a better position to give you an answer. Dear Professor Ahmed, I hope this finds you well. My name is Alaa' Al-Samarrai and I am contacting you on behalf of the Student Affairs Committee (SAC) of the FEDERATION OF STUDENT Islamic Societies (FOSIS) to seek your advice and expertise. We are currently working on a project entitled "ethical student loans" which aims to promote and make accessible Shari'ah compliant student loans to Muslim students in order to eliminate obstacles in funding for higher education. Therefore, we are consulting scholars and academics from a range of backgrounds in order to gain more clarity surrounding the issue. As you're probably aware, students in the UK are required to pay their tuition fees for University degrees upfront, and the general cost of tuition fees for one year, based on 09 / 10 figures is £3,225 (subject to change every year). Students have the option of requesting a tuition fees loan from the Students Loan Company which will pay their fees on their behalf. Students then pay this back in installments once they are earning over £ 15,000 a year, at a 9 % cut of whatever they earn above that. Repayments include the cost of inflation (arguably, interest) on top of the sum of the loan itself. In light of the above, what is the permissibility of student loans according to the Shari'ah ? And if it's contradictory, what in your opinion would be the best solution / viable alternative to the problem ? Your thoughts and advice would be highly appreciated. Best regards, Alaa' Al-Samarrai

Fatwa

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Publication Date

2009-12-16

Main Subjects

Financial and Accounting Sciences
Educational Sciences
Islamic Studies

Topics

• Islamic jurisprudence
• Education
• Students
• Loans
• Purchasing
• Rent

No. of Pages

4

Data Type

Fatawa

Language

English

Record ID

BIM-730592

• APA
• MLA
• AMA