Do cash back contracts involve unlawful interest?
Many companies and high street shops providing certain products and services (such as mobile phones) implement a scheme similar to the following example:
i) The company or high street shop offers a contract over one year (or some other period) in which it provides a customer with a certain product (in the case of mobile phones it is a handset plus a fixed quantity of calls or air time) for a price (say 30 sterling or us dollars) paid in monthly instalments. This amount is to be deducted directly from the customer's account via direct debit.
ii) The company or high street shop will after a period of time return to the customer a lump sum equivalent in amount to what the customer has paid minus a small amount. This small amount therefore seems to be what was paid in exchange for the product or service. (Sometimes this amount is as little as 1 pound or $1 multiplied by the duration of the contract in months). The returned lump sum might be given as a single payment or in instalments distributed throughout the duration of the contract. Also, sometimes it might be conditional to the submittal of the invoice statements to the company by the customer. In some cases two parties are involved; the customer and the company. However, many other times, there are three parties involved in the transaction: the customer, the broker/agent (which is usually the high-street shop), and the service provider (which is usually a large company such as Orange or T-Mobile in the example of mobile phones contracts). The customer is paying the money to the large company while getting cash-back from the broker and the service emanates from the large company.
These cheap contracts attract many people to take them not merely for their basic needs but also as a luxury or for future trading and business since they are able to acquire expensive products cheaply which can be re-sold again at a profit.
Is this scheme Islamically permissible?
Before I clarify the Islamic position concerning this transaction, I would like to summarise certain key principles concerning transactions in Islam more generally. These principles will help the reader to comprehend many issues in modern day Islamic finance.
Bilateral transactions can take two forms in terms of the profit intended [in this life]:
(1) Profitable transactions and
(2) Non-Profitable transactions
A profitable transaction can be a sale transaction or partnership for investing.
(i) A sale transaction [bay'] is any exchange between money on the one hand and any good or service on the other, or any exchange between a good or service on the one hand and another good or service of a different type. If this sale transaction is prompt or hand to hand then no further condition, apart from the normal sale conditions, is mandatory. If a time factor is involved during the exchange process then other guidelines have to be met which are beyond the scope of this fatwa. Leasing and renting are also forms of sale transactions since the service provided is the usage of the object leased or rented.
(ii) Partnership for investing [sharikah]. This occurs when two persons or more agree together to own a property or carry out commercial activities. The partnership could take several forms based on the role of each party. Sometimes both parties participate in forming the capital of this partnership, while at other times both participate in physical activities where no money from either of them is involved. On other occasions, one party invests money and the other makes available his or her experience, and so on. In modern Islamic finance this is known as investment. This type of contract requires a detailed explanation which is again beyond the scope of this fatwa.
Non profitable transactions can be classified into three sub-types:
(i) A loan, which is permissible or encouraged if two conditions are met: the same amount and type of item is returned for the same amount and type and no benefit of any form accruing to the lender should be explicitly or implicitly stipulated in the agreement or the contact. If the loan is of a physical nature then it is called 'areyah while if it is of a monetary form i.e. gold, silver, money or its like, then it is termed qard.
(ii) A trust ['ammanah]. An example of this occurs when money is deposited with another person for safekeeping, a "deposit of trust". One condition of such a deposit is that the trustee should not use the money for any purpose.
The trust can be of a physical nature or of monetary one, however, it should not be used by the trustee ['ameen] i.e., the one who safe-keeps it. The difference between this and a loan is the fact that in the instance of a loan, the borrower borrows the money to use it, whereas with a trust, the trustee should not use the money at all.
(iii) Security, mortgage, pledge [rahn]. This is a contract or an agreement in which the owner of property [rahen] pledges it to another [murtahen] as security for some future obligation, for example the obligation to repay a loan at a future date may be secured by the pledge of the borrower's property. The pledge has the advantage that the owner of the property may continue to benefit from it whilst at the same time using it as a pledged item, for example the owner of a house may continue to live in the house whilst providing it as security for a loan. The pledge [rahan] can be property, gold, silver, money or its like. What ever the nature of the rahn is, the one who keeps it apart from his owner, such as [murtahen], is not allowed to use it at all.
The guidelines mentioned here about these types can be directly and indirectly deduced and extracted from the famous hadith of Ubadah ibn al Samit. The Messenger of Allah (Salla Allahu 'alihi Wasallam), said: "Gold is to be paid for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, same quantity for same quantity and equal for equal, payment being made on the same spot. If these classes differ, sell then as you wish if payment is made on the spot." (Muslim)
This is one of the many miracles of the Messenger (Salla Allahu alihi Wasallam) who was gifted by Allah to have the most profound and eloquent manner of speech.
I would like to mention a very useful tip that helps anyone to apply utmost care prior to indulging in certain transactions. One should be very careful when he or she notices a combination of a profitable transaction and non profitable transaction in one transaction. An area of riba or prohibition is definitely being approached in such a case.
A good example of this combination is what is mentioned in one of the prophetic traditions where the Prophet (Salla Allahu alihi Wasallam) prohibited the combination of slaf (loan) and bay (sale).
Moreover, with the understanding of these types and their conditions, we should realise that any transaction where money is given in return for money should also signal a possible instance of riba or prohibited transaction irrespective of the amount of money involved and the name of the transaction or transactions.
The final indication of riba or prohibition can be clearly identified when we examine the result of the end to end transaction irrespective of its breakdown. We have to be very aware of this fact since, unfortunately, many transactions these days involve exchanges of such a nature. Moreover, I have seen very complex and twisted forms of contracts in the West that are nothing but a manifestation of riba and its central role within the economic system.
Concerning the transaction in discussion here, the cash-back system, it is clear that this involves the exchange of money now for money later in addition to a service and/or product. It is true that they call this transaction a sale, yet we have to be careful of terminologies since we do not share the same terminologies of non Divine systems.
The ultimate consequence of this transaction or transactions is that the customer pays money (which is the price of the product or contract for which he will receive the service) under the condition of receiving in return the agreed amount of cash back plus the service or the product. So all or most of his money will be returned to him in addition to the product or service.
In reality, from the Islamic view point, this transaction is a loan given by the customer to the company or high street shop. The money given by the customer is then returned to him either partially or fully with a benefit added to it, which in our case is a handset plus some free minutes of talk time. So this is in effect a loan that leads to a benefit which is unanimously prohibited. The basis for this unanimous agreement is the implicit meaning of the hadith of Ubadah and the explicit meaning of the statements [athar] of many companions which states "Any loan that gives rise to profit or interest is riba".
Some of the people of knowledge might consider this transaction as a combination of a loan and a sale. A loan since the customer pays A, say it is equal to B+C where B is bigger than C, over a period of time where he/she is going to get back B. So B in this case is the loan given by the customer to the shop or the company while C will be the price paid for the product or the service or both of them which makes this part of the transaction the sale one. If this combination is carried out in a way that leads to riba or to an exchange between money now and money later then it will be prohibited unanimously also. The basis of this prohibition is all the above mentioned prophetic traditions.
Consequently, I conclude that purchasing any product or service in accordance with the scheme described above is totally prohibited as it is a manifestation of riba if the cash back is equal or almost equal to the money paid by the customer. If the cash back is very little in comparison to either the value of the commodity being exchanged or to the price paid by the customer then the transaction is still prohibited since the exchange of money now for a different amount of money later is still involved.
In order to address some concerns and misconceptions that may arise with regard to this fatwa, I would like to make the following additional points.
1) The conclusion mentioned here is not a matter of disagreement between the scholars nor is it even founded on matters of disagreement. It is my habit to mention any strong difference of opinions involved in the discussion. Moreover, I normally do not base my published fatwas on matters of ijtihad or personal opinions, rather on matters of consensus or of similar authority.
2) Some brothers argue that there are in fact three parties involved in the transaction: the customer, the broker/agent (which is usually the high-street shop), and the service provider (which is usually a large company such as Orange or T-Mobile in the example of mobile phones contracts). The customer is paying the money to the large company while getting cash back from the broker and the service emanates from the large company. The broker/agent/shop is getting nothing but a sale commission.
In answer to this I say that it may be true that this scenario is taking place but this does not have any impact on the ruling of the transaction. The customer is paying to the large company and the broker, as a result of the customer taking a contract with the company, is obliged to return this amount in full or in part to him after a while. It does not matter whether the customer carries out the transaction directly with the ultimate borrower or delegates that task to the shop. The fact is that the customer is giving money to someone under the condition that he will get this money back in full or in part plus a phone and a service. This is the summary of this transaction.
3) Others may argue that the contract should be deemed acceptable due to necessity. Here I would like to mention what I always ask people regarding the rule of necessity: Who said that it is a necessity? On what basis was this conclusion made? I do not believe that there is a necessity or even a real need in most of the cases to engage in such transactions. However, if there is a real need, as when there is no other provider for a highly needed service or product, then the customer should take the transaction that is according to his need only, without any further indulgence that would provide for him or her a luxury or satisfy a superfluous business intention. Moreover, once he receives the cash-back he should get rid of the riba amount involved in it just as he gets rid of the interest or riba money.
4) If someone were to agree that the riba or the haram involved in this transaction is due to the cash back, and therefore propose that the service can be used so long as the cash back is disposed of or left to the shop, I would again say that this is not acceptable. It may be acceptable in the presence of a necessity or real need but the scope for this would be confined to a narrow set of circumstances. The main reason for this prohibition is the fact that taking such a contract and signing it is a manifestation of acceptance of a riba/haram-based contract. Let us, prior to indulging in such a contract remind ourselves that that the Prophet (Salla Allahu alihi Wasallam) has cursed "the one who consumes riba, the one who gives it to others, the one who writes it down and the one who witnesses it." He said:" They are all the same." (Muslim). If the one who writes riba or merely witnesses it is cursed, then what about the person who signs the riba based contract, even if he intends not to benefit from the riba?
How to dispose of the riba or the haram money involved in this contract:
The following process helps a person achieve this:
1 - It is essential to identify the time this transaction became known to the person as being haram or the time he or she decided to repent, which must be immediate and without any delay. (let us call this: time of knowledge or repentance).
2 - All earnings and benefits already received before the time of knowledge or repentance are considered to be halal or permissible. Allah says in the Quran "So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire - they will abide therein." [2:275]. This approach was adopted by the Shari'a to encourage people to repent and stop dealing in haram.
3 - If a contract or a transaction took place prior to the time of knowledge or repentance, yet there are some benefits, such as the cash back or the service that the customer is going to receive after this time, then he or she may dispose of either the price or the commodity, which is the service (and the product if any). He should not keep or benefit from both and is not obliged to get rid of both since he can keep the capital as it just explained.
4 - I would like to confirm here that it is difficult to say that the customer who initiated the contract and then came to realise its impermissibility or decided to repent from it MUST get rid of these benefits/interest/surplus once he receives them in the way explained above. Instead, I say that this is recommended and it will place him on the side of safety, especially if he was involved in it out of negligence and wants to repent.
5 - As for earnings and benefits that a person will receive due to a contract that takes place after the time of knowledge or repentance, such benefits and earnings are considered haram as aforementioned.
6 - Ridding oneself of this money means it is to be disposed of in such a way that one does not receive any kind of physical or moral benefit since it is not considered to be sadaqa; rather it is considered to be riba money.
7 - This is the proposed solution for those who have already taken out such contracts and are unable to cancel the contracts before their end-date. Those who can cancel the contract without incurring major loss should do so.
How to change this scenario/scheme to make it Islamically acceptable?
As already noted, the main problem in this scheme is the cash back involved in it. If there were no cash back involved, the contract will be ok. For example, if the shop/broker/agent sells the product for a price equal to the final net amount the customer is paying then it will be a normal sale transaction which is halal. This gives us the first and best option which can be provided for the shops/brokers/agents. However, many will not opt for this option since they do not have the money to do it; rather they are waiting to receive the commission from the company on each new contract.
Another option which can be carried out by the shop/broker/agent is to replace this cash back with another product or service or even coupons which enable the customer to exchange them by pre-selected items (some room for selection is allowed) from limited stores. The reason for the condition of specifying certain stores is to avoid replacing the cash back with coupons that might be considered as money or checks. This is not considered to be a deception to overcome the prohibited part of the transaction rather it will be considered as a normal sale were the customer pays certain amount of money in exchange of two or three known and specified real commodities.
Having said that, I would like also to mention that the suggestions given by some brothers to solve the problem in this scheme where the company or the shop/broker/agent gives the customer the full amount of the cash back in advance will be only valid if the customer pays the price in full at once and then immediately receives the full amount of the cash pack on the spot without delay.
As we have explained earlier that once a time difference between the price in full or in part and the cash back is involved then the transaction is impermissible and a possible instance of riba has occurred.
Before I conclude, I would like to emphasise that this fatwa deals with the above scenario of cash back systems only. Other scenarios may have different rulings.
To conclude, we ask Allah jalla wa Alaa to provide us with halal money and means. Allah knows best.
Finally, as I am expecting many responses to this fatwa, in order to make best use of time, I would like to ask the brothers and sisters, especially those who are not specialised in this field, to read the fatwa carefully beforesending me their views. Other than that, I would be more than happy to receive comments and constructive criticism.
Haitham Al Haddad
8th Thul Qe adah 1426
8th Dec 2005.
In this fatwa, I will briefly explain how the scheme works before judging its validity. Finally, I will explore some solutions for those who already have such contracts.