Are hire purchase contracts permissible?

Question: There is a contract here to purchase a car where you pay in installments and then after say 3 years you have the option to purchase the car for a lump sum or give the car back. Is such a contract allowed? So you pay in installments but its not yours until you get to this last payment?

Answer

Firstly, if the agreement is such that you lease the car for a period of 3 years and during this you pay the monthly rent to the company and at the end of the 3 year period you have the option to return the car or purchase the car at a price. 

Such a type of contract is allowed as this contract is essentially a rent contract followed by the option to purchase or return the car to the company. There is a single rent contract that exists in this case and once the period of rent ends then you have the option to either return the car or purchase i.e there is no contract upon the aspect or purchasing the car and therefore this is permissible. 

The prophet (saw) said

إنّما البيع عن تراض

“Verily trade is only by mutual consent”

Secondly, If the agreement is such that you lease the car for a period of 3 years and during this you pay the monthly rent to the company and then at the end of the 3 years you become the owner of the car, this contract is a type of hire-purchase agreement. There are two contracts that are made in this type of agreement, one is the rent contract of the car and then the second contract where the ownership of the car is transferred from the owner to the renter at the end of the rental period. 

The first problem with such a contract is that there are two contracts that are being conducted as a part of a single agreement. 

Ahmad narrated 

نهى النبي صلى الله عليه وسلم عن صفقتين في صفقة

“The Prophet (saw) prohibited two contracts in one contract”

Secondly, a question arises, how can a rent agreement convert into a sale? To answer this many people tried to propose that there is no sale that takes place rather the car is gifted automatically at the end of the rent agreement period which is again unacceptable. Even though some scholars accepted that since it’s a gift - ‘hiba’ therefore it can be gifted even before the product actually is available, however this is a weak opinion and the stronger is the opinion of the Hanafis which is also mentioned in Almabsoot, Badai and Hashiyat ibn Abideen that it is not permitted to gift what does not exist or what is expected to be available in the future. And this is the reality of this contract. How can the car be gifted to the renter even before the rent agreement is completed i.e before the vehicle is made available? As long as the owner does not has the possession of the vehicle he cannot gift it.  

Abi Saeed Al Khudri reported

نهى رسول الله صلى الله عليه وسلم عن شراء ما في بطون الانعام حتى تضع ، وعما في ضروعها الا بكيل او وزن وعن شراء العبد وهو آبق ، وعن شراء المغانم حتى تقسم وعن شراء الصدقات حتى تقبض وعن ضربة الغائص

“The Messenger of Allah (ﷺ) forbade selling what is in the wombs of cattle until they give birth, and selling what is in their udders unless it is measured out, and selling a slave who has fled, and selling spoils of war until it has been distributed, and selling Sadaqah until it has been received, and what a diver is going to bring up."

[Reported by Ibn Majah, Tirmidhi, Ibn Shaybah, Ahmad, Dar Qutni, Bayhaqi, Ibn Hazm]

Ibn Abbas reported

عَنْ ابْنِ عَبَّاسٍ أَنَّ النَّبِيَّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ نَهَى عَنْ بَيْعِ الْمَضَامِينِ، وَالْمَلَاقِيحِ، وَحَبَلِ الْحَبَلَةِ

“The Prophet (saw) forbade the trade of Al-Madameen, Al-Malaqeeh and Habal al Habala.” Reported by Tabarani. 

Al-madameen is the sale of what is in the wombs of female camels. Al- malaqeeh is the sale of the breeding qualities of camels" (i.e. for stud). Habal al Habala was a transaction in the days of ignorance where A man would buy the unborn offspring of the unborn offspring of a she-camel

Therefore the hiba part of the agreement is invalid and furthermore since there are two contracts in one contract, the original contract is invalid.

This is the reason that such a hire-purchase agreement is invalid and therefore not acceptable. 

In short, it is compulsory for the contract to be crystal clear before it is signed, i.e whether it is a hiring contract or a sale contract  and whether it is an immediate payment sale contract or deferred payment sale contract. This is while keeping in mind that the mixing of two contracts is not allowed as is the case today where hiring contracts convert into sale contracts if the buyer is interested in purchasing the product, this is because there are effectively two contracts in one contract in such a situation and hence the contract becomes invalid.

Hope it clarifies.

Ustadh Abu Khaled al-Hejazi