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The other day I was discussing Islamic mortgage companies in the U.S. with some friends and one of them criticized the practice of these mortgage companies charging too much money. This opened a debate among us whether there is a restriction in the Shariah (Islamic law) for how much profit a business can make. Some argued that charging too much money is unethical and should not be allowed. I argued that the Shariah does not care how much profit you make as long as the process to making that profit is permissible. In other words, Islamic law is concerned with how you got the money and not how much. A person is free to sell his/her property at whatever price he/she desires.
If a person is overcharging for an item, then this is an outside issue and has nothing to do with the validity or invalidity of the business transaction itself as long as they both mutually agree to go forward with the sale. In Islam, a business transaction of any type is seen as a contract between the seller and the buyer. A business contract in Islam is usually as follows:
- Seller makes an offer of a specific item with a specific price
- The buyer decides to move forward with the sale and accepts the offer
- There is an exchange of goods between the seller (receives the money) and the buyer (receives the product)
The above is a simple example of how a business transaction works in Islam. As long as both parties agree to move forward with the sale with the agreed upon price (cost of the item) and product (item being sold), this is considered mutual consent in Islam:
“O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent.” [Qur’an 4:29]
So as long as the seller does not force the buyer to purchase the product, he/she can sell it for how much ever he/she wants. Mutual consent is one of the conditions of a valid contract in Islam due to the Prophet Muhammad’s (pbuh) statement that:
“Transactions may only be done by mutual consent.” [Ibn Majah]
It may be the case that the buyer does not like the price yet still decides to go forward with the sale (which is a common phenomenon in the marketplace). However, this will not make the sale itself unethical or forbidden because it was done out of mutual consent and the seller is at liberty to sell his/her own property at whatever price he/she wants. Even very conservative websites like Islam-QA see nothing wrong with this type of transaction. In one of their questions regarding buying a home on installments, they state:
“If the bank or the developer owns the house – i.e., it has bought it from its agents or others, or from the builder – then it may sell it for a price to be paid by installments that is higher than the price if it is paid for immediately, and it does not matter if the profit is worked out in the same way as interest is worked out, or if the profits are increased according to the increase in the period of installments, so long as it is purchased for a specific price that will not increase. For example, if the price of the house is 100,000, but it is sold for 120,000 to one who will pay the price in installments over twenty years, or it is sold for 130,000 to one who will pay the price by installments over thirty years, that is permissible on condition that there be clear agreement on one of these options.”
An incident took place during the lifetime of the Messenger of Allah (pbuh) which I think is worthy of mention here. Anas bin Malik narrated that:
“The people said: ‘O Messenger of Allah, prices have become too high; fix the prices for us.’ The Messenger of Allah -peace and prayer of Allah be upon him- said: ‘Allah is the One Who decrees prices, Who takes and gives, and He is the Provider. I hope that I will meet Allah with no one among you making any claim against me concerning issues of blood or wealth.” [Ibn Majah]
Based on this hadith, the scholars stated that the market price should be let to flow in accordance to the dynamic of the market itself. No one should manipulate the current price. If the supplies are plenty but the demands are not, automatically the price will fall and the vice versa. It is common in Muslim countries that prices of animals for slaughter go high during Eid-ul-Adha because the demand is high but they fall right back down after Eid is over. Many Muslims complain about these prices during Eid but the sellers are just following the market price.
According to the majority of Muslim scholars, the pillars of a valid business contract in Islam are the following three. These are fundamental to the existence of a valid contract according to them:
- Offer and acceptance – Seller makes the offer and buyer accepts based on mutual consent
- Buyer and seller – There is a buyer and a seller
- Price and goods sold – There is a clear specific price mentioned and what is being sold is also clear
Now, there are two exceptions in Islamic law where it is forbidden to sell something beyond the market price:
- When selling something to an outsider who does not know the market price, therefore, the seller takes advantage of the buyer’s ignorance. In this case, the buyer has a choice, after he finds out that he/she has been cheated, to either accept the deal or request a refund. This is because the Prophet Muhammad (pbuh) said, “Do not meet incoming traders and whoever meets them and buys from them, when the trader reaches the marketplace he has the choice (of annulling the transaction).” [Ibn Majah]
- When the seller has a monopoly over a product which is a basic necessity for the people and exaggerates the price beyond the market value to such an extent that it becomes harmful because most cannot afford it. For example, there is only one grocery store in the area and the owner decides to push up the prices really high that most people cannot afford it. This act would be forbidden to the seller because food is a basic necessity and the government can even intervene and force him/her to reduce it. However, if there were multiple grocery stores in the area, which means plenty of competition, then if one of those stores exaggerated their prices, then that would be allowed because people have other options.
Here is what the renowned scholar Sh. Al-‘Uthyameen said on the subject:
“There is no specific limit on the profit due to the general meaning of the verses ‘Allah has permitted trade‘ [Qur’an 2:275] and ‘O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent‘ [Qur’an 4:29]. So long as the buyer is pleased with the price and purchases the product, then it is permissible even if the seller gets a huge profit out of it. However, if the buyer is among those who are naive about the market prices, then it is not permissible for the seller to deceive him and sell it to him for more than the market price…When children, women, or those ignorant of the market prices purchase from them, they sell to them with high prices, but if someone who is aware of the market prices buys from them, they sell it for much less.
[So in general] There is no limit on the profit and the seller can get as much as he wants because increase and decrease in prices are subject to supply and demand. When the demand for an item goes up, then so do the prices and when the demand goes down, then so do the prices…Yes, if someone has a monopoly over a particular thing and he refuses to sell the product except at the [very high] price that he has set, then those in authority would interfere and force him to sell it at a reasonable price that will not hurt the seller nor the people. It doesn’t matter if the monopolizer is one seller or many so long as you cannot buy that product except from them. It will be an obligation on those in authority to interfere and force them to sell it with a profit that will not hurt them nor the buyers. But if the item is available in multiple places and there is no monopoly over it, then there is no harm for the seller to make as much profit as he wants provided that the buyer is not naive about the market price.”
Now if we were to use the above knowledge to apply to the Islamic mortgage companies in the U.S., then two points can be made:
- The mortgage prices are not very different than the market value. And even if they are a little overpriced, then that is their right. It’s their product and they have the freedom to charge as they please. They are not forcing anyone to buy their products.
- Even if we accept the argument that their prices are too exaggerated, then it still would not make it forbidden for them because there are other options in the marketplace like renting or buying something smaller than your ideal home so you can afford the Islamic mortgage.
Even though Islam allows no restriction on profit in general, the following advice in Fataawa al-Lajnah al-Daa’imah should be considered for those seeking to make money through business:
“It is prescribed for the Muslim not to go to extremes in seeking profits but rather to be easy going when he buys and when he sells, because the Prophet (peace and blessings of Allah be upon him) urged forbearance in all dealings.”