What is the ruling of paying earnest money – a non-refundable down-payment for a purchase. I wish to purchase an automobile. The company that I wish to buy the automobile from ships it in from abroad when I agree to buy it. Before the company will do this, I must pay up-front a certain amount of money. If I decide later not to make the purchase, the company keeps the deposit. This money will not be refunded. Is this a lawful business practice?
Sheikh `Abd Allah al-Rîmî
This is money that is paid by the purchaser to the seller before receiving the purchased item to demonstrate that the purchaser is serious about making the purchase. The money is later deducted from the purchase price when the purchaser completes the transaction.
This practice is a matter of scholarly disagreement among Islamic jurists, the majority of whom disallow it. There are a number of scholars who permit it, however, including Ahmad b. Hanbal.
These scholars cite as evidence for its permissibility that Nâfi` b. al-Hârith purchased a property for `Umar b. al-Khattâb from Safwân b. Umayyah. The condition of the purchase was that if `Umar was happy with it, the purchase would be completed. Otherwise Safwân would be entitled to a certain amount of money.
When Ahmad b. Hanbal was asked whether or not he agreed with what took place in this hadîth, he said: “What else can I say? This took place with no less than `Umar.”
The scholars who permit this kind of transaction also point out that the hadîth related by `Amr b. Shu`ayb that prohibits it is a weak hadîth.
Sheikh `Abd al-`Azîz b. Bâz, the former mufti of Saudi Arabia, considered a non-refundable deposit to be permissible. He writes in his Fatâwâ Islâmiyyah (2/384):
There is no problem with taking a non-refundable down payment. This is the most correct of the two opinions that have been expressed by the scholars. This is on the condition that both the buyer and seller agree to it and the purchase has not yet been transacted.
The Islamic Law Council has published the following resolution on this matter:
After reviewing the papers presented to the Council in reference to the question of non-refundable down payments, and after listening to the discussions that have been put to the floor, the Council has made the following determinations:
1. The down payment under discussion is one where the buyer gives a certain sum of money to the seller as a deposit with the understanding that when the buyer receives the item being purchased, the sum will be counted as part of the purchase price. In the event that the buyer forfeits on the purchase, the seller keeps the deposit.
This deposit is legally treated like a rental agreement, since it is also a sale of benefits.
Exempted from this general permissibility is any sale where contractual validity is dependent on one of the two parties receiving his share of the exchange in full at the time of sale, as is the case with forward buying.
Also exempted is any sale where contractual validity is dependent on the full exchange on behalf of both parties at the time of sale, as is the case with currency exchanges and like-for-like transactions.
Likewise, in sales with a mediating reseller who sells to the buyer at a higher price (murâbahah), such down payments cannot be received by the party ordering the purchase if the transaction is at the stage where the purchase is being negotiated. At the actual time of sale, it may be received.
2. It is allowed for the seller to receive a down payment in sales where the date for concluding the sale is clearly defined. This down payment becomes part of the purchase price when the sale is concluded. It becomes the exclusive right of the seller in the event that the buyer defaults.
And Allah knows best.
Source: Islam Today
-- Al Arabiya Digital