Reducing partnership with a lease is forbidden if the price of each share is fixed at the time of establishing partnership. It is only permissible if the price of each share is determined at the time of each sale.

Finance through Reducing Partnership

Similar Questions

• Buy to let for financing purposes;

• Reducing partnership with lease.

The Issue

Reducing partnership may take different forms. The one meant here is a reducing partnership with a lease (lease-to-purchase). This means purchase to let in order to finance buying houses, cars, equipment, etc. It involves a combination of joint ownership, lease and sale. The goods are bought by the party providing finance for the client with a promise by the financing party to sell its share to the client in stages, on the basis of consecutive sale agreements. The client will hire from the financing party the share not yet bought until the ownership is completely transferred to the client.

Ruling

Reducing partnership is permissible provided that the financing party sells his share, or part thereof, at a price to be agreed at the time of each sale agreement. It is not permissible to promise to buy a share at its price at the time of establishing the partnership (i.e. its nominal value). This is made clear in a statement issued in the fourth session of the Assembly of Muslim Jurists of America. The statement warned some Islamic companies in America against certain irregularities in such transactions. It says: ‘Some Islamic finance companies in America declare that they implement the transaction of lease-to-purchase in this explained form. However, on studying the contracts of these companies it appears that the contract is merely a usurious loan, providing money at interest. As such, these are not contracts of partnership and they are not lawful. Moreover, contracts include the following irregularities:

1. Agreement by the financing party to sell its share to the client at the price paid at the time of entering into the partnership (i.e. its nominal value).

2. The client undertakes to pay all the costs associated with the bought article throughout the duration of the partnership, such as insurance, taxes, maintenance, etc.

3. The client receives all the profit that accrues, and in some partnerships the client bears all the loss, if the article is sold before the end of the term of the partnership.

4. The article is registered in the name of the client alone, without mentioning the financing party as a partner. It is also stated that the return paid to the financing party is interest.

5. Stipulating lease and sale in the partnership agreement.’

Muslims living in the West should exert every effort to establish Islamic alternatives in the area of investment and financing. One such area is to establish an Islamic bank with branches in many American and Western capitals and cities.

Sources

• The website of the Assembly of Muslim Jurists of America (AMJA): www.amjaonline.com.