Advance Pay Day Business: Is the Arrangement, Riba?

Question:
I have been living in Canada for the last 6 years. I am trying my best to keep myself away from all the evil things here. I have quite a few matters to discuss. Here is one of them.

Here in Canada, we have a few companies doing the "ADVANCE PAY DAY" business (APD), where the client comes 2 to 14 days earlier than his pay day and borrows the money from APD branch. The APD branch charges mark-up on the amount lent to the client.

Another scenario would be where a company or individual has an invoice maturing on the 15th of the month, but due to money problems, they come to APD and "discount" the invoice or bill on a lower amount. For example, the APD give $97 for $100 invoice, maturing a week after.

Now, I would like to know whether it is okay to do this business, where the risk is higher and the APD business owner does not know whether he will get the money on the due date; secondly, it's always unsecure lending, so the factor of profit and loss is definitely involved; thirdly, the borrower is using the money for his short term money problems and not for any long term commitment (normally the amount range is between $500 and $3000); and lastly, it saves the borrower from any embarassment and most probably, from any big loss.

I would really appreciate your response. Is there any better or modified version of the business that you could suggest in this regard?

Response:
The arrangement that you've mentioned is simply Riba, which is obviously not acceptable to Islam. When the lender gets a higher amount as opposed to the amount he lent, the difference falls within the definition of Riba. You mention that the return that the lender/company/bank discounting the bill, is going to get, is not certain; my understanding is that it is almost always certain (except insofar as the amount gets defaulted, and the agency refuses to pay). This kind of default risk does not make an arrangement riba-free.

Riba is an arrangement wherein a lender gives an amount to a borrower, and charges an increment on for having lent the amount for a given duration. If the amount that is being charged is definite, and the lender is not prepared to forego the higher amount under any circumstances, then it is nothing but riba.

I would suggest that either these borrowers (not being able to meet their day-to-day needs) should be more careful in their spendings, or they should find a lender prepared to offer them a loan on an interest-free basis. A third possibility could be to get the amount to be borrowed, indexed, so that when they return the amount to the lender, it is not the face value of the borrowed money being returned, rather, real value (purchasing power). However, this may not be very relavant to the case(s) you have mentioned, because they demonstrate short-term borrowing arrangements only, where inflation doesn't play a big role.

I cannot think of any other interest-free solution for short-term borrowing for consumption purposes. So all I can suggest is that if the person in need is a God-fearing Muslim, he should try as best as he can to manage his routine expenses within the pay/income that he/she is getting. In case the person is hard-pressed, and cannot find anyone willing to lend on an interest-free basis, then of course, the interest arrangement can be tapped as a last resort. There should be consolation in the fact that i) the person is hard-pressed, ii) he is resorting to a Riba arrangement due to lack of interest-free alternatives, and iii) he is not demanding/receiving riba (which is clearly haraam under all circumstances), rather being exploited into paying it. It is hoped that in such a case, the Almighty will be forgiving.

Views: 342