Financing Construction as a Loan

12-3-2018 | IslamWeb

Question:

The government gives small projects to area organizers and activists such as building community centers, toilets and utilities. Once the job is done, the cost will be paid by the government. One of my relative funding these projects for which he charge 10% of the fund he gave. He says it’s as a commission. Can we consider this as interest ?

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Answer:

All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad is His slave and Messenger.

If the financing is a loan in return for interest to the lender, then it is Riba (interest and/or usury) that is forbidden –whether it is called commission or anything else.

One of the permissible alternatives in financing the construction of real estates, is the so-called parallel constructing: in which case the funder agrees with the client on the description of the property that he wants to build and its price, and then the funder agrees with the contractor to build the property with the same specifications requested by the client, provided that the two contracts are separate. This method is permissible in principle.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) stated:

“It is permissible for an institution to carry out a contract of construction with the customer at a deferred price (paid by the customer) and the institution then makes another contract with a constructor to construct the needed buildings, during the period agreed upon with the customer, with the same specifications in return for a price which the institution pays immediately to constructing company, provided that these two contracts are not linked to each other (i.e. they are separate).” [End of quote]

Allah knows best.