KMart and its parent Sears is cutting into the definitely usurious practices of those rent-to-own companies with a program that might just be halal. Before we get into that, they are targeting the same customers, people, whose credit is bad, who want things they do not need. So although the KMart plan may be halal, it doesn't mean it is right. On the other hand, for someone who is busted due to no fault of his own may find a halal method of buying tools to start a ditch-digging business or to replace a income-generating computer just ruined by a spilt pot of tea, the deal may be creative and unitive.
The KMart program looks pretty bad given the press reports of how under the program a $300 TV ends up costing $415 at the end of the 18 month term. Here is an example in the article:
In an example provided by Sears, customers could buy a $400 item or group of items by making 10 biweekly payments over five months of $33, then decide whether to keep making payments, return the merchandise, or spend $220 to buy out the lease for a final cost of $553. That would be the equivalent of a 114 percent annual rate, according to Mierzwinski.
Here are some typical if rather liberal rules among the scholars of Islamic finance:
Murabahah: In this type of transaction, the bank purchases the property and then re-sells it to the buyer at a fixed profit. The property is registered in the buyer's name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of the contract, with the agreement of both parties, so no late payment penalties are permitted. Banks usually ask for strict collateral or a high down payment in order to protect against default.
Ijarah: This type of transaction is similar to real estate leasing or rent-to-own contracts. The bank purchases the property and retains ownership, while the buyer makes installment payments. When payments are complete, the buyer gains 100% ownership of the property.
Those two options seem pretty straightforward, but the devil is in the details. Did the buyer get the very best deal on the property? Are the payments above market rent? Is usury just built into the deal under another name? As one Moslem remarked, often these deals are "pork labelled beef."
The KMart offer as it stands is not halal, so it is contrary to Christian rules as well. They have two contracts regarding one event, and ownership does not truly pass.
Why the KMart deal above might be made halal if it were more clearly worded. Note that KMart considers it a sale, but one has the right to return it. If you can return it, then you never owned it, you were renting it. So why does KMart not just call the first part a rental for a 5 month term? That would be contract one. One may extend the rental just like any other rental.
At the end of the five month rental, KMart may offer a new and separate contract: would you like to buy what you are renting for $220? Since the option currently is yes or no without recourse, then just make that a second separate contract. So far, still halal. The offer is two separate contracts, with the same options. Also, the costs are based on the very best price the companies otherwise offer. So far so good.
If the rental price is well above market, then it is not halal. But what is the market for an assortment of tools or the rental of a computer? Should KMart discover an unknown market for rentals of a popular item, competitors are free to step in and compete to the benefit of the renters.
The second contract is to buy the goods at a residual price, which is probably higher than the market price, but it is in any event a voluntary transaction. On a $300 TV there is no market, for used TVs at any price. Even GoodWill will not take them, and you have to pay to recycle them in most places. So that item is not a good example. A man who has built up a good ditch digging business with the tools on rental may very well be willing to pay the price since he is used to those particular tools. In any event, he is free to go buy other used tools elsewhere.
And the same thing with the computer. A used $500 computer may very well has a resale value of $50 after 5 months, but that computer may be priceless to he who created his tools of the trade and put them on that machine. Of course he can send the computer back and buy a used $50 machine, but who knows, the point is in both instances, the prospective buyer is not obliged, therefore it is fair.
It seems to me the KMart deal is as a practical matter halal, although as described it is haraam, quite the reverse to normal problems. Since it seems the one contract can be divided into two separate unrelated contracts, each usury free, then it should be no problem to make this deal halal.
If KMart declines, this opens up an opportunity for entrepreneurs to get into the business.
I invite criticism of my reading of the deal.
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