Quesiton 101 : Assalamualaikum ya Syaikhs. May Allah always protect you and your families.

I have a question regarding financial transaction. In a company sometimes we make advance payment either it’s to employee as salary advance or to supplier as advance payment for future goods or service. Is this advance considered as loan? I know that every benefit taken from a loan is riba. Then are we allowed to have terms and condition to the loan?

For example, a company may give salary advance to an employee. The company then ask the employee to work overtime to pay the salary advance. Another example to supplier. The company may ask the supplier to supply the goods in certain time period maybe faster then the usual time.

Jazakallahu khair may Allah reward you abundantly

Answer : Walaikumussalam Br Arif Rachman

When an employer gives an employee salary in advance prior to the work done or gives advance payment to suppliers for goods prior to them being supplied, in both these cases it is not considered a loan. Rather it is an advance payment for the service or goods respectively.

Once the contract is agreed upon, the transaction is done and both sides owe to the other their part. Employees must be paid by the employer upon completion of the work agreed upon. Paying it in advance, but after the contract, is still fulfilling the obligation of paying the salary, i.e. hire costs for the service provided.

In a somewhat of a similar manner, paying the cost of goods after the contract is signed/agreed to but before supplying the goods is also permissible and merely one side completing the handing over of their part of the contract. In fact there is a transaction called ‘salam’ and ‘salaf’ that Arabs practiced prior to Islam and then Islam regulated it with fair terms and conditions. In such a transaction, both sides make a transaction agreement, i.e. contract, by specifying exactly what is owed by both sides and specifying the term when the goods will be submitted, then once the contract is agreed upon with these details, then the buyer hands over the money to the seller/supplier in exchange for the supplier supplying the goods as specified at a later day – such as handing over dates once they are produced on the tree.

So when a businessman makes a contract to pay the supplier early, that is permissible so long as what the supplier has to give is specified at time of contract and then not changed thereafter and so long as the time when the goods will be supplied is mentioned at the time of the contract. So it is thus not permissible for the buyer to give advance payment for certain goods and then expect later for the supplier to do other favors or to give the goods earlier than what was mentioned at the time of the contract. Note though that at the time of the contract, the buyer can say that if the goods will be supplied by six months then he will pay a certain amount and if the goods are instead supplied in one year then a certain lesser amount will be paid for that. Then the seller agrees to one of the two terms and conditions and then no one should change thereafter.

Likewise an employer may pay the employee early but not demand anything extra after the contract is agreed upon. Prior to the contract, they can consider numerous different offers of duration, amount, etc, but the two sides must agree on one terms and conditions at the time of the contract and then stick to it.

The idea here is that one of the conditions for a sale contract to be valid in Islam, the amount to be paid should be specified, as should be the full necessary description of the goods or services that affect the price, including the term when goods may be supplied if delayed or the payment if its the one delayed, all this should be specified at the time of the contract and agreed upon by both parties.

I hope this answers the question Br Arif? If not please let me know so as to elaborate.

And all our gratitude to Allah for showing us a fair, just and wise way to conduct business.