Assalamu’alaikoom Ya Syekh,Please kindly explain to me why a conventional loan annuity interest that is originally Haram due to Riba can change to Halal after the said interest is converted to Ujrah and the said Loan Transaction is converted to the ‘Aqad Ijarah. Jazakallah khair.

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.

There is a great difference between forbidden transactions, such as Riba, and permissible transactions, such as selling or hiring, and so forth. Allah Says (what means): {But Allah has permitted trade and has forbidden interest.} [Quran 2:275]

The interest (Riba) in a loan is forbidden. Loans are among the contracts of kindness (not intended for profit) and not among the contracts of trade that are intended for profit. If someone lends money to a person, then it is not permissible for him to condition an increase upon the repayment the loan, regardless of how large or small the amount of the interest is.

As for the contracts of compensation and trade, such as the hiring contract, among which is the renting/leasing contract that ends by ownership; taking a fee for this is lawful because the two contracts are different in essence: The loan contract and the lease contract. Subsequently, their effects and rulings are different.

However, some people may be confused because the contracts of some Islamic financial institutions are fake [not a real trade contract, while they claim it to be so].

For more benefit, please refer to Fataawa 364876, 321706, and 127389.

Allah knows best.