Please can you advise on the Shariah permissibility of guarantees and extended warranties
The stipulation of guarantee by the manufacturer or retailer to cover for parts, parts and labour, or replacement is not a condition that asserts the rights and obligations effected by the contract, nor is it congruent with the requirements of the contract, and nor is it expressly sanctioned by SharÓ'ah and thus should not be permitted according to analogy. However, as such guarantee is accepted by convention and the obligation of the guarantor is sufficiently stipulated so as not to give rise to dispute; it is permitted on the basis of juristic preference.
In return for a defined sum, payable immediately or in monthly instalments, the seller undertakes to provide a service or compensate the customer for a contingent loss.
The nature of cover provided under the warranty will determine the nature of the contract:
If the warranty provider provides only periodical service, then this will be an ijarah and will be tolerated. Conditions stipulating that the warranty provider utilizes his own tools and provides any necessary minor consumable or part such as oil, etc. are permissible as it is accepted by convention.
However, if the warranty provider also provides replacement parts for repair or cash, then this will not be permissible and will be analogous to conventional insurance.
Thus, except for when cover is for periodic service only, an extended warranty is essentially a form of conventional insurance wherein the buyer accepts a small loss to hedge against the risk of a large loss. It is a contract that entails prohibited elements of gharar, khatar, qimar and, potentially, riba and is not acceptable according to Islam.
And Allah knows best.
Mufti Mohammed Zubair Butt
Chair, Al-Qalam Shariah Panel
26th Muharram 1430
23rd January 2009