Buying now, paying later: the Islamic deferred payment sale

Following a deferred payment sale

A bank buys a car for 30,000 and sells it to a customer for 34,500 payable over three years. Ownership passes at once, the price never changes and the customer owes a fixed debt, which may be secured by a charge on the car.

Why a higher deferred price is permitted

Majority opinion holds that a seller may charge more for credit than for cash, because the difference is part of a sale price agreed before contracting. What is forbidden is adding an increase to an existing debt as time passes, which is riba.

Applying IIFA Resolutions 51 and 64

Resolution 51 (2/6), adopted in Jeddah in 1990, allows a higher deferred price but forbids late-payment increases and allows acceleration clauses. Resolution 64 (2/7) of 1992 permits a discount for early payment if it is not agreed in advance.

Debating murabaha, BBA and rebates

Murabaha discloses cost and margin; bai bithaman ajil need not. Malaysian BBA home financing drew criticism after courts questioned banks claiming the full sale price on early default, and Bank Negara Malaysia later required rebates (ibra’) on early settlement.

Treating deferred sales under law and tax

Legally the bank sells goods on credit, so consumer credit rules usually apply to retail cases. Some countries treat the profit as finance income for tax, and transfer taxes may arise twice unless the law provides relief for Islamic sale-based financing.

Where deferred payment sales are offered

Bank of Khartoum in Sudan offers bai muajjal credit sales of goods, Banque Misr in Egypt offers auto murabaha to businesses and Bank Asia in Bangladesh lists bai-muajjal among its Islamic investment modes. Malaysian banks long used BBA for homes.

Regulators shaping deferred sales

The Central Bank of Sudan supervises a fully Islamic system, the Central Bank of Egypt regulates Islamic windows such as Banque Misr’s, Bangladesh Bank oversees Islamic banks, and Bank Negara Malaysia sets rebate and disclosure requirements for sale-based financing.

Limits of the deferred payment model

Once the sale is concluded, the bank cannot reprice the debt, so most products are fixed-rate or use a ceiling price with rebates. Late payment also yields no extra profit for the bank, which pushes lenders to demand strong collateral.

Buying on deferred terms step by step

For a retail customer buying a car or equipment, the process below is typical. Business buyers follow the same sequence with additional company documents and sometimes a revolving purchase limit instead of a single transaction.

1. Choose the asset and obtain a quotation from the supplier in the bank’s name or for the bank’s purchase.
2. Apply with identity, income or company documents; the bank assesses affordability.
3. Sign a promise to purchase; the bank buys the asset and takes ownership and risk.
4. Sign the deferred sale contract stating the fixed selling price, instalments and security.
5. Take delivery; ownership passes to you, often with a charge or pledge in the bank’s favour.
6. Pay the instalments; on early settlement, request the rebate set out in the contract.

Costs and documents involved

The total price is fixed in the contract, so the main cost is the difference between the cash and deferred prices. Other costs depend on the asset and the country, and the table describes them without inventing rates.

Mistakes in deferred payment purchases

Deferred payment sales are simple in appearance, but disputes and Shariah defects are frequent when the order of steps is not respected or when customers misread the fixed-price logic. Typical problems seen by banks and advisers include the following points.

• Signing the sale before the bank actually owns the asset.
• Expecting instalments to fall when market rates drop, although the price is fixed.
• Assuming no consequence for late payment, while compensation or charity charges apply.
• Forgetting to claim the early settlement rebate when repaying ahead of schedule.
• Buying an asset the customer already owns, which turns the deal into bai al-inah.

Comparing deferred sale with ijara

In a deferred sale the customer owns the asset at once and owes a debt. Under ijara the bank keeps ownership and bears ownership risk, the customer pays rent, and the rent can be reviewed for future periods.

Can the bank charge more if I pay late?

No increase in the price is allowed, as Resolution 51 makes clear. Many banks impose a late-payment charge that is either given to charity or limited to actual costs, following AAOIFI Standard 3 on default and local rules.

Do I get a discount for early settlement?

Resolution 64 permits a discount if it is not a pre-agreed condition. Malaysia goes further, requiring banks to grant ibra’ on early settlement. Elsewhere, the rebate depends on the contract and the bank’s policy, so check before signing.

Is an acceleration clause allowed?

Yes. Both resolutions allow the parties to agree that all remaining instalments fall due if the buyer defaults, provided the buyer is not insolvent. The bank still cannot add profit beyond the originally agreed price.

Who owns the goods during the instalment period?

The buyer owns them from the moment of sale. Resolution 51 states that the seller may not retain ownership after the sale, but may require the buyer to mortgage or pledge the goods as security for the outstanding instalments.

Is deferred payment the same as buy now, pay later apps?

Not necessarily. Some Shariah-compliant buy-now-pay-later services use a deferred sale or a fee-based qard, but many conventional apps charge late fees that accrue as interest. Each provider’s structure, fee schedule and Shariah certification needs checking before use.