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One of the most important types of sale that has become widespread among members of society nowadays is the installment sale.
The reason behind its widespread adoption is the intense competition among producers and the weak purchasing power of consumers.
A growing number of people are in need of goods, but due to a lack of sufficient funds, they are unable to purchase them with cash.
At the same time, many markets have experienced recession, prompting various institutions and companies to devise installment-based sales methods to provide goods to consumers.
This approach fulfils the consumer's need for essential products and stimulates the economy, enabling manufacturers and producers to reinvest the generated revenue into further stages of the production process.(Muqorobin & Kurniawan, 2022)
Due to its widespread use, it has become necessary to understand the legal ruling regarding its permissibility and impermissibility, as well as to identify how to avoid elements of usury (riba), gambling (maysir), and uncertainty (gharar), which are common factors that render such contracts impermissible from a Shariah perspective. (Muqorobin & Kurniawan, 2022)
Read more about: Gharar: What exactly is it and how to avoid it?
Installment payments can be defined as the payment for a commodity made in predefined stages over a specified period of time.
According to Sulaiman bin Turki al-Turki installment in the terminology is postponing the payment of the debt divided to several known times.
It can be said that the sale of instalments is: (A contract on a sale, at a deferred price, paid separately on parts of known, at known times). (Muqorobin & Kurniawan, 2022)
From a Shariah point of view, installment sales are considered halal if the overall process complies with the Shariah terms and conditions related to such transactions.
For example, the buyer must take immediate possession of the commodity at the time of the sale, and the installment amounts and payment schedule must be predetermined and clearly known to both the buyer and the seller.
Read more about: Understanding Qabd: The Concept of Possession in Islamic Jurisprudence
If the buyer and seller fixed the price of the commodity in the contracting session, and both agree on the deferred sale,
which means that the seller will handover the commodity to the buyer in the contracting session and the buyer will pay the amount in different predetermined instalments,
then this type of sale comes under the Bai Muajjal ( it refer to a sale where the delivery of the commodity is on the spot while the payment of the price is deferred in the future date), which is permissible from a Shariah perspective. (Usmani, 2015)
Murabaha is a type of sale in which the seller discloses the cost of the commodity along with a specified profit margin to the buyer.
This sale can be conducted either on a spot payment basis or on a deferred payment basis.
In the case of a deferred Murabaha sale, the buyer pays the agreed price in predetermined instalments over a specified period.
From a Shariah perspective, it is essential that no interest or late payment fee is imposed if the buyer delays the installment payments.
Some Important rules for Murabaha Sale:
Following are the terms and condition of the Murabaha sale:
i -The subject of sale must exist at the time of sale. Any thing that does not exist at the time of sale can not be sold and its non-existence make the contract void.
ii -The subject be in the ownership of the seller at the time of sale. If the subject is not in the ownership of the seller then it comes under the category of short selling which is impermissible from a Shariah perspective.
iii -The sale must be instant and absolute and not be contingent to the future event.
v -The subject of the sale should not be a thing which is used for unislamic purpose.
vi -The characteristic of the subject must be known and identified to the buyer.
vii -The price of the commodity must be certain, if it is uncertain then the sale will be void. (Usmani, 2015)
Instalment sale considered halal, if it met all terms and condition related to it, like,
i -The price of the commodity should be fixed upfront.
ii -The buyer must take possession of the commodity; otherwise, the installment sale will be considered impermissible.
The reason for this ruling is that if the contracting session concludes without the buyer taking possession, the transaction falls under Bai' al-Kali bil-Kali (a sale of debt for debt),
which is prohibited from a Shariah perspective. As mentioned in a Hadith, the Prophet (P.B.U.H) forbade Bai al-Khali bil-Khali, where neither the buyer takes possession of the goods nor the seller receives the payment.
iii -Once the price is fixed it cannot be decreased in early payment nor can be increased in delay payment.
v -The installment payment schedule must be fixed and known in advance.(Al-Othmani, 2013)
If a late payment fee condition is included in an installment sale, the contract becomes Shariah impermissible. This is because the inclusion of a late payment fee introduces an element of interest (riba), which is strictly prohibited from a Shariah perspective. (Usmani, 2015)
Some Islamic financial institutions offer products based on the Buy Now, Pay Later (BNPL) scheme, where the buyer receives the product immediately and pays its price in predetermined installments.
To learn more about the overall process, along with the terms and conditions of BNPL, please refer to our BNPL detailed article.
Following are the differences between instalment-based sale and interest-based loan:
1- Instalment based sale is a sale-based transaction while interest-based loan is a qard contract.
2- In instalment-based sale the compensation is in the form of price of goods, while in interest-based loan the compensation is in the form of interest, since any benefit over the loan is interest.
3-In instalment-based sale there is no penalty in case of late payment, while in interest-based loan penalty charges in case of late payment (Usmani, 2015)
Read more about: Al Qard al Hasan (benevolent loan)- All You Need to Know.
The difference between halal and haram installment plans lies in their adherence to Shariah principles.
Halal installment plans are structured according to all the necessary Shariah-compliant terms and conditions, while avoiding elements that render a contract invalid—such as usury (riba), uncertainty (gharar), and short selling.
On the other hand, haram installment plans involve prohibited elements that make the contract impermissible, such as the imposition of late payment charges, the presence of usury, or excessive uncertainty.
Read more about: What are the available Riba-free loans in the UAE
References:
1- Al-Othmani, م. ت. ا. M. T. (2013). Qadaa Fiqhiyyah Mu’asirah (p. 277).
2- Muqorobin, A., & Kurniawan, C. S. (2022).
Installment Sale: Its Contemporary Application in Islamic Banking Finance (Case Study Brunei Darussalam). Malaysian Journal of Syariah and Law, 10(1), 1–10. https://doi.org/10.33102/mjsl.vol10no1.268
3- Usmani, M. I. A. (2015). Guide to Islamic Banking New. 342.
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
