At present, the demand and popularity of buying and selling in installment are increasing all over the world. People with limited income are more attracted to such offers. However, despite the huge demand of the people for buying and selling installments, public awareness about Shariah has not been created. That is why many brothers and sisters are getting involved in businesses relating to interest unintentionally.
Therefore, this short article has been prepared to increase the awareness of all quarters on the relevant matter. I hope the conscious reader will benefit by reading this article.
Installment buying and selling: Practices today
Purchasing goods in installments means that the seller will explain the goods of his sale to the buyer immediately along with the contract, but the buyer will not pay the price immediately; rather the buyer will pay the price of the product in phases as per the contract. In this case, the buyer requires to pay 30% and sometimes 50% as a down payment during the sign-off of the contract. The higher the down payment, the lower the monthly installment ratio. Similarly, if the buyer delays an installment, interest is added to the original rate of the product. For all these reasons, it is desirable for both the trader and the customer to know the Shariah of buying and selling in installments and be aware while transacting.
The main provision of installment purchase and sale
Basically buying and selling in installments is a legal and Shariah-approved transaction. Such transactions have been practiced and approved since the Prophetic era.
It is narrated from Saiyedatuna Ayesha رضي الله عنه in Sahih Hadith that Barira came to her and said; O Ayesha! I have made a written agreement with my master that I (in exchange for freeing me) will pay him one Uqiya (one Uqiyah for forty dirhams) a year and pay a total of nine Uqiya (in installments) for nine years. (Sahih Bukhari: 3636)
In this hadith, the practice of buying and selling in installments since the Prophetic era and its legitimacy is clearly proved.
However, in the current business establishments, there are some other issues related to additional pricing of the product in installment trading, like the addition of interest to the original rate in case of delay in collection of installments. Therefore, the issues related to Shariah of this transaction have been highlighted.
Additional pricing of products in installments
It is legal to set a price higher than the normal price of the product in installment purchase and sale. Traders and customers may discuss each other to set this price. There is no reason to think this extra price is Interest. In business transactions, the buyer and seller can set any price mutually. Ibn Qudama, in his book of jurisprudence, Al-Mughni, has stated that the majority of scholars are of the opinion that the price of a product is higher than that of cash. It is also the recognized opinion of the four schools of thought.
The condition, however, is that the arrears be finalized at the time of the contract. Therefore, the system that is in vogue in different showrooms is amendable. Usually, the seller offers different prices depending on the number of installments. For example, a general scenario is, if you take the product in cash the price is 10 thousand rupees, if you take it in three-month installments the price is 12 thousand rupees, if you take it in six months installment the price is 15 thousand rupees, if you take it in 12 months installment the price is 16 thousand rupees. In this case, the buyer only agrees to take the product in installments. Do not specify the price and installment type. Later he pays in any of the installments at his convenience. Such execution of the contract, without fixing price and installment is prohibited from Shariah point of view.
In case of delay in payment of installments, adding interest to the price of the product:
If a customer delays the payment of installments, in conventional installment trade, interest is added to the original rate of the product at different rates from time to time. Some well-known companies in the sub-continent directly mention such interest rates in their installment-purchase terms. For example, if there is a delay of 6 months, they say 6% or if there is a delay of 12 months, they say 12% interest or they mention it as; a fine in their language. From the point of view of Shariah, in case of failure to collect the installment, taking interest as a penalty in the name of additional payment/fine/whatsoever is simply a transaction of interest.
What is the alternate Shariah prescribed way?
In this case, as an alternative, the seller can keep a mortgage from the customer. If the buyer fails to collect the installment within the stipulated time, the seller will be able to accept the installment amount from the mortgaged item as per the agreement. Or the seller can sell the product and keep all the documents of the product like a mortgage. If the buyer fails to collect the installment, he can sell the product elsewhere as per the agreement. In modern terminology, such a mortgage is called Simple Mortgage.
Specify the time of installment collection and the number of installments:
An important condition for trading in installments is to specify the time and number of installments. Such as specifying the date of the month in which you will pay the installment. Mention the total number of installments. Because, if there is ambiguity about these issues at the beginning of the contract, then there may be an argument between the buyer and the seller. So it is important to make things clear at the very beginning.
Cut off and Pay now Watch Contract
In installment buying and selling, many merchants agree that if the buyer pays all the installments before the due date, the seller will deduct a fraction of the fixed price of the product, such as 8% or 12%. Its modern terminology is Cut off and Pay now. That is to give a discount on the condition of cash payment.
The rest of the terms and conditions of purchase and sale include explicit interest (sale-based interest). Such conditions should also be avoided during the contract. However, in case of collection of advance installment by the buyer, it will be valid if the seller is happy and deducts some amount from the price of the product without any condition/prior agreement.
There are 3 basic things to do as a trader in installment-trading
1. Finalize the price of the product and the number of installments
2. Refrain adding a charge extra in the name of interest or penalty/fine if the buyer fails to pay the installment in time. In this case, take the aforesaid correct Shariah alternate step.
3. To refrain from the contract of Cut off and Pay Watch Contract.
There are two things to do as a buyer in installment trading
1. Refrain from buying products in installments from any business organization which does not follow Shariah rightfully.
2. Absolutely refrain from availing any benefit/facility from interest banking, such as payments through interest bank, etc.
1. Sahih Bukhari
2. Al-Mughni (Ibn Qudama)
3. Mabsut Lis Sarakhsi
4. Buhush fi qazaya fiqhiyah mu’asara o fiqhul buyu’ (Mufti Taqi Usmani)
5. Al Lajnatut Daima Lil Buhusi Wal Ifta (Saudi Fatwa Board)
The writer of this article is: Shaikh Obaidur Rahman Hammad
This article has been published in Monthly IslaminLife Magazine, Shawwal Issue 1442 Hijri.