Credit Sales in Islamic Finance

The famous command in the Quran from Chapter 2, Verse 275, “Allah has permitted trade and prohibited riba” encourages Muslims to be involved in trade and avoid dealing in interest. Allah SWT has blessed the trade and it had been a chosen profession of the Prophet (PBUH) himself as well as many Muslims throughout the history of Islamic civilization.

Islamic scholars have allowed deferred payments for credit sales as that does not constitute riba, provided certain conditions for Shari’ah compliance are adhered to. It can be argued that the excess price charged in deferred payment transactions is similar to interest because it rewards the seller for time value of money. On the surface, that seems true, however, the scholars have taken great pains to explain the difference between Shari’ah compliant transactions and those based on riba.

In traditional finance there is no difference between commodity and money. Both can be traded and both have a price. Islam does not allow this premise. In Islam, money is only a medium of exchange and has no intrinsic value. Money can only be traded one for one. Different currencies can be exchanged at the then-current exchange rate. Any extra allowance will be only against time, hence constituting riba.

In case of commodities, the seller has the option to sell at any price he desires and market will bear. As long as both parties consent to the deal, and there is no element of Gharar or Maysir (uncertainty or speculation) the seller can charge a higher price for deferred payment. One of the conditions of credit transactions is that both parties must agree to the cash or credit price without any ambiguity. If the price is not determined at the time of transaction, it will not be a valid transaction. The contracting parties cannot leave the price option contingent upon time of payment as that give rise to uncertainty. Once the price is agreed upon, it remains fixed until the amount is paid, regardless of when the payment is made. Hence the increase price in deferred payment is not interest as it is not tied to the time value of money.