Credit sale or selling on credit in Islamic finance is broadly referred to as Bai Mu’Ajjal or Bai’Bithaman Ajil (BBA). Banks sell on credit which is recorded as receivables in their books and this becomes the liability of the customer. 

BBA implies deferred payment of the price. Its process starts with the customer approaching a bank with the intent to purchase an asset or commodity. The bank then buys the asset that the customer wants from a vendor or supplier at a price or P.

The bank sells the asset to the customer at marked-up price or M which is agreed upon with the customer which the bank will keep for itself. Finally, the customer makes payment based on price and mark-up (P+M) in a deferred manner.

Two forms of credit sale

There are two forms of credit sale musawamah and murabahah. 

Musawamah is a normal sale where customers bargain on price. Sellers do not disclose the cost of goods being sold which is why some level of market sophistication or expertise is expected from the buyers of the asset or commodity. Upon delivery, customers can pay on the spot or deferred method.

Murabahah means to gain, profit, or addition and is also known as a contract of trustworthiness. It is a cost-plus sale where customers bargain on the profit margin over the known cost price. In contrast to musawamah, murabahah protects innocent customers who lack skill in making purchase transactions of a particular asset in the market.

BBA includes murabahah features except that in murabahah, the bank is also the vendor of the good or asset to the customer. Pricing is not so much a concern since the customer is involved in locating the and purchasing the goods.

Conditions of sale transactions

Only qualified people can enter into a contract and mutual consent is mandatory in sales transactions. The seller must be the owner or agent of the owner of the mabi or object of sale. The mabi must be transferable. The buyer must acquire title and bear all risks and benefits of the mabi.

The mabi must be halal and must exist at the time of sale. It must be specifically identified and in physical or constructive possession of the seller. Damage, destruction, pilferage, theft, obsolescence, and market or price risk are some of the risks involved in ownership. 

Murabahah structures

Direct trading; purchase through an agent; and the customer as an agent are the three options available for murabahah structures. Direct trading is used in selected high-value assets but faces the challenge of managerial problems and corruption.

The bank appoints a qualified supplier as an agent according to the inventory plan in the second option. The third option, customer as an agent, is the safest way for the bank to avoid commodity-based risks and related problems since the client is involved in gathering information, locating, and negotiating for the asset or commodity.

Options to deal with delinquency

Delinquency is the risk of delayed or non-repayment of the credit sale which is a major risk in murabahah Islamic financing. This is because the customer knows that interest and other penalty charges can’t be charged upon maturity of the credit sale in contrast with conventional financing. 

To avoid this, the bank could state in the murabahah contract that the buyer will donate to charity in case of delayed payment. This kind of income is not permitted that is why it can only be used to support charitable activities. The deliberate act of default may be penalized. 

Rescheduling is allowed to make it easier for the buyer to meet the obligation to pay but no additional charge is allowed as such would be treated as interest which is riba. Ways to reduce non-repayment include requiring security in the form of a mortgage; lien or charge on any of the customer’s assets; guarantee from a sale party; promissory note; and bill of exchange.