Consumer Credit

Q: I would like to get some advice on the permissibility of buying an item on credit from a retailer. Let’s hypothetically say the item costs R5000, and the retailer offers the item on “credit” in instalments through a credit provider RCS. The monthly payment is fixed at R300 for 24 months making the total payable R7200 (This is all known beforehand). The actual “agreement” however,  stipulates that the extra amount paid (R2200) is based on an “interest rate” of x%. Does this still count as actual interest seeing that one does not take the actual “cash” money, but rather it is in the form of an item that is being paid over time?

A: There are two ways such a deal could be conducted. One is that the retailer fixes two prices for his item: a cash price and a credit price. If the customer pays cash then the item will cost a fixed price, and if the customer takes it on credit and pays it in instalments over a fixed number of months then the price will be higher. In this method there is no third [arty involved; no RDS. Instead the deal is only between the customer and the shopkeeper/retailer. Such a deal can only be lawful if at the time of concluding it the exact price is known, whether cash or credit. If there is any ambiguity over this at the time of the deal, it will be not be permissible and will fall under the category of ribaa or usury. For example, a retailer sells a fridge for a cash price of R5000 and a credit price of R7200 to be paid over a period of 12 months at a monthly instalments of R600. For this sale to be valid and lawful in Shariah, the customer must indicate whether he will be paying cash for the fridge or whether he will purchase it on instalments. If this is known when signing the deal, it will be lawful and valid, otherwise not.

The second method is using a third party such as RCS. This is called Consumer Credit. The retailer sells the item to the customer but is paid by RCS his cash price. RCS then charges the customer a higher price for the item, but allows the customer to pay it back in instalments. The customer does not pay anything to the shopkeeper; instead the shopkeeper facilitates the credit agreement between RCS and the customer by filling in the necessary forms and submitting a credit approval application. Once the credit is approved the shopkeeper hands over the item to the customer and immediately receives his payment from RCS, while simultaneously the customer signs an agreement with RCS binding him or her to a fixed monthly payment over a fixed number of months. What the customer pays is far more than what the retailer charged for his item. The excess paid back to RCS is interest or ribaa. This is almost like a getting a loan to buy an item and paying it back with interest. Therefore, this method is haraam. The example you gave is exactly what happens in such a deal

Allah Ta’ala knows best

Mufti Siraj Desai