Shopping experience is not the same as before. We used to use cash or credit card before but now with the advancement of technology, everything can be done through phones. Consumer behaviours keep changing over the times and this provide opportunities for companies to tap this market. The Buy Now Pay Later (BNPL) facility has become the most rapid application introduced by companies that offer luring and easy way to shopping.
BNPL facility enables consumers to purchase goods or services from merchants with the option of deferring payment and/or splitting the purchase price into instalments. A BNPL provider typically advances full or partial settlement to the merchants on behalf of the consumers, and consumers will make payments accordingly to the BNPL providers based on the agreed terms and conditions.
In Shariah, a BNPL facility may be deemed as an extension of the traditional sale contract which is already well-established and permissible in Islam, provided that the sale transaction is conducted in a manner that is consistent with Shariah principles.
A BNPL facility enables merchants to have a faster settlement process, and allow consumers to defer payments for goods and services without being subject to profit rate, provided that the instalments are paid on time. There has been a moderate growth in demand for BNPL facility, supported by the growing numbers of non-bank BNPL providers entering the BNPL market space.
The Shariah Advisory Council (SAC) of the Bank Negara Malaysia (BNM) recognises that there are various types of operational model adopted by different BNPL providers in the global and domestic market. While remaining supportive of and accommodative to innovation, in order to ensure that the operational structure and business model of the BNPL facility are consistent with Shariah principles, the SAC requires Islamic BNPL to comply with the following:
- The collective use of Shariah contracts as the underlying structure for the BNPL facility must observe the relevant Shariah requirements which are applicable to each Shariah contract and to the combined contracts;
- The use of such Shariah contracts under the BNPL facility must preserve the primary objective of the contract (muqtada `aqad);
- The Shariah contracts used under the BNPL facility must appropriately reflect the contractual rights and obligations of the contracting parties;
- The use of Shariah contracts as the basis of various features in the BNPL facility must not be structured in a way that gives rise to riba practices; and
- Where late payment charges are imposed, such imposition must reflect the actual cost incurred from such late payment and/or defaults by the consumer as it would be considered as compensation (ta`widh). The cost component must be justified according to applicable requirements imposed by the BNM and approved by the respective Shariah Adviser.
Where a Shariah-compliant BNPL facility is offered on a platform which also sells non-Shariah compliant goods and services, such BNPL facility would not be automatically considered as Shariah non-compliant, subject to the following:
- The transaction conducted using the Shariah-compliant BNPL facility is confined only to Shariah-compliant goods and services;
- The Shariah committee of respective Islamic FSP has approved the offering of such Shariah-compliant BNPL facility on such platform; and
- The Shariah-compliant BNPL facility has in place appropriate safeguards to ensure no transaction involving non-Shariah compliant goods and services can be facilitated.
The easy accessibility and fast credit approval process of the BNPL facility may inadvertently influence consumers to spend beyond consumers’ affordability. Given the lack of a central credit bureau reporting for BNPL facility obtained from the non-bank BNPL providers, Islamic FSP may face challenges in assessing consumers’ overall credit exposure, risking consumers accumulating larger outstanding debt across multiple BNPL providers. Without proper credit management and financial discipline, this could pose risk to the financial well-being of consumers.
Premised on the above, and in line with the principle of Maqasid Shariah that encourages the preservation of wealth (hifz al-mal), particularly in striving to avoid excessive indebtedness beyond one’s financial affordability, the SAC urges the following:
- Islamic FSP to uphold responsible practices, where the credit and affordability assessment process should be thorough and must takes into consideration consumers’ existing debts and income levels. Islamic FSP should ensure their processes comply with the relevant requirements imposed by the BNM; and
- Responsible practices in offering a BNPL facility, including the provision of clear and timely disclosures to consumers, would help consumers to make more informed decisions and further encourage the responsible and prudent use of the BNPL facilities.
Reach out to us at Faz Advisors if you want to know more about BNPL and let us assist you on how your company could offer BNPL in Islamic way.
Information and image are courtesy of Bank Negara Malaysia.
