INSIGHTS

Piecing Together the Sharia Compliance of BNPL

Introduction

Buy Now, Pay Later (BNPL) schemes provide short-term financing for retail purchases, often without additional interest charges. However, this convenience comes with credit risk for financial institutions. This risk stems from several factors:

  • Operational Costs: Managing BNPL transactions incurs operational expenses.
  • Customer Defaults: Delinquency, insolvency, or bankruptcy can lead to customers failing to repay.
  • Economic Downturns: Economic hardship can increase defaults as customers struggle to meet their obligations.

Unlike traditional loans, BNPL providers cover the purchase price upfront for the customer, who then repays the full amount in installments. This method benefits retailers by shifting credit risk to the BNPL provider, who charges them a commission on the sale. This paper delves into the critical aspects of BNPL, examining its Sharia compliance and exploring viable alternatives.

Key Highlights

  • BNPL Structure and Growth: We explore the mechanics of financing BNPL, explaining how it works. The paper breaks down the features that distinguish BNPL from traditional credit models.
  • Sharia Compliance Debate: We analyze the structure of BNPL models including the late payment penalties. The discussion addresses the concerns of Sharia compliance raised in academic circles.
  • Alternative Models: One suggested alternative is the Murabaha to Purchase Order (MPO) model. Here, the financial institution purchases goods from the seller, assumes ownership risk, and then sells them to the customer with an agreed markup, ensuring a Sharia-compliant transaction.
  • Credit Risk Management: The paper highlights various strategies employed by BNPL providers to mitigate credit risk, including credit analysis, third-party guarantees, flexible payment solutions, customer performance monitoring, and insurance options.
  • Impact of Defaults: Understanding the significant impact of customer defaults on BNPL institutions, the paper exhibits preventive measures to safeguard against potential losses and ensure financial stability.

For an in-depth analysis of BNPL’s Sharia compliance challenges and opportunities, download the full PDF report in Arabic by clicking here or the English version below.