Buy now pay later (BNPL): An Islamic finance perspective

Buy now pay later (BNPL) has rapidly emerged as a popular alternative to traditional consumer finance. The model allows customers to purchase goods and services immediately and pay for them in installments, often without an upfront payment. For consumers, BNPL offers convenience and flexibility. For Islamic finance, however, it raises an important question: How can deferred payment be structured without violating the prohibition of Riba?

The answer depends on the underlying contract.

Islamic finance does not prohibit deferred payments. In fact, Murabaha, one of the industry’s most widely used contracts, is itself a deferred-payment sale. Under a Murabaha arrangement, an Islamic bank purchases an asset and sells it to the customer at a fixed disclosed mark-up, with the customer paying the agreed sale price over time. The fact that the customer pays later does not make the transaction impermissible. What matters is that the arrangement is structured as a genuine sale rather than an interest-bearing loan.

This principle potentially provides a foundation for Shari’a-compliant BNPL. A BNPL provider could, for example, facilitate a genuine sale in which the customer purchases a product at an agreed deferred price. The total amount payable would be established when the transaction is concluded, with no additional charges accruing simply because payment is deferred. The price would therefore be known to the customer from the outset.

However, not every BNPL product automatically qualifies as Islamic finance. The contractual structure is critical. If a provider simply advances cash to a customer and requires repayment of a larger amount at a later date, the arrangement may resemble an interest-bearing loan and therefore raise concerns under the prohibition of Riba. Similarly, charges imposed on customers who miss payments must be carefully structured to reflect the actual expenses incurred by the financer in recovering the overdue amount from the customer. A late-payment charge cannot simply become additional income for the financing provider if it effectively represents interest on overdue debt.

The UAE’s legal framework provides important principles in this regard. Islamic financial institutions are prohibited from charging interest on loans and finance facilities, including increases in the customer’s financial obligation solely because of delayed payment. Where compensation for late payment is permitted under the applicable Shari’a framework, it cannot simply be treated as ordinary profit by the institution; rather, it should be disbursed as charity which does not constitute any material benefit for the bank.

BNPL also raises broader questions around consumer protection and responsible finance. The convenience of splitting payments can encourage consumers to make purchases they might otherwise postpone or avoid. This makes transparency particularly important. Customers should understand the total amount payable, any fees that may apply, the consequences of late payment, and the precise nature of the contractual relationship.

For Islamic finance, BNPL represents both an opportunity and a challenge. Its popularity demonstrates growing demand for flexible digital payment solutions, but its rapid development also requires careful Shari’a governance to ensure that technological innovation does not outpace the principles governing the underlying financial contracts.

Ultimately, a Shari’a-compliant BNPL model is possible, but it cannot be achieved simply by removing the word “interest” from a conventional product. The underlying transaction must be examined in its entirety. What is being sold? Who owns the asset? How is the provider compensated? What happens when the customer delays payment? The answers to these questions determine whether BNPL is genuinely compatible with Islamic finance or merely conventional finance with a new name.