Ruling on ‘No Cost EMI through banks’

Ruling on ‘No Cost EMI through banks’

By: Dr Mohammad Akram Nadwi
Oxford

Question:
The following question was kindly sent to me by my esteemed brother, Hafiz Mahmud Karim:
Al-salām ʿalaykum wa raḥmatullāh wa barakātuh
Is No-Cost EMI Through Banks Halal for the Seller?
“No-Cost EMI” lets buyers pay for products in monthly instalments without any interest. The seller covers the interest, either by giving a discount or paying the bank, so the buyer only repays the original price. Sometimes a small processing fee or partial down payment may apply. The key question is whether this arrangement involves any hidden interest, which would affect its permissibility under Shariah.

Answer:
Wa ʿalaykum as-salām wa raḥmatullāh wa barakātuh,
In Islamic jurisprudence, it is permissible for a seller to sell a product on deferred payment or in instalments, even if the deferred price is higher than the cash price, provided that the final price is fixed at the time of the contract and there is no increase due to late payment. For example, a product worth £1,000 in cash may be sold for £1,050 if the buyer pays in ten monthly instalments of £105 each. This is not considered riba, because the extra amount is part of the agreed selling price, not interest on a loan.

In the case of a “No-Cost EMI,” the bank normally charges interest on the EMI transaction. The seller then absorbs this interest by giving the customer a discount or by paying the equivalent amount directly to the bank. As a result, the buyer repays only the original product price in instalments, with no interest added.

From the buyer’s perspective, if the instalments equal exactly the purchase price, there is no riba in what the buyer pays. The key concern lies in the relationship between the seller and the bank. If the arrangement is simply that the seller provides a discount equivalent to the interest that would have been charged, this is essentially a trade discount and is permissible. However, if the seller directly pays interest to the bank on behalf of the customer, the transaction risks becoming an interest-bearing contract disguised under commercial terms, which is problematic according to Shariah principles.

Regarding processing fees, if they are fixed and genuinely administrative, they may be acceptable. If, however, the fee is effectively a cover for interest, calculated proportionally to the loan amount and duration, then it constitutes riba and is impermissible.

Thus, for the buyer, a “No-Cost EMI” can be halal if they truly pay only the original price, with no hidden increase linked to time. For the seller, permissibility depends on the mechanism: if it is done by reducing profit margins or providing a discount, it is halal. If it involves explicitly compensating the bank for interest, it is not halal.

In conclusion, a “No-Cost EMI” is permissible only if the structure avoids both explicit and implicit riba. If the seller’s adjustment is simply a discount or reduction of profit, there is no issue. But if the scheme effectively functions as an interest-bearing loan covered by reimbursement, it falls under riba and is impermissible.

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