Untapped potential to combine Islamic Finance and BNPL

This blog was co-authored by Rahul Lalwani, Senior Consultant and Saadat Sabur, Consultant at Capco, with input from Mohsin Khan, Principal Consultant and Capco's Islamic Finance Capability Lead.

Buy Now Pay Later programmes have seen tremendous growth globally. Despite growing concerns about stoking consumer debt, BNPL services fulfil a major consumer need and provide a financial alternative that is both simple and effective.

We believe there are significant opportunities for BNPL within an Islamic Finance context. BNPL is vital for the Muslim population in developed and developing economies alike as these services can, when used sensibly, be an effective tool to manage unexpected expenses and preserve monthly cash flow.

Current leading BNPL service providers are not Shariah-compliant for two reasons: the charging of interest and the lack of an Aqd (Islamic contract) between the BNPL provider (as lender) and the consumer (as borrower). We explored how an Islamic Finance BNPL product can work in practice, and why such products could be successful in the UK across Muslim and non-Muslim customers: 

1. The consumer can register for BNPL through an app or website to use a basic service, such as buy now pay 30 days later or two split payments – half today and half next month. These options would incur no interest.
   
   
2. If the consumer wants to opt for a longer tenure (six weeks to 24 weeks), then a hard credit check should be initiated, and a credit limit assigned to the customer. The customer can then convert any purchases within the credit limit.
   
   
3. The consumer can go to any partner retailers and select the BNPL payment option at checkout and choose one of the allowed payment options. The BNPL provider and the consumer enter into a Murabaha agreement, through which the financing of the goods/services is offered by the provider on a cost-plus financing basis. Any fees arising from the transactions can be charged under the concept of Ujrah, which allows the companies to levy a financial charge on the services provided.
   
   
4. The consumer receives the goods and/or services for which the payment was made.
   
   
5. The amount is deducted (as per the plan selected by the user during checkout) at regular intervals.
   
   
6. Penalties are levied for any missed payment but should be via a fixed charge that is clearly specified and should not have any compounding factor. 

An ethical approach to BNPL

The UK’s Woolard Review urges the regulation of BNPL services to keep consumers protected and treated fairly and highlights questions around debt and creditworthiness. Introducing Shariah-compliant offerings would solve many of these issues, as the focus of Islamic Finance BNPL solutions would be on providing interest-free credit, with reasonable charges and an emphasis on mutual benefit rather than any potential exploitation of customers through late payment and other fees.

This is something that would potentially appeal to the broader population too – an ethical BNPL service built around fair trading and the wellbeing of the wider community. However, careful handling of the different challenges that this new category of credit introduces is vital to ensure that the principles of Islamic Finance are preserved, while providing access to the range of benefits that BNPL solutions offer.