Ruling on Selling on Credit at a Higher Price Than the Current Market Rate

This article is based on the "Fatawa of the Saudi Fatwa Committee" and draws from the writings of Shaykh Ibn Baz (may Allah have mercy on him).

Question:​

What is the ruling on selling goods on credit at a price higher than the current market rate?

Answer:​

The majority of scholars agree that selling on credit at a higher price than the market rate is permissible. This ruling is supported by the following evidence:

1. Quranic Evidence:​

Allah (SWT) states in the Quran:

"O you who have believed, when you contract a debt for a specified term, write it down."
[Surah Al-Baqarah: 282]

This verse does not impose a condition that credit sales must match the current cash market price. It emphasizes the documentation of the transaction rather than its pricing.

2. Prophetic Evidence:​

The Prophet Muhammad (ﷺ) permitted credit sales in transactions where the terms were clear and defined.

• Example: When the Prophet (ﷺ) arrived in Madinah, he observed that the people practiced salam(advance payment sales) for dates for a year or two. He instructed them:
  "Whoever engages in a salam sale should do so for a specified weight, a specified measure, and a specified term."
  [Sunan At-Tirmidhi, Hadith No. 1311]

3. Historical Precedent:​

• In a hadith narrated by Abdullah bin Amr bin Al-As (RA), the Prophet (ﷺ) instructed him to procure camels for a military expedition. When camels were scarce, the Prophet (ﷺ) permitted him to buy two camels on credit in exchange for one camel from the upcoming zakat camels.
  [Sunan Abu Dawood, Hadith No. 2823]

This indicates that credit transactions at different pricing terms are permissible when agreed upon by both parties.

Economic Rationale:​

1. Facilitating Trade and Ease for Buyers:
   
   • Credit sales allow buyers to acquire goods without immediate payment, making transactions easier for those who lack immediate funds.
   • Sellers benefit by earning a profit, while buyers benefit from deferred payment terms.
2. Avoiding Harm to Traders:
   
   • Insisting on cash prices for credit sales would cause significant harm to traders who would bear unnecessary losses. Shariah aims to maximize benefits and minimize harm in financial transactions.

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4. Exception: 'Tawarruq' (Structured Financing):​

• Definition: In this arrangement, a person buys an item on credit to sell it for cash and meet their financial needs.
• Scholarly Opinions:
  • There is a difference of opinion among scholars regarding its permissibility.
  • The stronger opinion (based on necessity and general principles) is that it is permissible if there is no specific evidence prohibiting it.
  • This allowance is based on the principle that transactions are generally permissible unless explicitly forbidden.

However, one must exercise caution and strive for balance to avoid falling into unnecessary debt.

Conditions for Validity:​

1. Goods Must Be in Possession of the Seller:
   
   • Selling an item not in one's possession is prohibited. Evidence includes:
     • The Prophet (ﷺ) forbade selling food purchased by estimate until it was transferred to the buyer’s home.
       [Sunan An-Nasa’i, Hadith No. 4608]
     • Similarly, Zaid bin Thabit (RA) narrated that the Prophet (ﷺ) forbade selling goods where they were purchased until they were brought into the seller’s possession.
       [Sunan Abu Dawood, Hadith No. 3499]
2. Clarity in the Terms of the Sale:
   
   • The price, payment period, and conditions must be explicitly stated and agreed upon by both parties.
3. Avoiding Riba (Interest):
   
   • The transaction must not involve any conditions that would result in interest (riba), as this would render the deal impermissible.

Conclusion:​

Selling on credit at a price higher than the current market rate is permissible under Islamic law. It facilitates trade and benefits both buyers and sellers. However, care must be taken to ensure that:

• The goods are in the seller’s possession before the sale.
• The terms are clearly defined.
• The transaction does not involve riba.

When structured financing (tawarruq) is done out of necessity, it is permissible, but avoiding unnecessary debt and seeking moderation is always preferred.