Is it ok to say I will sell you this phone for $120 if you pay in cash and for $200 if you pay me after a year?
In this article, I will analyze the practice of offering to sell an item at one price if paid in cash and at a greater price if it’s paid for in the future (which I will refer to in this article as a "credit sale" or "buying on credit"). Specifically, I want to try to ascertain if this practice involves the use of Riba or not.

For those who are unfamiliar, Riba is an Arabic word and in the context of Islamic finance, it is used to refer to unlawful gains. The Quran and tradition of the prophet cause us to believe that riba is present in any loan of money which requires more than the principle to be returned to the lender.

An example of riba would be if you borrowed $120 from a lender on the condition that you pay back $200 in one year. This difference of $80 between what you borrowed and what the lender requires to be returned to them only because they had to wait for their money, in Islam, is an unlawful gain for the lender and referred to as “riba”.

For a detailed explanation of riba’s meaning please read my article on Islam's view on debt and interest.

So, when searching for riba in the practice of selling an item on credit for a greater price than its cash price, I will attempt to answer two questions: First, Is there a loan of money? and second, if there is a loan of money: is the lender requiring compensation in return for lending their money.

At its core, purchasing something on credit is different than paying for it in cash in one major way: when you buy something in cash you have to part with the entire price of the item at the time of ownership whereas buying on credit allows the buyer to gain ownership of the item and be indebted with the remainder of the item’s price.

So if the buyer is indebted with the price of the item this means someone must have lent them the amount that they are indebted with. Since they are indebted to the seller it follows then that the seller is the lender. Now you may say: but the seller never handed any money to the buyer. This is true, but for all intents and purposes, it is as if the seller did.

Similarly, if you use a credit card to make a purchase no money is ever handed to you or deposited in your account? But you know that you received a loan because after using your card you become indebted to the credit card company.

To further verify the existence of a loan when you buy on credit simply ask yourself, is there any difference between me going to a seller and purchasing something on credit and between me going to a bank first, borrowing the cash price of the item I want to buy and then buying the item with the money I borrowed? In both cases, you end up with ownership of the asset and indebted with the item’s price.

The only difference between a credit sale and taking a loan from a bank first is that in the case of a credit sale the buyer buys the item and borrows the money from the same party i.e. the seller. Put differently, the seller in the case of a credit sale is playing the role of the lender.

So now it’s clear that the sale of an item on credit is not just one transaction, it is, in fact, two transactions. The first transaction involves the seller lending the buyer money to make the purchase (albeit implicitly), the second transaction involves the buyer actually purchasing the item from the seller. Just like when you make a purchase using a credit card there are two transactions: the first involves the credit card company lending you the money, and the second is the actual purchase.

So then the first question we set out to answer: is there a loan of money? Has been answered and the answer is clearly yes.

Now the question becomes: In the case of a credit sale, is the lender requiring compensation in return for acting as a lender? To answer this question we need to determine if the lender requires more than the loan amount to be returned to them.

Since no money was exchanged the only way to tell how much the loan was for is by looking at the cash price of what was bought.

If I tell you I bought a phone priced at $120 in cash using my bank credit card, how much money did I borrow from the bank? Clearly $120 right?

Similarly, if I buy a phone priced at $120 in cash with a promise to pay the seller its price in the future. How much of the seller’s money have I borrowed? Precisely and exactly $120 right? If I had borrowed more than $120, and the price of the phone was $120 in cash, I would have been able to buy the phone and have money left over after I made the purchase.

So with credit sales, we know that there is a loan and we know that the loan amount is the cash price of the item.

So now to determine whether the lender is requiring compensation for lending their money we simply ask: is the buyer indebted with more than the cash price of what they bought. If they are, then this more than they are indebted with is the seller’s required compensation for lending money to the buyer.

So in order to ascertain whether a credit sale involves riba or not we need to ask the following question: is the amount of the buyer’s indebtedness greater than the cash price of what they purchased? If the answer is yes, then this extra that the seller is collecting is riba.

Now after making this conclusion, I think it is my duty to examine any opposing arguments to see if they hold any merit. I have divided what I’ve heard and read in response to the conclusion I made regarding the impermissibility of selling at different prices in cash and on credit to three major arguments:
The first argument is as follows: we know in Islam that paying for something in advance of receiving it, for a price that is less than the current or expected price of the item is allowed, which is called bai’ al-salam (بيع السلم) and there is a clear hadith that allows it:

Abd Allah ibn Abbas may Allah be pleased with him said: the prophet peace be upon him came to Madina while people were paying for dates two and three years in advance. So the prophet said: whoever pays in advance for something should specify the quantity of the product and the date that the product needs to be delivered on.

So this was authorization from the prophet peace be upon him to pay for something in advance of receiving it with no restrictions mentioned on what the agreed upon price between the buyer and the seller needed to be (and with bai’ al-salam the purchase price is more often than not less than the item’s expected price when it is scheduled to be delivered.)

So the argument is: since you are allowed to pay in advance for an item at a price that is less than its expected price when the item is scheduled to be delivered to you, doesn’t it follow then that it is ok for the reverse to happen … that is, shouldn’t it also be ok if you are going to receive something today and pay for it in the future that you pay more in the future than its current price?

In my opinion, the answer is plainly no; when you pay in advance for something, the most you can receive is an expected discount. There is no guarantee that the future price of the item at the time of delivery will actually be less than what was paid for it today. But when you sell something on credit for more than its cash price you are receiving a guaranteed profit for acting as a lender. This in Islam makes all the difference. Contractually requiring a profit for a financier in Islam takes the financing from being permissible to being prohibited riba because this puts undue pressure on the indebted in the case of loss.

Allah says in the generous Quran: “And Allah has allowed trade but prohibits riba.”

Further still, I have demonstrated that a credit sale is an equivalent of taking out a debt from a lender and buying an item in cash. Can you do the same with Bai Alsalam?  Could I say in Bai’ Alsalam it is as if the purchaser loaned money to the party promising delivery? The answer is no because the party promising delivery doesn’t owe any money to the purchaser. Their obligations are limited to delivering what was agreed on at the agreed upon date regardless of how much the market price of the delivered item ends up being.  In Bai’ Alsalam the financer is not entitled to any money in the future nor is there any guarantee made regarding the future market price of the items to be delivered.

So saying that Bai’ Alsalam justifies selling on credit for a premium does not hold up.

The second argument I hear purports that Islam never prohibited selling an item for one price in cash and for a greater price on credit. And since everything in Islam is permissible except that which is explicitly prohibited: this practice is not prohibited.

Firstly, in the opinion of many scholars of hadith, it is not true that Islam never prohibited this. There is a hadith with a very strong lineage of authentication which says:

((مَنْ بَـاعَ بَيْعَتَيْنِ فِي بَيْـعَةٍ فَلَـهُ أَوْكَسُهُمَا أَوِ الرِّبَا ))
“Whosoever makes two sales in one has the right to the lesser of the two prices or has charged riba.”
Many of the hadith scholars like ibn serene, imam Sufyan al-thouri, imam alnisaie…explain this hadith as referring to credit sales wherein the seller says the price is so and so if you pay in cash and it is a higher price if you pay in the future.

Granted, other scholars have differed in opinion on the interpretation of this hadith so for argument's sake, assume it is true that there is no explicit prohibition of selling on credit for a premium…assume this is true for argument's sake. What you cannot deny however is that Islam does very clearly and explicitly prohibit contractually guaranteed compensation for lenders. And so it follows that every practice that involves this contractual guarantee of profit for a lender is prohibited.

It’s like if someone said, Islam never explicitly prohibited sausage and I came and opened up a particular sausage and said if you look inside you can clearly see there’s pork in it, therefore, Islam prohibits consuming this particular sausage … no Muslim would argue with that conclusion… and I’m saying if you examine the component parts of a credit sale that is charging more than the cash price you’ll see that there is riba in it. It involves both a financing and a sale transaction and if you examine the financing transaction you’ll clearly find a contractual guarantee of profit for the lender, this is riba.

The third argument goes something like this: the legitimacy of a sale price is that the buyer and seller have agreed to it and that should be it, so long as they’ve agreed to the sale price there should be no problem.

Again I’m not talking about the legitimacy of a sale price. I’m talking about the legitimacy of a price that has been placed on lending. Whether or not it is packaged as one big sale doesn’t change the substance of the matter.

Recall here what we talked about in my article/video on Murabaha regarding Eina sales. Eina sales are also just sales with two willing participants but the prophet’s widow had no doubt that it was prohibited in Islam because the substance of the Eina sale was a financing transaction. So substance always trumps form in Islam.

In conclusion I find that while selling on credit is completely permissible in Islam, i.e. it is completely permissible for the seller to lend the buyer the price of the purchased item, selling an item on credit at a price greater than the cash price of that item is not permissible because it involves a loan for which the lender is contractually owed a profit.