This study aims to investigate whether offering contractual rebates in deferred sales equals or differs from offering them in loans and critically evaluate the practice of discretionary rebates in Islamic finance.
The study follows a qualitative approach. It obtains primary data through 15 qualitative interviews with Sharìah scholars and Islamic bankers. A general review is conducted to consult classical sources of Sharìah and other related scholarly materials to delve into the issue. The study utilises a thematic analysis technique to investigate qualitative data.
The study finds that a contractual increase in the price of deferred sales due to a moratorium is permissible, and it differs from an increment in loans, which is riba, i.e., usury. Likewise, a contractual rebate on deferred sales due to early settlement is lawful, not riba. Even a contractual loan reduction due to early repayment is permissible, not riba, based on the Prophet’s saying dà wa tàajjul, i.e., “reduce and expedite.” Offering contractual rebates does not contradict Sharìah. Rebates motivate clients to make regular and prompt repayments. The study verifies that a discretionary rebate does not provide this benefit; instead, clients feel insecure about whether and how much rebate they will obtain, depending on banks’ discretion. A discretionary rebate may cause disputes and gharar, i.e. ambiguity, in agreement. The study posits that a contractual rebate can be offered, and necessary clauses on a mandatory rebate and its calculation formula shall be incorporated into the main contract. Nonetheless, offering rebates has become a custom, resembling an agreement stipulation. The regulators could oblige to offer rebates, provided it secures public wellbeing and eliminates possible harm.
This study advocates a contractual rebate, which removes clients’ unhappiness and the possibility of dispute. By incorporating a binding rebate into the agreement, Islamic banks will remain competitive and flexible in pricing. A secure rebate genuinely encourages customers to settle their debt promptly. Moreover, the study would lead to a harmonisation of rebate offerings in Islamic finance across jurisdictions.
Previous studies theoretically addressed contractual rebates but made no difference between loan and credit sale rebates. This study is an unprecedented effort to examine empirically the validity and implications of contractual rebates. It highlighted the difference between the loan and deferred sale rebates. Additionally, the study will support Sharìah scholars, Islamic bankers and regulators in allowing and guiding contractual rebates accordingly.
