The Arrangement of 'Buy-back on Mark-up'

The Supreme Court of Pakistan, in determining the applications and implications of the term “Riba” asked for assistance of religious scholars and other interested people of the country. For this purpose, answers to ten questions were sought. The third among these questions was:

The Pakistani banks and some financial institutions finance their clients on the basis of buy back on mark-up agreements. According to this method, the client of the bank purports to sell a particular commodity to the bank, and simultaneously buys it back on a high price on deferred payment basis. A certain rate of mark-up (percent per annum) is applied to the second sale. Does this arrangement fall within the ambit of Riba?

My Reply to this question follows:

As has been explained in my reply to the first question, this kind of transaction was called “Bai` al-`eenah” or the transaction of al-`eenah. This kind of transaction is so similar to a simple transaction of interest bearing loans that “Aqrab al-Mawarid” has mentioned it in the very definition of the term “Riba”.

This kind of transaction shall fall within the ambit of Riba because of the combination of the following factors in this transaction:

• It entails gain on credit sale, which is over and above the gain on cash sale; and

• A certain rate of mark-up (percent per annum) is applied to the second sale

both these factors actually amount to: “a gain on a loan (credit sale), at a predetermined rate (certain rate of mark-up), which the lender demands from the borrower for allowing the borrower to use his financial assets for a given period of time (percent per annum)”, which, as is clear from my answer to the first question, is the very definition of “Riba”.