Definition and Scope
Credit agreements are contractual arrangements through which an Islamic financial institution extends a financing facility to a customer using one or more Shari'ah-compliant modes. The standard covers the full lifecycle of a credit facility — from initial application and credit assessment through disbursement, repayment, default handling, and restructuring. the Credit Agreement standard governs all forms of institutional credit, including corporate facilities, consumer financing, trade finance lines, and working capital arrangements.
Types of Credit Facilities
Murabahah-based credit: The institution purchases an asset and resells it to the customer at a disclosed cost-plus-markup, with payment deferred over an agreed schedule. This is the most common form of Islamic credit — used for auto finance, home finance, and trade finance. The markup is fixed at inception and does NOT change based on payment timing. Ijarah-based credit: The institution acquires an asset and leases it to the customer for an agreed rental. At the end of the lease term, the asset may be transferred to the customer through a separate sale or gift contract (Ijarah Muntahia Bittamlik). The rental payments must reflect the asset's usufruct value, not a disguised interest rate. Musharakah-based credit: The institution and customer jointly acquire an asset, with the institution's share gradually transferred to the customer over time (Diminishing Musharakah). The customer makes periodic payments that include both a rental component (for using the institution's share) and a purchase component (buying additional equity). This structure is commonly used for home financing.
Essential Requirements
Shari'ah-compliant purpose: The financing must fund a permissible activity. The institution may NOT extend credit for the purchase of prohibited goods (alcohol, pork products), gambling operations, conventional insurance businesses, or any activity that violates Shari'ah principles. The purpose must be verified at application and monitored throughout the facility's life. Full disclosure of terms: ALL material terms must be disclosed to the customer before contract execution, including: total cost of financing, payment schedule, markup or rental rate, penalties for late payment, conditions for early settlement, and the institution's rights in case of default. No hidden fees or undisclosed charges are permissible. Prohibition of Riba, Gharar, and prohibited activity: The credit agreement must be free from: • Riba (usury/interest) — no interest charges on outstanding balances, no compounding of unpaid amounts, no percentage-based penalties • Gharar (excessive uncertainty) — all terms must be clearly defined; no ambiguity in payment amounts, timing, or conditions • Prohibited activity — the financed asset or activity must not involve anything forbidden under Shari'ah
Default Handling
Connection to the Procrastinating Debtor standard — Procrastinating Debtor (al-Madin al-Mumatil): When a customer defaults on a credit facility, the institution's remedies are governed by the intersection of the Credit Agreement standard and the Procrastinating Debtor standard. A debtor who has the ability to pay but deliberately delays is classified as a "procrastinating debtor" and may be subject to penalties — but these penalties are strictly regulated. Late payment fees — the critical distinction: The institution may impose a late payment charge, but this charge must be a fixed service charge (e.g., 200 AED per missed payment) that represents the institution's actual administrative cost of following up on the default. The charge must NOT be: • A percentage of the outstanding debt — charging 1% per month on the unpaid balance is Riba al-Nasi'ah (interest on deferred payment), regardless of what it is called • Compounding — charging interest on previously accrued late fees is double Riba • Profit-generating — the late fee must cover actual costs, not generate profit for the institution Actual cost demonstration: The institution must be able to demonstrate that its fixed late payment charge corresponds to genuine administrative expenses (staff time, correspondence, legal review). If challenged by a Shari'ah auditor, the institution must produce cost documentation. A fixed charge that vastly exceeds actual costs may be reclassified as disguised Riba.
Credit Assessment and Due Diligence
Pre-approval requirements: Before extending credit, the institution must conduct thorough due diligence on the customer's: • Financial capacity — ability to service the financing without distress • Credit history — track record of meeting financial obligations • Purpose verification — confirmation that the financing will be used for Shari'ah-compliant purposes • Collateral adequacy — if collateral is required, its value must be independently assessed The institution has a Shari'ah duty to avoid extending credit that the customer cannot reasonably service. Extending excessive credit that leads to customer distress violates the Maqasid principle of protecting wealth (Hifz al-Mal) and may constitute exploitation (Istighlal).
Restructuring Provisions
Term extension: If a customer faces genuine financial difficulty (as opposed to deliberate procrastination), the institution may extend the repayment period. The original markup or rental rate remains fixed — the institution may NOT increase the price in exchange for granting additional time, as this would constitute Riba al-Nasi'ah (additional compensation for additional time). Mode conversion: In some cases, the institution and customer may agree to convert the financing from one Shari'ah-compliant mode to another — for example, converting a Murabahah facility into an Ijarah arrangement if the customer's circumstances change. This requires a new contract with full disclosure and Shari'ah board approval. The existing contract must be formally settled or terminated before the new contract takes effect. Debt rescheduling: The institution may reschedule payments (e.g., reducing monthly installments while extending the term) without any additional charge beyond the original agreed price. Charging a "rescheduling fee" that is calculated as a percentage of the outstanding balance would constitute Riba.