Installment Sale Financing Facilities

Installment Sale Financing Facilities

Sale, which is legally referred to as bay‘, is one of the lawful forms of transactions and consists of the transfer of ownership of property by the seller to the buyer in exchange for a consideration paid by the buyer.

A sale is the transfer of ownership of a specific asset in return for a specified consideration. Such transfer may be absolute or conditional, and delivery of the whole or part of the subject matter of the sale, as well as payment of the whole or part of the price, may be deferred.

Accordingly, under the Iranian Civil Code, all forms of sale, including cash, deferred, and forward sales, are valid even if the price or the subject matter of the sale is not delivered at the time of contract formation.

The parties are legally permitted to determine a deferred period for delivery of the goods or payment of the price, and there is no legal requirement for immediate payment or delivery upon conclusion of the contract.

Based on the foregoing principles, installment sale financing, as applied in Iran’s Islamic banking system, is derived from deferred sale. The definition outlined in Article 47 of the Executive Regulation of Chapter Three of the Law on Usury Free Banking reflects this same concept.

An installment sale is the sale of all or part of a tangible asset at a known price, payable in equal or unequal installments at specified intervals.

Rights and Obligations of the Parties in Installment Sale Contracts

Characteristics of Installment Sale Financing

From the perspective of legal nature, pursuant to Article 344 of the Iranian Civil Code, where no specific condition is stipulated in a sale contract and no time is determined for delivery of the goods or payment of the price, the sale is deemed absolute and the price is considered immediately payable, unless commercial custom and usage imply the existence of a deferred condition even if not expressly stated.

Installment sale financing serves as a short-term instrument for meeting the working capital needs of production units for raw materials, spare parts, and tools. It also serves as a medium- and long-term financing instrument to meet the capital needs of production and service units for production equipment, machinery, and facilities. Additionally, it is used as a long-term financing method to meet housing needs.

In installment sale transactions, ownership of the goods is transferred to the customer immediately upon conclusion of the contract.

Installment Sale of Tools, Raw Materials, and Spare Parts

To facilitate the provision of working capital for production units, whether natural or legal persons, banks may purchase the required raw materials, spare parts, and tools exclusively upon the request and commitment of such units for purchase and consumption. The bank may then sell these items to the relevant units on a deferred and installment basis.

Raw materials include any raw, semi-manufactured, intermediate, or packaging materials used in the production of a specific product. Spare parts refer to components used to replace parts of production machinery. Tools include equipment and instruments with a useful life of approximately one year, which are portable without specialized equipment and are used as auxiliary means in the production process.

Installment Sale of Production Equipment, Facilities, and Machinery

The duration of installment sale contracts for raw materials, spare parts, and tools is limited to one production cycle. It shall not exceed one year, unless extended with the Central Bank’s approval.

The duration of installment sale contracts for production equipment, machinery, and facilities shall not exceed the useful life of the assets being sold.

The duration of installment sale financing for housing is subject to the relevant regulations and executive guidelines governing housing facilities.

Banks may, for the purpose of expanding industrial, mining, agricultural, and service activities, purchase movable assets upon the customer’s request and commitment, for direct use or consumption, and sell such assets to the customer on an installment basis upon obtaining appropriate guarantees.

Assets covered by this type of financing include production equipment, machinery, and facilities with a useful life of more than one year. Useful life refers to the period during which the machinery can be effectively utilized, as reflected in tax depreciation tables. Equipment used in production processes is classified as production tools; devices operated by mechanical power are classified as machinery; and items necessary for the proper use of machinery or for the performance of service activities are classified as facilities.

Installment Sale of Housing

Banks may, for the purpose of facilitating housing development, construct affordable residential units and sell them on an installment basis.

The conditions and regulations governing the granting of housing facilities and the assessment of the useful life of residential units are determined by the Money and Credit Council.

Frequently Asked Questions Regarding Installment Sale Financing