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
Installment sale financing is a form of sale under which all or part of a tangible asset with a known price is transferred to the buyer, while payment of the price is made in installments. From a legal perspective, ownership of the asset is transferred immediately. At the same time, payment is deferred.
Ownership is transferred immediately to the customer, it serves as a short, medium, or long-term financing tool for production and capital needs, and payment terms are determined in accordance with contractual provisions and banking regulations.
Banks may purchase raw materials, spare parts, and tools required by production units and sell them to such units on an installment basis. The duration of these contracts is generally limited to one production cycle and to a maximum of one year.
The contract duration must not exceed the useful life of the machinery, equipment, or facilities. Banks may provide such financing upon obtaining appropriate guarantees.
Banks may construct affordable housing units and sell them on an installment basis. The conditions and duration of such facilities are governed by regulations issued by the Money and Credit Council.
Yes. Ownership of the goods is transferred to the customer immediately upon execution of the installment sale contract, while payment of the price is made in installments. What is installment sale financing, and what is its legal nature?
What are the main characteristics of installment sale financing?
How is installment sale financing applied to raw materials and tools?
What limitations apply to the installment sale of machinery and facilities?
How is installment sale financing applied to housing?
Is ownership transferred immediately in installment sale financing?
If the buyer wants to pay everything off early, can the seller charge a fee for that or does it have to be allowed without penalties?
That depends on the agreement and the applicable state law. Some installment sale agreements include prepayment provisions, while others do not. The wording of the contract is important. If you are negotiating these terms, it is best to review them before signing to understand how an early payoff would be handled in your situation.
What happens if the buyer misses one payment but catches up a week later?
Not necessarily. Many agreements include notice requirements, grace periods, or specific default procedures before more serious remedies become available. The outcome depends on the contract terms and the governing law. If a payment issue has already arisen, a careful review of the agreement can help clarify the available options.
Is it possible to refinance later with a bank even if the property was originally bought through an installment sale?
In many cases, yes. Buyers sometimes refinance to pay off the remaining balance owed to the seller. Whether refinancing is available depends on factors such as the buyer’s financial qualifications, the property’s condition, and the lender’s requirements. Each situation should be evaluated individually.
Can the seller ask for a bigger down payment after both sides already agreed on the basic terms?
Once a binding agreement has been reached, changing key financial terms generally requires both parties to agree. Until the contract is finalized, negotiations can continue. If there is a dispute about whether an agreement already exists, it is important to review the documents and communications carefully.
Does an installment sale affect the buyer’s ability to sell the property before the payments are finished?
It can. Some agreements restrict a buyer from transferring or selling the property without the seller’s consent until the balance is paid. Others may allow it under certain conditions. The contract language is the starting point for answering that question.
If interest rates drop a lot after signing, can either side ask to change the interest rate?
Generally, the agreed interest rate remains in place unless the contract specifically allows for adjustments or both parties voluntarily agree to modify the terms. It is usually not changed automatically because market conditions have shifted.
What if the property needs major repairs a few months after closing? Does that change the payment obligation?
That depends on the terms of the sale and the circumstances surrounding the repairs. Questions about property condition, disclosures, or responsibility for repairs are often separate from the financing arrangement itself. If significant issues arise, the facts should be reviewed before reaching any legal conclusions.
Can an installment sale be used between family members or does that create extra legal issues?
Family transactions are possible, but they should be documented just as carefully as transactions between unrelated parties. Additional tax and legal considerations may apply, so it is often wise to structure the agreement with professional guidance from the beginning.
If the seller passes away before the payments are finished, who receives the remaining installments?
In many situations, the seller’s rights under the agreement become part of their estate or pass according to their estate plan. The exact outcome depends on the applicable law and the documents involved. If this has become an actual concern, a review of the agreement and estate planning documents would be appropriate.
Are installment sale contracts usually recorded with the county, or is that optional?
Recording practices vary depending on the type of transaction and the jurisdiction. In some situations, recording certain documents helps protect the parties’ interests and provides public notice. The appropriate approach depends on the structure of the transaction and local legal requirements. If you are preparing an installment sale, obtaining advice based on your specific circumstances is recommended.