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The Profitable Shift: Implementing Installment Sales For Business Growth

A muslim woman wearing a hijab is using a laptop for business.

If you are a merchant in the Kingdom of Saudi Arabia, will it be beneficial to enable installment sales in your store?

This typically means cooperating with a financial services company or a provider of personal finance in Saudi Arabia offering Murabaha financing.

What Is Murabaha Financing?

In Murabaha, everybody gains something. The merchant gains a sale, the financing company profits, and the buyer gets to spread the cost of a big purchase over time.

Murabaha is Shariah-compliant for the following reasons:

  • It lets the financing company earn a profit, not interest; the gain is its return for assuming ownership of the item and the risk of not recouping what it paid.
  • It is fair, confident, and transparent because the buyer knows exactly how much the financing company paid the merchant, how much profit the financing company is earning, how much he needs to pay per month in installments, and how long he must pay before the item's ownership can be fully transferred to him.
  • It is asset-based, as the transaction is anchored on an appliance, furniture, and even real estate.
  • It is also ethical; this financing scheme may only be used to purchase something that will not harm the community.

Murabaha is one of the most popular and fastest-growing Shariah-compliant financing structures, growing 38.4% in 2021 compared to 16.5% for Tawwaruq and 9.8% for Ijara. According to Arab News, Murabaha reached SAR 779 billion ($207.7 billion) in 2021.

The Benefits of Enabling the Murabaha Installment Sales Option 

Merchants who wish to enable Murabaha must work with financial services companies that offer it. The following are a few of the benefits that await when you allow Murabaha installment sales:

Increase Sales

One of the most significant benefits of enabling installment sales is the potential for increased sales. There are two potential ways this can happen.

First, it can make your products accessible to a broader audience. Many customers may not have the necessary funds to make a large purchase upfront, which is why people may not shop at your store. You can overcome this obstacle by offering installment payment plans, activating new markets, and increasing your revenues.

Second, enabling installment sales through Murabaha financing can help you increase basket size or lead to higher average order values. Customers are more likely to purchase higher-priced items if they can spread the cost over time. Thus, if you offer an installment payment plan, you can empower your buyers to buy more items, purchase something more expensive and, ultimately, spend more at your store.

When you can raise the average value or basket size of every order, you can increase your revenue and profitability.

Reach New Customers

As mentioned earlier, an installment payment plan can expand a merchant's audience. Some customers do not have the funds right now or do not have enough funds for a big-ticket purchase but, given the opportunity and the means, are more than willing to proceed with a purchase.

Installment payment plans give these customers the opportunity and the means. Enabling Murabaha installment sales with a partner financing company will unlock market segments you may not have been able to reach before.

Improve Customer Experience

The credit card penetration rate in Saudi Arabia is estimated to be 0.3 credit cards per person. Statista predicts this will continue to increase and reach a new peak in 2028. However, it will still be far from other countries' credit card penetration rates. In the United States, for instance, Statista estimates the credit card penetration rate to be at 62.73% in 2023.

The relatively low credit card penetration rate has implications for the customer experience. Specifically, it means that the convenience of paying via a credit card to pay for a big-ticket purchase and then paying the credit card company in installments is not something everybody can enjoy.

By partnering with a Murabaha installment sales financing company, you can offer installment payment convenience to all your customers, even those who do not have credit cards. Enabling installment sales will help you give your customers a positive customer experience.

Increase Customer Loyalty 

By offering installment plans, you can increase customer loyalty and retention. Customers are likely to patronize a business that offers flexible payment options, especially if they have had a positive experience with the company.

Enhance Competitive Advantage

Suppose Jane has to buy a new bed. She has no credit card, but the furniture cost is much higher than she is prepared to pay in one lump sum. Given a choice between a furniture store that offers an installment payment plan and another that does not provide the same, where do you think Jane will shop?

Indeed, enabling installment sales can give your business a competitive advantage over other retailers that do not offer flexible payment options. This can help you attract and retain customers in a competitive market.

Avoid Risk

Cooperating with a financial services company willing to finance installment purchases is an excellent way to boost sales without increasing risk. In a Murabaha arrangement, the financing company assumes all risks in the installment sale. As the merchant, you don't have to do anything but sell the product to the financial services company. You don't have to collect payments, so you don't have to hire payment collectors. You don't have to pay anyone to assess and evaluate buyers for fit and creditworthiness.

Enable All the Benefits Without the Risks

Murabaha is a financing arrangement available in Saudi Arabia and other Muslim states, and it allows customers to purchase products and assets on an installment basis.

You will do well to partner with a financial service company to enable Murabaha installment sales for your store. Doing this will allow you to improve your sales and customer experience, increase your sales and customer loyalty, and enhance your competitive advantage while helping you avoid the risks of selling products on installment.

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