Qist Bazaar has secured a Shariah Compliance Certificate. What does it mean?

The Securities and Exchange Commission of Pakistan (SECP) has for the first time ever granted a Shariah compliance certificate to a licensed non-banking finance company (NBFC) that specialises in Buy Now Pay Later (BNPL) services. The certificate aligns with the Shariah principle of Musawamah, which incorporates profit margins into the sale price of commodities.

Qist Bazaar (Private) Limited, the recipient of this coveted certification, received it under the Shariah Governance Regulations of 2018. The startup caters to investment finance services for which it has enlisted the expertise of a Shariah advisor Mufti Ibrahim Essa from Alhamd Shariah Advisory services Pvt Ltd to structure their financial products and services in compliance with Shariah regulations. 

This unprecedented move marks the issuance of the first-ever Shariah compliance certificate for a BNPL platform, representing a significant stride towards promoting Shariah-compliant financial instruments and facilitating novel business models for tech-driven entrepreneurs. The Commission believes that this can be a pivotal framework for the endorsement of Shariah-compliant entities and securities. 

Arif Lakhani, the co-Founder of Qist Bazaar told Profit that Qist Bazaar is the only BNPL service in Pakistan that has received this certification from SECP and that the certification process spanned nearly a year and involved a comprehensive evaluation, including an audit of their financial operations. 

The structure of credit offering under Musawamah

Profit asked Lakhani to explain how Musawamah works, to which he said that Musawamah is an Islamic financing method for product-based transactions. 

Lakhani told Profit that, “Both the buyer and seller agree on the product and its price upfront, which includes profit and expenses. The buyer starts with an initial payment, often as a down payment and the remaining amount is paid through negotiable instalments, offering flexibility.”

He continued, “The profit earned by the seller is not explicitly disclosed but included in the product’s total price, complying with Islamic finance principles.” 

When inquired whether the customers are aware of the instalment structure upfront or if the instalments are linked to any benchmark, Lakhani explained that the instalment amounts and total sum are determined prior to agreement signing, with no additional fees regardless of circumstances, including fluctuations in central bank rates.

 How does this model differ from conventional BNPL offerings by other startups?

This is a relatively new concept for those who are not familiar with Islamic financing, especially in a BNPL capacity. Lakhani elaborated upon the main ways in which the Musawamah model of financing breaks away from conventional instalment models. 

“Firstly, none of the other BNPL startups provide their services to the general public. They all require a credit card or a bank account as a prerequisite for their financing services. Qist Bazaar, on the other hand, caters to the unbanked and underserved population, eliminating the need for cards or bank accounts,” Lakhani explained. 

According to the Financial Access and Behaviour of Individuals report by Karandaaz, financial inclusion stood at 30% of the total population of Pakistan in 2022. This means that only 30% of the 235 million people in the country had access to formal financial products and services. Moreover, the same report highlighted that only 13% of the population had access to digital financial tools in 2017 and the proportion of formal borrowers was a mere 3.5% in 2021. 

Qist Bazaar’s services aim to solve a pressing problem, by catering to individuals who lack access to formal banking channels and tools. 

Profit requested analyst Waqas Ghani to share his insights on this unprecedented development. He said that, “Services like these can help individuals who do not have a bank account in accessing credit and taking part in economic activities, potentially contributing to economic growth. If BNPL services adhere to Shariah principles, they may also attract those uncomfortable with conventional interest-based credit options.”

Secondly, Lakhani also mentioned that Qist Bazaar has a Shariah advisory firm on board. This advisory firm not only guides them in adhering to the principles of Musawamah in their processes but also ensures that business operations, advertising practices, and other aspects align with the teachings of Islam. “This commitment to transparency and compliance means that Qist Bazaar does not impose processing costs, late fees, or any hidden charges on its customers,” Lakhani shared. 

Profit reached out to Shehryar Hydri, Managing Partner at Deosai Ventures, to share his perspective on this new model of shariah compliant BNPL. Hydri, talking from an investor’s point of view, said that, “BNPL is really tricky and has suffered as a sector globally but there are a few players that are executing with caution.”

“At the end of the day, consumers’ buying power is eroding and they need convenient instalment plans to maintain or improve their lifestyle. BNPL can provide one of those platforms if the markups are not predatory,” Hydri asserted. 

He also highlighted that, “As far as Shariah compliant BNPL is concerned, it’s just a need of the market that they’re catering to, similar to Ijara, Sukuk and other instruments.”

In an unrelated news, the startup has also expanded its debt facility. According to Lakhani, the company has successfully closed off a debt facility with another bank (in addition to BAFL) under Shariah-compliant terms.

Moreover, the company initiated a strategic funding round. Lakhani disclosed that, “We initiated the funding round with a focus on raising modest amounts to complement our debt-based funding strategy. Stocks through their Demo Day Fund 1, have chosen to invest in Qist Bazaar, joining others who are in the process of closing their investments.”