SS 58: Repurchase Agreement / Buyback

What this standard is about

A buyback is simple on the surface: someone sells an asset and later buys it back. But the details decide whether the deal is a genuine sale or a disguised interest-bearing loan. This standard covers the buyback of tangible assets or usufruct rights, the conditions that keep it lawful, and its modern applications, including sale-and-lease-back deals and repurchase agreements (repos) used for liquidity.

Why it exists

Buyback tricks are one of the oldest ways to dress up interest as trade. A person "sells" something for cash today and "buys" it back later at a higher price, and the difference functions exactly like interest on a loan. Islamic banks also need legitimate short-term liquidity tools. This standard separates lawful buybacks from forbidden ones and gives banks Shariah-compliant alternatives to conventional repos.

The key rules, simply put

• The first sale must be real. Ownership must genuinely transfer: the buyer gets the benefits of the asset and bears the risk of its loss.
• The buyback must be a separate, independent contract. It may never be written as a condition of the first sale.
• Only one binding unilateral promise to buy back is allowed. Binding promises from both sides turn the deal into a disguised loan.
• There must be no collusion to produce a higher deferred price than the spot price ('inah). Forbidden patterns include selling on credit and buying back for cash at a lower price, or selling for cash and buying back on credit at a higher price.
• A price difference is acceptable when there is no collusion and it reflects a genuine change in the asset's value, or when the buyback is by an independent third party.
• A conventional repo, where securities are "sold" for cash and repurchased later at a higher price without any real transfer of ownership risk or yield, is treated as an interest-bearing loan backed by securities. It is not permitted.
• Lawful liquidity alternatives include selling permissible securities such as stocks, sukuk, or fund units with a unilateral promise to buy back, and tawarruq transactions.
• Sale-and-lease-back is allowed if the lease is independent of the sale.
• A partner in a musharaka or mudaraba may promise to buy back at the market price at the time, but may not promise a fixed price that guarantees the capital.

An everyday example

A company sells its machinery to a bank for cash and immediately leases it back for five years under a separate lease contract. The bank truly owns the machines and bears their risk. This is allowed. If instead the company "sold" shares to the bank today with a binding two-way agreement to repurchase them next month at a fixed higher price, that is a disguised interest loan and is forbidden.

Words to know

• 'Inah — a buyback trick: selling on credit then buying back for cash at a lower price, used to disguise an interest-bearing loan.
• Repo — repurchase agreement: selling securities for cash today and agreeing to buy them back later at a higher price.
• Tawarruq — buying a commodity on credit and selling it to a third party for cash to raise funds.
• Rahn — a pledge or mortgage; an asset held as security for a debt.
• Usufruct — the right to use something and enjoy its benefits.

Source

• AAOIFI Shariah Standard No. 58 — clauses 3/1, 3/3, 3/4 quoted in Suhuf journal, Vol. 37 No. 1 (2025) — https://journals2.ums.ac.id/suhuf/article/download/8114/3415 (no free full text of the standard is published; AAOIFI sells the complete text)