Case Study Riba and Late Payment Compensation Under the conventional banking system, a debtor who defaulted on a payment obligation may be charged interest. On the other hand, an Islamic Financial Institution (IFI) shall not impose late payment charges as this will infringe the rule of rib a. The charge, if imposed, will constitute an unjustified increment above the principal amount due to deferment of the payment. However, this situation may trigger a moral hazard issue on the part of the customer, especially in a dual banking system where conventional and Islamic banking systems run side by side. A customer may give priority to settle their obligation with conventional banks; thus, putting the Islamic banks at a disadvantage compared to the conventional banks. The Sharia Sharia Advisory Council Bank Negara Malaysia (Central Bank of Malaysia) has allowed the bank to impose taw id on defaulting customer who fails to meet his obligation to pay the financing. The permissibility to charge compensation is, however, not absolute as it is subject to some conditions as follows: 1. The amount of taw id cannot exceed the actual loss suffered by the financier. 2. The determination of compensation is made by a third party, which is BNM 3. The default or delay of payment is due negligence on the part of the customer. The basis of this f atw a is to curb the bad intention on the part of defaulting customer to deliberately delay or not to pay their debt as agreed, and to protect the bank from the actual loss incurred due to the customers negligence. An issue which might arise here is how to determine whether the delay in making the payment is actually due to deliberate negligence or actual financial difficulties on the part of the customer. The essence of the permissibility of taw id is to deter the tendency by customers who might deliberately decide or intend not to pay their obligations as and when due. However, debtors assessed and confirmed to be in actual difficulties should not be punished. Rather, they should be granted ample time to settle their debts. Questions: 1. Why IFI might not impose charges on late payment from their customers? Explain in detail. 2. What is the consequence of such situation? 3. What is the solution proposed by the Malaysian Sharia Authority (as in many other countries)? Do you think this solution is compliant with the rules regarding Riba? 4. In case of actual difficulties faced by the debtor what solution would be suitable in light of the objectives of the sharia?

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