Riba and Late Payment Compensation Under the conventional banking system, a debtor who defaulted on a payment
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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 ta‘w 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 ta‘w 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 customer’s 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 ta‘w 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?
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 ta‘w 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 ta‘w 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 customer’s 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 ta‘w 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?
Expert Answer:
1 Islamic Financial Institutions IFIs do not impose charges on late payments from their customers due to the prohibition of riba in Islamic finance Ri... View the full answer
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