Islamic Scholars Divided on Late Payment Penalties

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Islamic Scholars Divided on Late Payment Penalties

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The issue of late payment penalties in Islamic finance has been a subject of ongoing discussion among Islamic scholars, with differing viewpoints arising from interpretations of Shariah principles. The majority of contemporary scholars generally consider any additional charge for delayed payments as Riba, or usury, which is strictly prohibited in Islam. They cite Quranic verses and Hadith that forbid Riba, emphasizing that if a debtor is experiencing poverty, they should be granted an extension, and forgiving the debt entirely is considered virtuous.

However, a different perspective has emerged among some contemporary scholars, particularly in the context of Islamic banking. These scholars distinguish between *ta’widh*, which is compensation for actual financial losses incurred by the creditor due to late payment, and *gharamah*, a penalty intended to deter delays. The Shariah Advisory Council of Bank Negara Malaysia, for instance, in resolutions from 2010, has allowed for a late payment charge mechanism that includes both *gharamah* and *ta’widh*. Under this framework, *ta’widh* can be recognized as income for the financial institution to cover actual losses, while *gharamah* cannot be recognized as income and must be channeled to charitable causes. This approach aims to address the harm caused by delayed payments while still adhering to the prohibition of Riba.

It is important to note that even within this nuanced view, there are conditions. For example, *ta’widh* can only be imposed after the agreed-upon repayment period has lapsed. Furthermore, if a debtor is genuinely unable to pay, Islamic teachings emphasize granting them respite. The debate highlights the complexities of adapting Islamic finance principles to modern economic practices while upholding core

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