Another major difference between Islamic & conventional financial institutions is in terms of when a customer delays in paying an instalment, whether or not the institution affected can charge late payment fees. If such a scenario happens to the customer of a conventional financial institution, the institution can charge late payment fees or interest to compensate them for the delay by the customer in paying the amount due.
Islamic financial institutions on the other hand do not have such an option, as any additional amount would be tantamount to interest (riba) which is prohibited in Islamic law. Therefore, in principle, Islamic financial institutions are unable to charge any late payment or delay fees to their customers, which is in stark contrast to a conventional institution.
Due to this prohibition, initially, many of the Islamic financial institutions, did not impose any form of late payment amount on customers who delayed in paying their debts. However, eventually Islamic financial institutions began to face a problem as many solvent customers would intentionally delay their payments to the Islamic financial institutions as they were aware that they could get away with it without being charged anything e.g. if a customer had a finance facility from both a conventional & Islamic financial institution, they would tend to be more timely in paying the conventional institution because if they didn’t they would be charged a late payment fee, whereas with an Islamic financial institution they wouldn’t be charged anything.
This issue was evaluated by Shariah scholars of various Islamic financial institutions and based on an opinion within the Maliki Madhab, it was allowed for Islamic financial institutions to stipulate within their contracts, an undertaking by the customer, mentioning that the customer undertakes to donate a late payment amount to charity if they delay in any instalments. The Islamic financial institution would collect this amount on behalf of the customer and distribute it to a charity approved by the institution’s Shariah board.
The above view was adopted and is now widely practiced by Islamic financial institutions globally. It was approved by AAOIFI in Shariah Standard No. (3): Procrastinating Debtor as reproduced below:
2/1/8 It is permissible in contracts involving indebtedness (such as Murabahah) to stipulate an undertaking by the debtor, that in case of procrastinating in payment, the latter will donate an amount or a percentage of the debt to be spent for charitable causes through the Institution.
To read more about the role of AAOIFI & their Shariah Standards, please refer to our previous article (link below):
https://rizqonomics.com/blog/islamic-economics-finance-reading-list-1-aaoifi-shariah-standards/
From the links in the above article you can download the PDF versions of the AAOIFI Shariah Standards which will enable you to read Shariah Standard No. (3): Procrastinating Debtor in more detail and understand the Shariah basis for the above opinion.
As mentioned previously, while AAOIFI’s opinion on late payment amounts has been widely adopted by Islamic financial institutions globally, there are still some Islamic financial institutions within Saudi Arabia and possibly elsewhere, whose Shariah boards do not allow any form of late payment amounts even if the amount subsequently goes to charity.
From the above discussion, we have highlighted another clear difference between Islamic & conventional financial institutions. Conventional financial institutions can charge late payment fees and keep it as part of their income whereas Islamic financial institutions either do not charge any late payment fees or if they do collect any amount, it goes to charity and doesn’t form part of their income.
To read the previous post (#2) of this series, please click the link below:
To read the next post (#4) in this series, please click the link below:
