Sunday 4 Ramadan 1444 - 26 March 2023

Islamically-acceptable alternatives for the bank to acquire what is owed to it, instead of charging a penalty for late payment when selling by instalments


Publication : 03-02-2023

Views : 881


You mentioned previously, in question no. 140603 , that it is not permissible for an Islamic bank to stipulate a penalty to the customer in order to guarantee that he will pay the instalments that he owes to the bank for financing a purchase at the times agreed upon between the two parties. My question is: Is there any alternative that is permissible according to Islamic teachings, instead of a financial penalty, that Islamic banks can stipulate that the customer should pay in real estate transactions such as these, in order to guarantee that he will pay instalments on time?


Praise be to Allah.

If the bank sells a property to the customer by instalments, it is not permissible for them to stipulate a penalty in the event of late payment, because the instalments are a debt that the customer owns, and charging a penalty for late payment of a debt comes under the heading of riba. Please see the answers to questions no. 89978 and 112090 .

It is permissible for the bank – in order to guarantee its rights – to appoint someone as a guarantor, meaning someone else in addition to the borrower from whom the bank can demand payment, if the one who owes money delays payment or takes too long to pay.

The bank can also take something in pledge, which includes taking the purchased item itself as a pledge, so it will be held in pledge until the payments are complete, whilst allowing the customer to continue using it. The benefit of this pledge is that the customer cannot sell it. It is permissible to stipulate that if he is unable to pay, then the bank will sell the item that is held in pledge without needing to go to court.

Another means of guaranteeing payment is stipulating that the customer should open an account in the bank, and allow the bank to have access to it, so that it can take instalments directly from it as soon as his salary is paid into the account (direct debit).

And another means is putting the customer on a blacklist, and agreeing with all other banks that they will not deal with those whose names appear on this list.

And Allah knows best.

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Source: Islam Q&A