Islamic Contract – Bay’ al-Murābahah: Late Payment Charges in Murābahah Transactions

​Islamic Contract – Bay’ al-Murābahah: Late Payment Charges in Murābahah Transactions
Q1: What are late payment charges in murābahah financing?
Answer:
Late payment charges refer to charges imposed on customers who fail to make payment within the agreed payment period in a murābahah contract.
In Islamic finance, late payment charges are carefully regulated to ensure that they:

• do not amount to ribā (interest); and
• are imposed only for legitimate Shariah purposes such as compensation or deterrence against intentional delay.

Q2: What is the AAOIFI position regarding late payment charges?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 5/6):

• the murābahah contract may include an undertaking by the customer to pay an amount of money or percentage of the debt upon late payment;
• however, the amount collected must be donated to charitable causes.

This means:

• the Islamic bank cannot treat the penalty amount as profit or income;
• the purpose is mainly to discourage deliberate default by customers.

AAOIFI adopts this approach because:

• benefiting financially from late payment resembles ribā;
• therefore, any collected penalty should not enrich the bank.

Q3: What is the BNM position regarding late payment charges?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 19.1):

• the murābahah contract may include a clause imposing late payment charges;
• these charges may consist of:
  • gharamah (penalty); and
  • ta‘wīd (compensation).

The amount imposed must follow the rates and guidelines determined by the relevant authorities.
Meaning of Gharamah

• Penalty imposed to deter late payment.
• Usually channelled for charitable purposes and not recognised as bank profit.

Meaning of Ta‘wīd

• Compensation for actual loss suffered by the bank due to delayed payment.
• May be recognised as income to the extent of actual losses incurred.

BNM’s approach balances:

• Shariah compliance;
• operational practicality; and
• financial discipline in Islamic banking.

Comparison Notes: AAOIFI vs BNM on Late Payment Charges
AAOIFI Position

• Late payment undertaking allowed.
• Amount collected must be donated to charity.
• Bank cannot profit from customer’s delay.
• Stronger precaution against ribā.

BNM Position

• Late payment charges expressly allowed.
• Includes:
  • gharamah (penalty); and
  • ta‘wīd (compensation).
• Charges subject to regulatory limits.
• Bank may recover actual losses through ta‘wīd.

Case Study 1: AAOIFI Approach on Late Payment
An Islamic bank provides murābahah financing for equipment.
Figures

• Murābahah selling price: RM120,000
• Monthly instalment: RM2,000
• Customer delays payment for 3 months.

The contract states:
“In the event of late payment, the customer undertakes to contribute 1% of overdue instalments for charitable purposes.”
Calculation

• Overdue amount = RM6,000
• 1% late payment amount = RM60

The RM60 collected:

• cannot be recognised as bank profit;
• must be channelled to charity.

Analysis

• Purpose is deterrence, not profit-making.
• This arrangement complies with AAOIFI standards.

Case Study 2: BNM Approach on Late Payment
An Islamic bank grants home financing through murābahah.
Figures

• Murābahah selling price: RM500,000
• Monthly instalment: RM3,000
• Customer delays payment for 4 months.
• Total overdue amount = RM12,000

The contract includes:

• ta‘wīd rate = 1% per annum;
• gharamah imposed according to BNM guidelines.

Calculation Example
Ta‘wīd (Compensation)
RM12,000 \times 1\% \times \frac{4}{12}
12000 \times 1% \times \frac{4}{12} = 40
Ta‘wīd payable = RM40
Additional gharamah may also be imposed according to regulatory guidelines.
Analysis

• Ta‘wīd compensates the bank for actual losses caused by delayed payment.
• Gharamah functions as a deterrent penalty.
• The arrangement complies with BNM requirements.

Notes: Important Principles Regarding Late Payment Charges
AAOIFI Emphasis

• Penalties allowed only as deterrence.
• Amount collected must go to charity.
• Bank cannot profit from delay.

BNM Emphasis

• Allows both:
  • ta‘wīd (compensation); and
  • gharamah (penalty).
• Charges regulated by authorities.
• Bank may recover actual losses.

Common Shariah Principle
Late payment charges in Islamic finance must:

• avoid ribā;
• prevent injustice;
• encourage payment discipline; and
• remain within Shariah-approved limits.