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​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.




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