Is It Permissible to Impose Late Payment Fees on Customers?

Answered by Shaykh Ahmed al-Ahmed

Question

Is it permissible to impose late payment fees on customers for installment payments?

Answer

In the name of Allah, and all praise is due to Allah, and prayers and peace be upon the Messenger of Allah.

When a debtor delays repaying his debt at the specified time, he causes the creditor to lose the equivalent profit that the creditor could have earned by investing an amount equal to the money delayed by the debtor. Or, the debtor might cause financial damages such as penalties due to contractual breach conditions, because of his failure to fulfill obligations that the creditor has with individuals or institutions, etc.

So, is the procrastinator obligated to pay such equivalent profits that the creditor would have earned during the delay period, or to compensate for the financial damage incurred? [Al-Iqtisad al-Islami (5th), Majallat Jami‘at al-Malik ‘Abd al-‘Aziz]

Perhaps the first to raise this issue for discussion was the esteemed Shaykh Mustafa al-Zarqa (Allah have mercy on him). He said: “As far as I know, the jurists of the schools of thought have not previously dealt with this issue – that is, compensating the creditor for the delay in fulfilling the due payment in debts – and have not researched it. The reason for this, in my estimation, is threefold:

• This matter did not hold as much importance and impact in the dynamics of business and trade in the past as it does in the present era.
• In the past, it was easier and faster for a creditor to obtain their rights through judicial proceedings when a debtor delayed or procrastinated in repayment. This contrasts with the situation today in our current era.
• This issue involves a level of religious sensitivity, which could be among the factors why it was not extensively researched. This includes the fear of falling into the sin of usury (Riba). [Zarqa, Majallat Abhath al-Iqtisad al-Islami]

It should not be readily accepted that Shaykh Mustafa al-Zarqa’s view that the jurists did not examine this issue is correct. In fact, they did study it, but they did not dedicate separate discussions to it; because, in their view, it falls under the general category of Riba (usury). Therefore, it was not difficult for the majority of contemporary jurists to find numerous shreds of evidence that categorize this issue under the type of usury that the Holy Quran severely penalizes.

Legal Rulings

Contemporary jurists differ in their ruling on this issue and in the penalty for a debtor who procrastinates in paying a financial penalty in compensation for the resulting damage, whether through loss of profit or direct harm. They have expressed three main opinions:

• Unlawful;
• Lawful; and
• The financial penalty for actual damages only.

First Opinion: Unlawful

It is forbidden to compensate the creditor for lost profit or for the damage incurred. This is the view of the early scholars and the majority of contemporary jurists.

Among them are Dr. Wahba al-Zuhayli in his book, “al-Mu‘amalat al-Maliyya al-Mu‘asira,” Nazih Hammad in his book, “Dirasat Fi Usul al-Madayinat,” Usmani in his book, “Buhuth Fi Qadaya Fiqhiyya Mu‘asira,” Usman Shabbir in his book, “Siyanat al-Madyuniyat Wa Mu‘alajatuha Min al-Ta’thur Fi al-Fiqh al-Islami,” Muhammad al-Ashqar in “Buhuth Fiqhiyya Fi Qadaya Iqtisadiyya Mu‘asira,” and others like Ajil al-Nashmi, Saeedi, Hassan al-Amin, Ibn Bayya, Rafiq al-Masri, Muhammad al-Qari, and others in their research.

As stated in the resolution of the Islamic Fiqh Council affiliated with the Organisation of Islamic Cooperation in its sixth session on installment sales: “If the buyer (debtor) delays in paying the installments beyond the specified time, it is not permissible to obligate him to any increase on the debt, whether with a prior condition or without. For that would be usury, which is prohibited. It is forbidden for a solvent debtor to procrastinate in paying what is due at the time of the installments, but still, it is not legally permissible to stipulate compensation in the event of a delay in payment.” [Majallat al-Majma‘ al-Fiqhi (Volume Six)]

They base their arguments on the following evidence:

• Allah (Most High) says: “But Allah has permitted trading and forbidden interest.” [Quran, 2:275]
  This verse indicates the prohibition and nullification of usury, which is any increase in debt in exchange for a delay. [Tabari, Jami‘ al-Bayan fi Ta’wil Ay al-Quran; Ibn Atiyya, al-Muharrar al-Wajiz]
  Imposing a fine on the debtor for the damage incurred during the period of procrastination is essentially an increase in the fixed debt in exchange for a delay, which is exactly the usury that the verses were revealed to nullify. The difference in terminology does not change the realities. [Bin Bayya, Tawdih Awjieh Ikhtilaf al-Aqwal fī Masa’il min Mu‘amalat al-Amwal; Butaybi, al-Awraq al-Tijariya]
• “But if you repent, you may retain your principal—neither inflicting nor suffering harm.” [Quran, 2:279]
  This noble verse indicates that the creditor is entitled only to his principal amount. It does not differentiate between a debtor who is insolvent and one who procrastinates. Any increase over the principal is usury, and even if the procrastinator is unjust in his delay, it is not permissible to combat injustice with another injustice. [Nazih Hammad, Dirasat fi Usul al-Madayinat]
• The saying of the Prophet Muhammad, peace be upon him: “Delay in payment on the part of one who possesses the means makes it lawful to dishonor and punish him.” [Abu Dawud; Nasa’i; Ibn Majah; Aḥmad]
  Delay was present during the Prophet’s time (Blessings and peace be upon him), and he clearly stated that delay makes the dishonor and punishment of the procrastinator lawful, but he did not say it makes his wealth lawful. Had it been permissible, the Prophet (Blessings and peace be upon him) would have clarified it, as the need for it was significant, and silence at a time of need is indicative. [Usmani, Buhuth fī Qadaya Fiqhiya Mu‘asira; Nazih Hammad, Dirasat fī Usul al-Madayinat]
• The issue of procrastination is not a new one requiring fresh jurisprudential effort; it is an old issue that frequently arises. No jurist before this era is known to have permitted the imposition of a financial penalty on a procrastinating debtor for the creditor’s benefit, which indicates that they considered it a form of prohibited usury. [Usmani, Buhuth fī Qadaya Fiqhiya Mu‘asira; Ḥasan al-Amin, Ta‘liq ‘ala Baha al-Zarqa; Bin Bayya, Ta‘liq ‘ala Baha al-Zarqa; Majallat Dirasat Iqtisadiya Islamiya]
• If imposing a financial penalty on a procrastinator is not usury in itself, it certainly is a means leading to it. According to the jurisprudential principle of “blocking the means” [Zarkashi, al-Bahr al-Muhit; Shatibi, al-Muwafaqat, Shawkani, Irshad al-Fuhul], endorsing it opens the door to usury, as happened with the Christians [Rafiq al-Misri, Bay‘ al-Taqsit Tahlil Fiqhi Iqtisadi] who legitimized the forbidden usury in their law under the pretext of compensating for damage. [Jaza‘iri, ‘Aqd al-Qard, li al-Jaza‘iri: 205, Rafiq al-Misri, Bay‘ al-Taqsit Tahlil Fiqhi Iqtisadi]

Second Opinion: Lawful

It is permissible to compensate the creditor for the lost profit or the losses and damages incurred. This view is held by some contemporary jurists, including Dr. Mustafa al-Zarqa, who discussed this in his research “Hawl Jawaz Ilzam al-Madin al-Mumatil Bi-Ta‘wid al-Da’in,” Shaykh Abdullah bin Muna‘, who mentioned this in his research “Matl al-Ghani Zulm Wa-Annahu Yuhillu ‘Irdahu Wa-‘Uqubatu,” Dr. Muhammad al-Amin al-Darir, and Dr. Abdul Hamid al-Saih in “A‘mal al-Nadwa al-Fiqhiyya al-Rabi‘a Li-Bayt al-Tamwil al-Kuwayti,” and Dr. Abdul Hamid al-Baali in his book “Ususiyyat al-‘Amal al-Masrifi al-Islami al-Waqi‘ Wa al-Afaq.”

They base their opinion on the following evidence:

• The verses indicate the importance of fulfilling contracts, delivering trusts, and maintaining justice; including:
  “O believers! Honor your obligations.” [Quran, 5:1]
  “Indeed, Allah commands you to return trusts to their rightful owners; (…).” [Quran, 4:58]
  “Honour (your) pledges, for you will surely be accountable for them.” [Quran, 17:34]
  “Indeed, Allah commands justice, grace, (…).” [Quran, 16:90]
  It is noted from these verses that Allah (Most High) commands the fulfillment of contracts, delivery of trusts, and justice. The command of Allah is obligatory to follow, and anyone deviating from justice is unjust. The unjust, if his injustice leads to harming others, is responsible for that. Undoubtedly, the procrastinating debtor is unjust and has deprived the creditor of benefiting from his money, which necessitates his responsibility for that. Therefore, imposing a financial penalty on him for the damage inflicted on the creditor is in line with the justice commanded by Allah. [Zarqa, Hawl Jawaz Ilzam al-Madin al-Mumatil bi-Ta‘wid li al-Da’in]
• Based on a saying of the Prophet Muhammad (Blessings and peace be upon him) narrated by Abu Sa‘id al-Khudri: “There should be neither harming nor reciprocating harm.” [Ibid.]
  The Prophet, peace be upon him, in this hadith, emphasized the prohibition of harm and ordered its removal. The harm inflicted on the creditor cannot be removed except by financially compensating for the lost benefits of his money during the period of procrastination. Punishing the procrastinating debtor in a way other than financial compensation does not benefit the creditor, so his harm can only be removed by financial compensation. [Ibid]
• The previous hadith (“Delay in payment on the part of one who possesses the means makes it lawful to dishonor and punish him.”) indicates that the procrastinator deserves punishment, and one form of punishment is monetary penalization, as affirmed by scholars like Imam Abu Yusuf from the Hanafi school, Ibn Farhun from the Maliki school, and Ibn Taymiyya and Ibn al-Qayyim from the Hanbali school. [Ibn al-Humam, Fath al-Qadir; Babarti, Tabyin al-Haqa’iq; Ibn Farhun, Tabsirat al-Hukkam; ibn Taymiyya, Majmu‘ al-Fatawa; Ibn al-Qayyim, I‘lam al-Muwaqqi‘in]
• The basis of conditions is their validity and obligation, and the condition of penalizing a procrastinating debtor is valid because it aligns with Shari‘a principles and has no specific prohibition. [Mani‘, Matl al-Ghani ]
• Penalizing a procrastinating debtor is beneficial as it encourages timely debt repayment. [Ibid.]
• Shari‘a principles and general objectives distinguish between a just person and an unjust one. The procrastination of the debtor is unjust, causing harm to the creditor by depriving him of the benefits of his money during the delay, which could be extensive. Not penalizing the procrastinating debtor equates the unjust with the just, encouraging debtors to procrastinate and delay rights, contrary to the objectives and wise policy of Shari‘a. [Zarqa, Jawaz Ilzam al-Madin]

Third Opinion: Compensate Actual Damage

It is not permissible to compensate the creditor for missed profits, but it is permissible to compensate for actual damages incurred. This view is held by some contemporary scholars, including Dr. Zaki al-Din Shaban in his commentary on “Buhth al-Duktur al-Zarqa fi Majallat Jami‘at al-Malik Abdul Aziz,” Dr. Muhammad Zaki Abdul Barr in his commentary “al-Darir fi Majallat Jami‘at al-Malik Abdul Aziz,” and Dr. Sulayman al-Turki in his book “Bay‘ al-Taqsit wa Ahkamuhu.”

The evidence for this view is similar to that of the second opinion, with the additional condition that compensation is for actual losses due to the debtor’s delay, not potential damages or expected profits.

Conclusion

After reviewing the opinions and evidence related to compensating creditors for lost profits or damages due to a debtor’s delay, I conclude that the most credible opinion is the first one, which states that such compensation is not permissible. This opinion equates such compensation with usury and unjustly consuming people’s wealth, similar to pre-Islamic practices where extending a loan’s term led to an increase in debt. Acknowledging Allah’s greater knowledge, I emphasize the importance of caution in religious matters and suggest adhering to the more conservative view in cases of ambiguity.

Note: Know that when there is a choice between a permissive and a prohibitive opinion, you should exercise caution regarding your religion and adhere to the prohibitive view for the integrity of your faith and honor.

And may peace and blessings be upon our master Muhammad, his family, and his companions.
Shaykh Ahmed al-Ahmed