What Is the Ruling of Penalty Fees Given to Charity?

Shafi'i Fiqh

Answered by Shaykh Irshaad Sedick

Question

If I purchase a car via an Islamic Bank, they will buy it and rent it to me, and with my final installment, they will sell it to me.

My concern, however, is what happens if my payments are late? They charge penalty fees and claim they will give it to charity. Isn’t that riba? The penalty fee is necessary to avoid a delay in the repayments. Is it lawful to buy from them?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

May Allah guide us to what pleases Him.

Penalty Fees

Like the example in your question, many contracts and payment plans operate with a penalty fee system. There are differences of opinion about the Sacred Law validity of penalty fees. Your question, however, refers to what the permissibility is for entering a contract with a penalty fee clause, e.g., a credit card, when you know that you will pay on time and, therefore, not pay riba.

Contemporary Fatawa

If and where you can abstain from contractual agreements involving penalty fees, you should, so that you steer clear of the area of disagreement as much as possible. In many contemporary circumstances, such contracts are unavoidable. It would be best to pay before any penalty fees are incurred when you enter such contracts since this is the safest, and Allah knows best.

However, many contemporary scholars, such as the late renowned contemporary Shafi’i mufti, Shaykh Taha Ibn Yusuf Karaan, and Mufti Taqi Usmani, opined that such fees are permissible, and Allah knows best.

Still, it would be best to verify the specifics of the contract by a local mufti (he would be familiar with the bank and their advisory board) or a third-party Islamic finance auditor first. [AAOIFI Standards, 2017, Standard No. (9), 8/1-8]

Late fees are also permissible if the fees are paid to a charity. [AAOIFI Standards, 2017, Standard No. (9), 6/4]

Please see:
Rent-to-Own Contracts

I pray this benefits and that Allah guides us all.
[Shaykh] Irshaad Sedick
Checked and Approved by Shaykh Faraz Rabbani 

Shaykh Irshaad Sedick was raised in South Africa in a traditional Muslim family. He graduated from Dar al-Ulum al-Arabiyyah al-Islamiyyah in Strand, Western Cape, under the guidance of the late world-renowned scholar, Shaykh Taha Karaan. 

Shaykh Irshaad received Ijaza from many luminaries of the Islamic world, including Shaykh Taha Karaan, Mawlana Yusuf Karaan, and Mawlana Abdul Hafeez Makki, among others.

He is the author of the text “The Musnad of Ahmad ibn Hanbal: A Hujjah or not?” He has served as the Director of the Discover Islam Centre and Al Jeem Foundation. For the last five years till present, he has served as the Khatib of Masjid Ar-Rashideen, Mowbray, Cape Town.

Shaykh Irshaad has thirteen years of teaching experience at some of the leading Islamic institutes in Cape Town). He is currently building an Islamic online learning and media platform called ‘Isnad Academy’ and pursuing his Master’s degree in the study of Islam at the University of Johannesburg. He has a keen interest in healthy living and fitness.