Are Additional Charges Through Debt Collection Valid?

Answered by Shaykh Muhammad Carr

Question

Is it permissible to rent a product with an option to purchase it later, if late payments may result in additional charges through debt collection?

Answer

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

I pray you are in good faith and health. Thank you for your question.

Allah says,

“O believers! Fear Allah, and give up outstanding interest if you are (true) believers. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.” [Quran, 2:278-279]

The Prophet (Allah bless him and grant him peace) said, “Delay by a wealthy person makes his honor and his punishment permissible.” [Ahmad]

Additional charges for late payments that accrue to the lender are usurious and impermissible.

AAOIFI has permitted additional charges that do not accrue to the lender. The purpose of these charges is to encourage timely payment rather than financial gain.

It may be provided in the lease or lease-to-own (ijara or ijara muntahiya bi al-tamlik) contract that a lessee who delays payment for no good reason undertakes to donate a certain amount or percentage of the rental due in the event of late payment. Such a donation should be paid to charitable causes under the coordination of the Institution’s Shari’a Supervisory Board. [AAOIFI Standards]

The basis for the permissibility of stipulating that a solvent debtor should undertake to make a payment to charity in case of default is that this is similar to an undertaking to make a donation that is approved by the Maliki scholars, notably Abdullah Ibn Nafi’ and Muhammad Ibn Ibrahim Ibn Dinar. [Ibid.]

Additional charges directly related to the collection of outstanding debt are valid. The compensation amount should be limited to actual monetary losses, fees, and expenses incurred by the creditor/financier due to late payment, such as debt collection costs, litigation expenses, and notice costs.

And Allah knows best.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefited from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.