Is Charging for a Bounced Debit Islamically Allowed?

Answered by Shaykh Muhammad Carr

Question

I had to take out a loan to pay for new flooring. I had the money to cover the payment from my salary, but one of my parents withdrew funds from my bank account without my knowledge. This caused the flooring company’s direct debit to fail, and they are now charging me a “debit rejection fee.”

The company claims that the loan is interest-free and that the charge is simply a fee for the failed debit transaction. They say it covers the cost they incur when a debit fails and also incentivizes customers to pay on time.

Answer

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

Allah Most High says,

“O believers! Do not forbid the good things Allah has made lawful for you, and do not transgress. Indeed, Allah does not like transgressors.” [Quran, 5:87]

A fee for a bounced debit order does not constitute riba. It is permissible for the company to charge a debit rejection fee, as this represents a legitimate cost.

Late payment charges or penalties in Islam can be categorized into ta‘widh and gharama. Ta‘widh refers specifically to compensation for an actual, verifiable loss suffered by the creditor or financier due to late payment. It is not a punitive charge, but a form of restitution based on real damages, such as administrative expenses, provided the loss is substantiated and not speculative.

Importantly, ta‘widh must not become a disguised form of interest (riba), and its permissibility is contingent upon strict Shari‘a compliance and oversight.

A lending institution may charge for services rendered in loans an amount equivalent to the actual amount directly spent on such services. However, the institution may not charge an amount in excess of such a service charge. All charges above the actual amount spent are prohibited, and it is necessary to ensure precision in determining the actual charges so that they do not lead to an excess that can be deemed a benefit. [AAOIFI]

I pray this is of benefit and Allah guides us all.
[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.