Is It Permissible to Accept a Bank’s Offer to Settle a Debt for Less Than What Is Owed?

Answered by Shaykh Muhammad Carr

Question

If the bank agrees to reduce the amount and I pay the agreed-upon settlement, would I be sinful in the sight of Allah for paying less than the original debt? Would this be considered unjustly taking someone else’s money, even though the bank offered the reduction?

Answer

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

May Allah reward you for ensuring that your vocation aligns with Islamic Law.

“Allah wants ease for you and does not want unbearable hardship for you.” [Quran, 2:185]

He also says,

“So fear Allah all you can, and hear, and obey and expend: It were better for your very own selves.” [Quran 64:16]

Conventional banks typically provide interest-based loans. In this scenario, settlement entails reducing the interest, which is not only permissible but also compulsory if one is able to do so.

If the debt relates to a non-interest loan or liability, then a cash settlement contract in lieu of a deferred payment is considered invalid. [See Khatib, Mughni al-Muhtaj]

However, the obligation is discharged if the debtor makes the payment and the creditor accepts it. Shaykh Zakariyya al-Ansari states:

“Yes, if the debtor settles the deferred payment ahead of time, or offers sound coins in place of broken ones, and the creditor accepts it, then both the deferment and the brokenness are waived—because fulfillment and receipt have occurred by those entitled to them.” [Zakariyya al-Ansari, Sharh al-Bahja]

Invalidity of a Cash Settlement Contract

It is stated in Nihayat al-Muhtaj, “And if he makes a settlement from ten (dirhams) immediate (i.e., due now) on five deferred, he is cleared of five and five remain immediate — because he made a settlement involving a waiver of part and a promise to defer the remainder. The promise is not binding, while the waiver is valid.

(And if the reverse occurs) — that he makes a settlement from ten deferred on five immediate — (the settlement is void) because the attribute of immediacy cannot be attached [to a deferred debt], and the other five were only being waived in return for that [immediacy]; so when the immediacy does not materialize, the waiver is invalid.” [Ramli, Nihayat al-Muhtaj]

However, as previously noted, if the settlement is practically carried out with the mutual consent of both parties, the debtor is discharged from his obligation.

International Fiqh Academy and AAOIFI Ruling

“The basis for the permissibility of discounting for unconditional earlier payment is the saying of the Prophet (peace be upon him) in the case of Ubay Ibn Ka‘b (Allah be pleased with him) and his debtor: ‘Write off a portion of your debt.’ The International Islamic Fiqh Academy has issued a resolution in support of this rule.” [AAOIFI]

It is permissible for the institution to grant its client a rebate on payment, provided that the rebate was not stipulated in the contract and that this is in accordance with regulatory directives. [ibid]

Unrestricted Permissibility of Rebate

Some scholars permit a rebate unconditionally, regardless of whether it is stipulated at the inception of the contract. This opinion is reliably attributed to Ibn ‘Abbas, Ibrahim al-Nakha‘i, and Abu Thawr. [Ibn ‘Abd al-Ghaffar, Mas’ala Dha‘wa Ta’ajjal]

And Allah knows best

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

Related Answers

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2. Should I Try to Have the Interest Waived When I Pay Back a Bank Loan?
3. Can I Accept Repayment From Someone Who Took an Interest Loan?
4. What Can We Do to Get Rid of an Interest-Based Loan on a House?
5. Can You Buy a House with an Interest-Based Loan If Necessary?

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.