Late Payment Charges in Islamic Banking: A Critical Shariah and Legal Analysis with Reference to Malaysia and Comparative Jurisdictions

Late payment charges in Islamic banking are a complex mix of Shariah rulings and modern financial operations especially regarding the prohibition of riba (interest). This study discusses the Shariah and legal basis for late payment mechanisms including, ta’widh (compensation) and gharamah (penalty) in Malaysia context and compares them with the jurisdictions of the Kingdom of Saudi Arabia, Pakistan, Indonesia and United Kingdom. This study uses a doctrinal and comparative approach by discussing the frameworks, judicial development and Shariah interpretations of such charges. As in Malaysia, the legal framework developed by Bank Negara Malaysia under Islamic Financial Services Act. This framework distinguishes between the compensatory and punitive parts in a systematic manner to comply with Shariah rulings and legal certainty. In contrast with the Kingdom of Saudi Arabia, where it generally follows the recommendations set by the Accounting and Auditing Organization for Islamic Financial Institutions. This shows the importance of the fines being paid for charity purposes. Pakistan is stricter as not allowing banks to gain money from penalty charges. However, Indonesia adopts hybrid types of regulations and its enforcement is not consistent. The United Kingdom is a non-Shariah jurisdiction but is focused on alternative dispute resolution and fairness in handling financial disputes. The findings highlight persistent concerns about the substantial similarities between late payment charges and conventional interest, as well as issues of consistency, transparency and Shariah compliance. The paper concludes that such mechanisms can be justified on the basis of maslahah (public interest), provided that it is subjected to strict regulatory control, ethical implementation and alignment with the aims of Shariah (maqasid al-shariah).

Late Payment Charges, Islamic Banking, Ta’widh, Gharamah, Riba

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