Imposing fines for late installment payments is Riba
Fatwa No: 270868

Question

I am going to buy a car and the process is as follows : The customer chooses a car from the showroom, then the invoice for the car is issued in the name of the bank, and the car is purchased in the bank's name, then it is re-sold (by the bank) to the customer with a profit margin. The bank buys the car before it re-sells it to the customer with an increase on the price. But the customer makes a down payment of 20% of the value of the car in advance, before the bank even pays a single dirham to the dealership. When the bank receives the invoice for the car, the bank withdraws that 20% from the customerfs account and adds the remainder of the price and pays it to the dealer, and the car remains in the bankfs name until the customer has paid its price in full, by installments. The customer has to issue post dated checks for the installment amount. If he doesn't pay the installment for a month then bank will charge 1% of the monthly installment as a fine, which bank will give it to the charity organizations.This fine is to discourage people from late payment. Is this transaction halal??

Answer

All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad, sallallaahu ‘alayhi wa sallam, is His slave and Messenger.

This transaction – known as Purchase Order Muraabahah (i.e. a deal in which a customer promises that he will purchase the goods from the seller, and then the seller purchases the goods to sell it to the orderer with a specified profit) - is prohibited if there is a condition that a fine is imposed in case of delay in paying the installments; even if the fine is given to charity. This condition is considered invalid.

The Islamic Fiqh Academy Resolution No. 53/2/6 (in its 6th session held in Jeddah in 1990) states:

"3- In case a purchaser (debtor) fails to pay the installments on time, he should not be forced to make any extra payment, whether according to a prior agreement or not, because forcing him to do so renders the transaction riba (usury) that is forbidden in Islam.

4- It is unlawful to a solvent debtor to procrastinate in payment of due installments. Nevertheless, compensation for delayed payment should not be stipulated as a pre-condition in the contract.

Hence, it is impermissible to conclude that transaction with this condition stipulated in the contract.

For further information, please refer to Fataawa 81662, 92320, 191743.

Allaah Knows best.

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