Late Fees - Halal or Haram? Explained In Under 5 mins

Asslamu alaikum,

Fuad Here 🙋🏻‍♂️,

Welcome to todays newsletter, let’s talk about late fees. We usually all agree to pay them & charge them, but what does islamic finance say about them?

Late fees have become a common way for financial institutions to make an extra buck, but what does Islamic finance have to say about this? Is it haram to charge a penalty for late payment?

Well, in Islamic finance, late fees are definitely not halal!

That's because they're considered a form of riba or usury, which is strictly prohibited in Islam.

Late fees charge additional interest on the outstanding amount, which goes against the principles of Islamic finance. You might as well just charge a penalty for breathing!

Islam prohibits charging interest or any form of excess payment on a loan, as it's considered exploitative and unfair.

Islamic finance promotes justice, equality, and ethical conduct, and late fees go against these principles. It's like trying to promote world peace by starting a war.

Instead of late fees, some Islamic financial institutions use a concept called "qard al-hasan" or benevolent loan.

This allows for a grace period without any additional fees or interest charges, as it's considered a form of charitable lending.

It's like giving your friend a break when they're struggling to pay back the money you lent them. That's what friends are for, right?

If the loan repayment is significantly delayed or becomes delinquent, then other measures may be taken to recover the funds.

These measures may include legal action or asset repossession. But, the key difference between these measures and late fees is that they are focused on the recovery of the principal amount rather than additional interest or penalty charges.

Imagine taking a toy back from a kid who borrowed it from you, instead of charging them rent for it.

Overall, Islamic finance emphasizes fairness and ethical conduct, and late fees are not in line with these principles.

The prohibition of late fees is just one example of how Islamic finance seeks to create a more equitable financial system. It's like having a mum that's always making sure everything is fair, except this time it's the whole financial industry that's getting the lecture.

As Prophet Muhammad (peace be upon him) said, "The truthful and trustworthy merchant is associated with the prophets, the truthful, and the martyrs."

Islamic entrepreneurship and finance encourage a fair and just economic system where everyone can benefit from economic opportunities.

POV its a giant playground where everyone gets to play, and nobody gets sent to timeout.

In conclusion, late fees are definitely not allowed in Islamic finance due to the prohibition of riba or usury. Instead, Islamic finance promotes alternative concepts such as benevolent lending and emphasises ethical conduct and fairness in the financial system. Think of your mum as your banker – you know she's going to be fair, but you might not get the best interest rates.

Thank you reading! Hopefully this has armed you with the knowledge to make better choices when you go to shop or conduct business,

Until next time,

Assalmu alaikum

Fuad al’Rafei