Are late-payment fees riba?
The riba of pre-Islamic Arabia was “pay now, or pay more later”. A late fee that the lender keeps is exactly that, whether it is a flat charge or a percentage, and it applies to Islamic banks too. What Islamic banks use instead is your promise to give a set amount to charity if you are late, which the bank must pass on and can never keep.
The guidance
I pay an instalment late. What does the contract say happens?
- The lender adds a fee or extra charge, which it keepsHaram · Riba · Qur’an 2:275Anything added to a debt for late payment and kept by the creditor is riba, whether a flat fee or a percentage. It is the old "pay now or pay more" riba, and it applies to Islamic banks too.
- I pledged in advance to give a set amount to charity; the lender keeps noneHalal · Charity pledge · AAOIFI 3Islamic banks use this to discourage late payment. The money must go to charity under the bank’s Shariah board and can never be the bank’s income. It is your promise, not a penalty the lender earns.Other views: This comes from a Maliki view on binding pledges, adopted by Mufti Taqi Usmani and AAOIFI. Some Hanafi scholars doubt that a gift can be made compulsory.
- The lender gives me more time but raises what I oweHaram · Riba · Qur’an 2:275Increasing a debt in return for extending it is exactly the riba of pre-Islamic Arabia. Extra time may be given free, never for more money.
People also ask
Is a late fee on my credit card or utility bill riba?
A late fee added to a debt you owe and kept by the creditor is riba. A utility bill is also a debt once due. Pay on time, and if charged, do not treat the fee as acceptable in future.
Can a lender give me more time if I pay a bit more?
No. Increasing a debt in return for extending it is the riba the Qur’an came to end. Extra time may be given free, never for more money.
Is the charity-pledge mechanism accepted by all Hanafis?
It comes from a Maliki view on binding pledges, adopted by Mufti Taqi Usmani and AAOIFI. Some Hanafi scholars doubt that a gift can be made compulsory; the money must in any case go to charity, never to the creditor.
Can the whole debt become due if I miss an instalment?
Yes. An acceleration clause, where all instalments fall due on default, is allowed. What is not allowed is adding to the amount.
Related questions
All questionsThe four schools on riba
This guidance follows the Hanafi school as applied today by Mufti Taqi Usmani and the AAOIFI standards. Notes mark where the Maliki, Shafi’i or Hanbali schools differ. The four schools on riba →