Shari’ah Standard (3): Procrastinating Debtor (Revised)

 

 

Shari’ah Standard (No.3): Procrastinating Debtor (Revised)

 

The purpose of this standard is to explain the Shariah rulings applicable to the transactions of Islamic financial Institutions relating to solvent debtors and/or guarantors procrastinating in settling their obligations and contractors delaying in fulfilment of their obligations, which invokes penalty stipulated in the contract.

1.   Shari’ah Ruling on Procrastinating Debtor

1.1.  Default in payment by a debtor

1.1.1.     Default in payment by a debtor who is capable of paying the debt is Haram (prohibited).

1.1.2.     It is not permitted to stipulate any financial compensation, either in cash or in other consideration, as a penalty clause in respect of a delay by a debtor in settling his debt, whether or not the amount of such compensation is pre-determined; this applies both to compensation in respect of loss of income (opportunity loss) and in respect of a loss due to a change in the value of the currency of the debt.

1.1.3.     It is not permitted to make a judicial demand on a debtor in default to pay financial compensation, in the form either of cash or of other consideration, for a delay in settling his debt.

1.1.4.     The procrastinating debtor is liable for legal and other expenses incurred by the creditor in order to recover his debt.

1.1.5.     The creditor is entitled to apply for the sale of any asset mortgaged as collateral for the debt, for the liquidation of the debt. He is equally entitled to stipulate that the debtor must give a mandate to the creditor to sell the mortgaged asset without recourse to the courts.

1.1.6.     Unless failure to pay was caused by force majeure, it is permissible to stipulate that all outstanding instalments become due once the procrastinating debtor fails to pay an instalment. It is preferable that this clause is implemented only after notifying the debtor and after the lapse of a reasonable period of time. [See Shari’ah Standard No. (5) on Guarantees (item 5/1)]

1.1.7.     2/1/7 In the case of a Murabahah sale, if the asset that was sold is still available in the condition in which it was sold, and the buyer has defaulted in the settlement of the price and has later become bankrupt, then the seller (the Institution) is entitled to repossess the asset instead of initiating procedures to obtain a bankruptcy order.

1.1.8.     It is permissible in contracts involving indebtedness (such as Murabahah) to stipulate an undertaking by the debtor, that in case of procrastinating in payment, the latter will donate an amount or a percentage of the debt to be spent for charitable causes through the Institution.

1.2.              Guarantor

a)   It is permissible for a creditor to demand that a debt be settled by the debtor or the guarantor of the debtor, unless the guarantor stipulated that the settlement must first be sought from the debtor.

b)   All rulings applicable to debtors in default are equally applicable to guarantors in default.

1.3.              Contractor

It is permissible to include penalty clauses in contracts for construction, Istisna’a and supply contracts. In case of a refusal to pay the amount due under a penalty clause, the rulings relating to default by a debtor would be applicable. It is permitted to deduct the amount from outstanding amounts due to the contractor.

1.4.              Non-material punishments for default in payment

The Institution is entitled to include the name of a debtor in default in a list of undesirable customers (black list) and to send a warning admonition to other companies about the defaulting debtor, either when there is an inquiry from other companies about the debtor or when such ‘black lists’ are exchanged between companies directly.

1.5.               General rulings

1.5.1.     The Institution is entitled to [monitor and] investigate [the financial status and activities] of a defaulting debtor through all permissible and legitimate means.

1.5.2.     The Institution may accept a payment from a debtor who is in default that is in excess of the amount of the debt, provided there is no contractual condition whether written or verbal, or custom or mutual agreement relating to this additional amount.

1.5.3.     It is permissible for the Institution to stipulate in a contract dealing with indebtedness that, if the debtor is late in making payment, the Institution is entitled to recoup the amount due from any of the accounts of the customer with the Institution, whether current accounts or investment accounts. This may be done without getting any further consent of the debtor provided the balance in the account is of the same currency as that of the debt. If, however, the currency is different, then the rate of exchange to be used must be the then prevailing rate of
exchange.

1.6.              Establishment of default in payment

Default in payment is established when, following a normal demand for payment, a debtor who has not proved that he is insolvent fails to settle the debt on its due date.