Shariah Advisory Council (SAC) of Bank Negara Malaysia in its 95th meeting held on 28 January 2010 had decided that ta’widh (compensation) may be imposed on late payment of financial obligation arising from exchange contracts (such as buy and sell and hire purchase) and qard (loan). Nevertheless, ta’widh may only be imposed upon the lapse of the repayment period agreed by both contracting parties. The amount of ta’widh received may be recognised as income by the seller/financier/creditor on the basis that it is imposed as compensation for actual loss incurred by the seller/financier/creditor. The rate of ta’widh shall be determined by the authority namely Bank Negara Malaysia.
In addition, the SAC in its 101st meeting held on 20 May 2010 had arrived at the following decisions:
1. Ibra’ (Rebate) for Financing based on Buy and Sell Contracts
In line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant ibra’ to customers for early settlement of financing based on buy and sell contracts (such as bai’ bithaman ajil or murabahah). In order to eliminate uncertainties pertaining to customers’ rights in receiving ibra’ from Islamic banking institutions, the granting of ibra’ must be included as a clause in the legal documentation of the financing. The determination of ibra’ formula will be standardised by Bank Negara Malaysia.
2. Late Payment Charge Mechanism for Islamic Banking Institutions
As a deterrent mechanism against cases of default by customers in discharging their financial obligation arising from Islamic contracts, the imposition of late payment charge by Islamic banking institutions that comprises both concepts of gharamah (fine or penalty) and ta’widh (compensation) is allowable. Gharamah is not allowed to be recognised as income, and it must be channeled to specified charitable bodies. However, Islamic banking institutions may recognise ta’widh as income on the basis that it is imposed on the customers as compensation for the actual loss incurred by the Islamic banking institutions.
As a measure to protect the customers’ interest, the imposition of late payment charge by Islamic banking institutions should consider the customers’ financial capability. The maximum rate of gharamah and ta’widh that may be imposed by Islamic banking institutions will be determined by Bank Negara Malaysia.
The effective date for the implementation of the resolutions on ibra’ and late payment charge mechanism will be determined in the guidelines to be issued by Bank Negara Malaysia.
Shariah Advisory Council of Bank Negara Malaysia
29 June 2010