SS 3: Procrastinating Debtor

What this standard is about

The standard covers debtors who are able to pay but delay payment anyway. It also covers solvent guarantors who delay, and contractors who finish work late and become debtors through a penalty clause. It does not cover debtors who are insolvent or bankrupt, or debtors who delay for a valid Shariah reason.

Why it exists

In pre-Islamic times, lenders told debtors: pay now, or pay extra for more time. That is the classic form of riba (interest). The standard blocks this practice in modern contracts. A debt is a fixed amount. Lateness does not make it grow.

The key rules, simply put

• A debtor who can pay but delays is doing something prohibited.
• No penalty clause may charge extra money for late payment of a debt. This applies whether the extra amount is fixed in advance or not.
• The ban covers compensation for the creditor's lost income and for changes in the currency's value.
• A creditor cannot ask a court to award such compensation either.
• The late payer must still cover the creditor's legal and recovery costs.
• The creditor may sell any mortgaged collateral to recover the debt.
• The contract may require the debtor to promise a donation to charity if they pay late. The bank cannot keep that money as its own income.

An everyday example

A customer owes $10,000 due in June but pays in September. The bank cannot add a $500 late fee to the debt. It can recover its legal costs and sell any pledged collateral. The debt itself stays at $10,000.

Words to know

• Riba — interest; any guaranteed extra on a loan or debt. Not allowed in Islamic finance.
• Procrastinating debtor — a debtor who delays payment while able to pay.
• Collateral — an asset pledged against a debt, sold to recover the debt if the debtor defaults.

Source

• AAOIFI Shariah Standard No. 3 — https://islamicmarkets.com/publications/procrastinating-debtor-scope-of-the-standard