Understanding Islamic Finance - Doha Academy of Tertiary Studies

166 Understanding Islamic Financeseverity of the problem, all Sharī´ah bodies like the Islamic Fiqh Council of the OIC, theAAOIFI, the Shariat Appellate Bench of the Supreme Court of Pakistan, etc. have approvedthe provision of penalty clauses embedded in contractual agreements that keep a balancebetween the requirement in view of the severity of the problem and that of the Sharī´ahconditions/principles to keep the fine difference between interest and a Murabaha profitintact. The penalty thus received has to be given to charity. 63Banks can claim liquidated damages or compensation for a loss arising from default.However, the amount of compensation should be decided by the court or any independentreconciliation committee, keeping in mind the loss incurred by the bank in profit that it couldhave earned if it had invested the amount on a similar project during the delay period. 64The penalty proceeds should be given to charity because penalties on default in repaymentcannot become a source of income for the creditor. 65 This implies that liquidated damagesto be given to banks in cases of default on the part of the banks’ clients should be based onactual loss. If required by any of the parties, the court may reasonably adjust the amount ofcompensation. The “actual loss” should not be the loss in terms of conventional “opportunitycost”. It has to be proved by the bankers themselves to the satisfaction of the court or anyarbitrator.However, some Sharī´ah boards allow Islamic banks to charge from the defaulter the raterealized by them on their Murabaha portfolio during a specific period. They also recommendthat the financial condition of the client be taken into account. 66 A Fatwah of the religioussupervisory committee of Bank Al Baraka, Sudan says in this regard:“It is permissible for the bank and the Murabaha client to agree that the latter would pay compensationfor harm he would cause the bank by reason of his delay in payment, on the condition thatthe harm caused to the bank be material and actual, and that the Murabaha borrower be prosperous(enough to pay) and (deliberately) tardy (in paying the debt). The best means of calculating theamount of this compensation is to base it on the actual profit realized by the bank during theperiod for which the Murabaha client delayed payment. For example, if the client delayed paymentfor three months, the bank would take the return on investment it had realized during those threemonths, and demand compensation from the Murabaha client at this realized rate of return. If thebank did not make any return during the relevant period, it would not demand anything from theclient”. 67In this context we will have to differentiate between Qard and Dayn, as jurists haveapproved imposing penalties in the latter case only. This means that in the case of a loan(Qard), the creditor should give more time, 68 while if the liability to pay has emerged fromany sale or exchange transaction and the client is deferring the payment through dilatorytactics, he can be required to pay a fine, which goes to charity, and even to compensate thebank for a loss through arbitration. According to this approach, the OIC Fiqh Council hasdifferentiated between pure loan contracts and debt contracts involving the performance ofcertain obligations/acts by the clients, and decided that penalty clauses can be put into theoriginal contracts or in a separate agreement in all financial debt contracts except where the63 AAOIFI, 2004–5a, No. 8, pp. 122, 132.64 Al Baraka, Resolutions (1981–2001), No. 3/2, pp. 65–66.65 OIC, Islamic Fiqh Academy, Resolution No. 109 (3/12), pp. 251, 252.66 Al Baraka Sudan Fatwah in IIBID, p. 125, also in IAIB, pp. 36–37; cf. Ray, 1995, pp. 50, 182, 183.67 In Dalil al fataāwa al Sharī´ah fi- a Māl al Masrafiyya, Cairo: IIBID, 1989, pp 125, 126; cf. Ray, 1995, pp. 182, 183.68 It is not permissible to impose a penalty for delay in repayment of Qard al Hasan, Al Baraka, Resolutions (1981–2001), No. 6/11,p. 103.