The conventional banks handle default in payment, by charging interest on customers. Since charging of interest is against the principles of the Shari’ah, Islamic banks are not allowed to emulate this mechanism to resolve the issue of default. This issue requires a Shari’ah-compliant mechanism to deal with the issue and it was brought to the attention of the Council, for its resolution.
The Council, in its 4th meeting, held on 14th February 1998 / 16th Syawal 1418, resolved that ta`widh (compensation) may be imposed on the defaulting customer who fails to meet his obligation to pay the financing, based on the following conditions:
1. The amount of ta'widh cannot exceed the actual loss suffered by the financier;
2. The determination of compensation is made by a third party, which is Bank Negara Malaysia; and
3. The default or delay of payment is due to negligence on the part of the customer.
Issuer: Shariah Advisory Council, Central Bank of Malaysia.