Loan processing fees are not considered interest
Fatwa No: 308173

  • Fatwa Date:5-1-2016 - Rabee' Al-Awwal 25, 1437
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Hello I am a poor student. My college gives all student a 120$ loan. Yes, it is a very small sum of money, but my family are poor and that amount can help me . However, my problem is that this loan has an interest rate of 4%. I cannot eat haram money. With this loan, the student must repay it by installments after five years. In other words, after five years, its installments will begin for repayment. (If I get it today, I must pay the first installment in August 2020.) As you know, after five years, the value of any country's money will have reduced (due to inflation and devaluation). Can I take this loan, or is it haram? if we calculate four percent of 120$, it equals 4.8$. After five years, this is very little. If we were to consider this (makes up for the) devaluation, can this loan then be halal? Can I take it? Note that our bank considers this 4% as bank wages (for the preparation of papers and documents and etc.). It is not clear 'profit'. Anyway, have I bean clear? Please help me. May Allaah bless you.


All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah and that Muhammad, sallallaahu ʻalayhi wa sallam, is His slave and Messenger. 

There is a difference between the administrative fees charged in return for loan processing and the interest payable by the debtor beyond the actual loan itself, even if it is given a different name. If this money consists of actual administrative fees, then there is no harm in paying them. The Council of the Islamic Fiqh Academy, in its third session, has resolved that "it is permitted to charge a fee for loan-related services. However, this fee should be within the limits of actual expenses, and any fee in excess to actual service-related expenses is forbidden because it is considered usurious interest (riba)." [End of quote]

According to the previously underlined resolution of the Council of the Islamic Fiqh Academy, the criterion for distinguishing between actual administrative fees and usurious interest is that the charged fees should be within the estimated administrative expenses of the provided loan services and not more.

As for the inflation or the small percentage of the interest, both factors are irrelevant in this regard and do not entail deeming dealing with usury allowable. Dealing with usury is permitted only in case of a real and sharee'ah-acceptable necessity; and, verily, whoever fears Allaah, He will make for him a way out of his problem and provide for him from (sources) he could not have imagined.

Allaah knows best.

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