Banks Imposing Administration Fee if Loan Repayment is Delayed

7-7-2025 | IslamWeb

Question:

Some Islamic Finance organisations provide loans and then say that there is an "administration fee" they will charge if the loan repayment is delayed. They say this fee covers the cost of staff organising paperwork and so on. Does this fall under the same principle of Riba and under the concept of a "late payment fee"?Considering most contracts in my country revolve around late payment fees being stipulated in a contract, e.g. gym membership, mobile sim plan, WiFi, Rent, etc. What do we do?

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Answer:

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

The fees imposed for delayed loan repayment, or in any other debt from any transaction, are considered as Riba (usury), which is prohibited. It is not permissible to enter into a contract that includes such terms except for those who are compelled by a valid need, while it is essential to avoid delay to avoid incurring such penalties.

The following was stated in the resolution issued by the Islamic Fiqh Council of the Muslim World League held in Makkah in the year 1409 AH: The Fiqh Council unanimously decided the following: “If a creditor stipulates that the debtor must pay an additional sum of money as a specified financial penalty, or a certain percentage if they delay repayment beyond the agreed-upon date, then such a stipulation or imposition is invalid, and it is not obligatory to fulfill it. Moreover, it is not permissible (whether the stipulator is a bank or any other entity) because this is essentially the Riba (usury) of the pre-Islamic era, which was prohibited by the Quran.”

Allah knows best.