Loan service fees, late payment fees, collection fees : microfinance Fatwa

Fatawa Question

[Question one] : Aslamo Alaykum Dr. Kahf, My name is Rasha. I work as an intern in a microfinance institution in the USA that lens capital to micro entrepreneurs. I proposed to the management to establish a free interest rate loan program to serve the Muslim community. I would appreciate your help to tell me a Fatwa about the following. The product that is sold is the lending service and not the “money”. Fee charged is for the lending service and not for the money. Service fee is based on actual costs and not on interest rates. Service fee takes the form of a flat rate that is invariable to loan size, however ; it is variable to service period. The question is : in case of late payments on the side of the borrower to the lender, is it allowable to collect late fee service. I understand that attempting to earn extra revenue due to the passage of time may be Haram. However, the main point is to enforce the borrower to pay his debt. This is because if there is no late re-payment fee, then the borrower will not feel obliged to pay on time. So, now my question is : taking into consideration that for a borrower to pay his debt, he pays it on monthly installments, is it permissible to charge a fixed amount of late repayment fee that is invariable with loan size as an enforcement tool to encourage him pay debt on time. This fee will be required after being 5 days late in repaying the installment amount on its due time. Example : $ 30 will be charged as a late repayment fee that is required to be paid for every monthly installment he does not pay on time. This $ 30 amount accumulates as the number of late monthly repayments accumulate. E.g. 3 late monthly repayments will be charged $ 90. Thanks you very much [Question Two] : Thank you very much Dr. Kahf for your help. I really appreciate it. I think I did not clarify the picture to you as it should be, so, I will do it now, In Sha Allah. First of all, I work as an intern in a US microfinance institution that is non-for-profit. It has a social mission of alleviating poverty through helping micro-entrepreneurs establish and expand their businesses as small business are considered to be the engine of the economy. In addition, low-to moderate income business owners who we serve are usually excluded by commercial banks because their small business lending requirements is not served by traditional banks or because they have bad credit scores ; thus, their borrowing requests are not approved. I meant by “the product that is sold is the lending service and not the money”, that we are not selling loans. Instead we charge fees for providing the service that helps micro-entrepreneurs have access to capital. The service implies all activities that allow us get money that we can lend (e.g. grant writing), lend the money to potential borrowers (e.g. marketing, loan consultancy, underwriting), and get the money back from the borrower (e.g. collection services). We charge fees to cover the cost of this service I.e. the administrative cost. In fact, even with the interest based lending methodology, most MFI including mine do not cover their administrative costs ; instead, they depend on grants to fill in the financial deficit. Moreover, we do not expect to cover our administrative costs even in the halal loans project unless we have huge number of clients. Usually any non-for-profit microfinance institution has two sources of lending funds (money lent to borrowers). The first source is grants and this is a zero cost funding. The second source is banks such that the MFI borrows money from banks by a reduced interest rate then it lends this money to borrowers who in fact incur the interest rate of the bank. As for the halal loans project, the only lending funding resource that will be used is grants because it is zero cost and implies no interest rate. It is worth to mention that the purpose of the loans is to help micro-entrepreneurs establish or expand their business I.e. for business purposes only. However, my MFI does not involve in business partnerships with borrowers, it does not share with them management decisions, profits or losses ; management is all up to them ; thus, the whole profit or loss is theirs. As for your insight regarding late fees, you said : “… we charge a handsome late fee but we do not take as revenue to the creditor but to be given to charity”. If you please me, I just would like to understand what the point behind giving it to charity is. In fact in case of delinquency there are additional administrative activities that take place to enforce this delinquent borrower to pay his / her debt e.g. phone calls, emails, official letters, site visits, internal documentation of the case, and in severe cases, activities that may take place will be more costly e.g. selling collaterals, going to court, etc. The point is that in case of delinquency, we will be incurring additional administrative fees and even the $ 30 late fee may be or may be not covering the administrative costs depending on the intensity of delinquency. Finally, I really appreciate your help and may god reward your effort. Thanks a lot Rasha

Fatwa

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Publication Date

2010-12-11

Main Subjects

Financial and Accounting Sciences
Islamic Studies

Topics

• Islamic jurisprudence
• Microfinance

No. of Pages

4

Data Type

Fatawa

Language

English

Record ID

BIM-729960

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