Fatwa No : 82932
Charging a penalty for non-payment of an installment.

Charging a penalty for non-payment of an installment.

In the name of Allah, the Most Gracious, the Most Merciful.
Assalamu Alaikum wa Rahmatullahi wa Barakatuh.
What do the esteemed scholars and jurists of Islam say regarding the following issue:
If something (such as a car, house, etc.) is purchased on installments from a bank, and if the installments are paid on time as per the bank's terms, then according to the bank’s claim, no interest is charged. As is common practice in banks nowadays, a bank sets a price of, for example, 1 million, but when selling it on installments, they raise the price to 1.2 million and call it a sale and purchase agreement.
However, in the event of a delay in paying the installments within the specified time, the bank charges interest (riba). Kindly clarify, in the light of Shariah, whether calling this arrangement a “sale and purchase” is valid or not?
Additionally, Meezan Bank claims that its banking system operates in accordance with Islamic principles. Kindly clarify, based on Islamic evidences, the difference between Meezan Bank and other conventional banks in terms of what is permissible and what is not. May Allah be your Helper and Protector. Ameen.

الجوابُ حامِدا ًو مُصلیِّا ً

In the mentioned case, the transaction of buying and selling based on the stated condition is not permissible according to Shariah. However, purchasing and selling on installments can be carried out in a Shariah-compliant manner. The correct method is as follows:
During the contract session (majlis-e-aqd), both the cash price and the credit (installment) price should be discussed, and one of them should be finalized during the same session. If the intention is to purchase on credit, then the total credit price must be finalized during the same session, along with the number of installments and the specific amount to be paid in each installment. Moreover, in case of a delay in payment, no additional amount should be charged over the agreed installment.
If a transaction is made with these conditions, it will be considered valid in Shariah. Also, the additional amount paid due to deferred payment (i.e., the difference between the cash and credit price) is not considered interest (riba).
As for Meezan Bank, many of its operations, praise be to Allah, are aligned with Shariah principles. However, it remains a private institution and, due to the prevailing national conditions, such institutions may also face limitations or external influence. Therefore, if someone wishes to invest through Meezan Bank, it is better and more cautious to inquire about the specific investment scheme, its rules and conditions, and then seek a Shariah ruling based on that information.

مأخَذُ الفَتوی

وفي المبسوط للسرخسي: وإذا عقد العقد على أنه إلى أجل كذا بكذا وبالنقد بكذا أو قال إلى شھر بكذا أو إلى شھرين بكذا فھو فاسد؛ لأنه لم يعاطه على ثمن معلوم ولنھي النبي - صلى الله عليه وسلم - عن شرطين في بيع وهذا هو تفسير الشرطين في بيع ومطلق النھي يوجب الفساد في العقود الشرعية وهذا إذا افترقا على هذا فإن كان يتراضيان بينھما ولم يتفرقا حتى قاطعه على ثمن معلوم، وأتما العقد عليه فهو جائز؛ لأنھما ما افترقا إلا بعد تمام شرط صحة العقد اھ (13/ 8)۔