Exploring the Practice of Ta’widh (Compensation) and Gharamah (Penalty) Charges in Islamic Banks in Malaysia and Brunei

Abstract

Malaysia and Brunei differ in their treatment of ta’widh (compensation) and gharamah (penalty) for late payment charges in exchange contracts such as sale, lease, and qard (loan), where the Central Bank of Malaysia or Bank Negara Malaysia (BNM) permits them, while the Brunei Darussalam Central Bank (BDCB) has no ruling regarding the matter. This research reviews global Shariah scholars’ views on imposing ta’widh and gharamah for defaulted Islamic financing, examines the suitability of BNM’s 1% ta’widh rate, analyzes the impact on Brunei’s Islamic banks for not charging ta’widh and gharamah, and offers recommendations to improve the implementation of ta’widh and gharamah in both countries. This research conducts face-to-face semi-structured interviews with representatives from the Association of Islamic Banking and Financial Institutions Malaysia and Bank Islam Brunei Darussalam who are directly involved with late payment charges. The findings indicate that Islamic banks in Malaysia practice ta’widh and gharamah in accordance with the guidelines by BNM on the late payment charges. Islamic banks in Malaysia believe that BNM is being considerate by permitting them to charge 1% ta’widh, despite some scholars contending that the 1% charge is considered as riba.  As for Brunei, there is not yet any regulation on the practice of ta’widh and gharamah by BDCB but rather dependence on the Islamic banks themselves to decide on the practice. This study contributes to a new perspective related to the ta’widh and gharamah that would be very pertinent to the Islamic banks in Malaysia and Brunei.