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Charging Extra Amount on Loan to Be Given to Charity: Permissible?

01 September, 2022
Q A certain organization works on developing villages and small enterprises through giving small loans to villagers. A borrower is given (2500 JDs) to be paid back over a certain period, but he/she must pay (75 JDs) as loan fees, which will be spent on village affairs. What is the ruling of Shariah on charging extra amount on loan?

Answer

In the Name of Allah, Most Gracious, Most Merciful. 

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.


In this fatwa:

If the loan fees charged are equal to their actual cost, then charging extra amount on loan is permissible. In this case, the lender has the right to spend the fees as he/she sees fit, but other than that is forbidden. 


Answering your question on charging extra amount on loan, the General Iftaa’ Department in Jordan, states:

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From the perspective of Islamic Shariah, a loan isn’t a commutative contract. Rather, it is a means of facilitation for the borrower.

Therefore, charging extra amount on loan is religiously unlawful because that is riba (usury/interest).

Ibn Qudamah said,

“According to scholarly consensus, every loan in which an extra amount is stipulated is not allowed.”

Ibn Al-Mundhir said:

“Scholars agree that if the lender stipulated an extra amount or a gift against the loan then that is riba.” (Al-Mughni, 4/240)

However, if that extra amount was for the actual expenses and fees of the loan itself, then that is permissible on the condition that it is real and equal to the actual cost.

However, scholar are of the view that giving the loan fees to charity doesn’t justify charging them in the first place.

Al-Hattab, a Maliki scholar, stated,

“The loan which yields a benefit to other than the borrower is not permissible. This ruling applies whether it yields benefit to the lender or someone else.” (Mawahib Al-Jaleel, 4/546)

Therefore, if the loan fees charged by the above organization are equal to their actual cost, then that is permissible. The lender has the right to spend the fees as he/she sees fit, but other than that is forbidden.

Almighty Allah knows best.

Source: https://www.aliftaa.jo/

About Prof. Dr. Monzer Kahf
Dr. Monzer Kahf is a professor and consultant/trainer on Islamic banking, finance, Zakah, Awqaf, Islamic Inheritance, Islamic estate planning, Islamic family law, and other aspects of Islamic economics, finance, Islamic transactions (Mu'amalat). Dr. Monzer Kahf is currently Professor of Islamic Finance & Economics at the Faculty of Economics and Management, Istanbul Sabahattin Zaim University, Turkey