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Charging the Loanee with Administrative Expenses is Permissible with Conditions

Answered according to Shafi'i Fiqh by Darul Iftaa Jordan
Is it permissible to charge the administrative expenses of loans as a percentage from their value, what is the nature of such expenses, and what is the ruling of Islamic Sharia as regards tricks employed by some institutions pertaining to the cost of the loan?

Answer:
All perfect praise be to Allah; and may His blessings and peace be upon our Prophet Mohammad and upon all his family and companions. It is impermissible to charge an increase on a loan because it is considered usury as stated by Ibn Qudamah: “ Every loan conditioned with an increase upon settlement is undisputedly forbidden “{Al-Moghni/240}. As regards charging the debtor for these expenses, the Muslim jurists have allowed it, but with conditions: First: These costs must be real i.e charged against an actual service; therefore, it isn`t permissible to collect a cost against risk since the loan is guaranteed in all situations. Second: costs must be direct i.e. the ones paid by the creditor in favor of the loan; therefore, it is impermissible to charge the debtor for the indirect costs such as the general expenses of the institution and the wages of employees and the like. Third: The loan costs shouldn`t be tied to the amount of the loan or its period{as a percentage}, rather, they must be tantamount to the true cost, without any increase. Fourth: Costs are charged upon providing service; therefore, it is impermissible for the bank to charge periodical fees under the pretext that they are loan costs unless expenditure or service recurred. Fifth: These costs must be determined by people well-versed in this field such as accountants so as to avoid overestimation. Sixth: Administrative expenses must be placed in a separate bank account so as to make sure that the surplus is spent in charitable causes, and that the creditor {institution}doesn`t benefit from them. The Iftaa` Department recommends that loan or credit oriented institutions don`t underestimate the costs imposed on loans because every unreal increase is usury and interest, for Allah says{what means}: “And know that God Knoweth what is in your hearts, and take heed of Him; and know that God is Oft-forgiving, Most Forbearing. “{Al-Baqarah/235}. And Allah knows best.

This answer was collected from the official government Iftaa Department of Jordan.

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