6 in the event of loss suffered on the musharakah

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6. In the event of loss suffered on the Musharakah pool on the basis of annual audited accounts, the Islamic bank and the State Bank shall share the loss in the proportion of their share of investment in the Musharakah Pool expressed on daily product basis. The share of loss to State Bank will first be met out of credit balance in the Takaful Fund, if any. The loss not met from the Takaful Fund shall be borne by the State Bank. 7. In case of loss, the Islamic bank shall be entitled to claim refund on account of share of profit paid by it to SBP on provisional basis, alongwith SBP’s share in the loss of principal amount extended to the Musharakah pool. Q8. Is it permissible for an Islamic bank to impose penalty for late payment? Ans. In Islamic law it is permissible to penalize a debtor who is financially sound but delays payment of debt without any genuine reason. Such act of the debtor is unjust as the Prophet (PBUH) has said, "A rich debtor who delays payment of debt commits Zulm". A heavy non-performing portfolio and default on part of the clients is a serious problem confronting the financial institutions all over the world including Pakistan. This problem could be a threat to success of Islamic banking system. If clients do not honor their commitment in respect of timely payment of a debt created in installment sale, Murabaha, leasing or do not pay banks’ share of profit in participatory modes or do not deliver goods at stipulated time in Salam and Istisna’a, it could cause irreparable loss to the system, the banks and financial institutions and ultimately to savers and the economy. The jurists allow punishment (T´azir) to such borrower in the form of fine. In the opinion of some Maliki jurists a delaying borrower would be obliged to pay for charitable activities. In view of the severity of the problem, all Shariah bodies like Islamic Fiqh Academy of the OIC, Shariat Appellate Bench of the Supreme Court of Pakistan, etc. have approved the provision of penalty clause in the contractual agreements that keeps a balance between the requirement in view of severity of the problem and that of the Shariah conditions/principles to keep the fine difference between interest and Murabaha profit intact. However, the penalty proceeds would be used for charity because penalty on default in repayment cannot become an automatic source of income for the creditor. Q9. Can Islamic banks claim solatium or liquidated damages on account of late payment/default by the clients? Ans. The contemporary Shariah scholars have evolved a consensus that banks are authorized to impose late fees on the delinquent. But proceeds of such penalty are to be used for charity purposes. Only the court or any independent body can allocate any part of the penalty as liquidated damages / solatium for the banks. Liquidated damages can be given to banks in case of default on the part of banks’ clients provided it is based on actual financial loss. The court may reasonably adjust the amount of compensation. The ‘actual financial loss’ cannot be the loss in terms of conventional ‘opportunity cost’. It has to be proved by the bankers themselves to the satisfaction of the court or any arbitrator. However, some Shariah Boards allow Islamic banks to charge from the defaulter the rate realized by them on their Murabaha portfolio during a
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6 In the event of loss suffered on the Musharakah pool on...

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