Sharīʿah issues on taʿwidh in Malaysia

Abstract

Purpose

This paper aims to investigate the current mechanism of taʿwidh (compensation) from the perspective of Shariīʿah, which is used by Islamic banking in Malaysia to deal with the issue of late payment.

Design/methodology/approach

This study is qualitative in nature, using semi-structured interviews carried out with two types of informant – members of the National Sharīʿah Advisory Council (SAC) and the Internal Sharīʿah committee (SC) – with regard to practicing taʿwidh.

Findings

The findings reveal taʿwidh is an alternative to the interest-based late payment penalty, which is prohibited in Islam. While taʿwidh finds justification in the hadith and maʿlaʿah, in respect of sustaining the competitiveness of the Islamic banking operation, its practice is still debatable because it is determined by a special rate instead of the actual loss. This paper addresses this issue by suggesting that even though the central bank has allowed Islamic banks to regard 1 per cent as their income, they should review that amount, and claim only the actual loss. The remaining money could be used for charitable purposes, which can be conducted by Islamic banks themselves.

Research limitations/implications

This study is limited because it focusses on the extent to which the current practice of taʿwidh in Malaysia has complied with Shariīʿah principles. It does not focus on gharamah (penalty), which is considered to be the second late payment penalty mechanism. Moreover, data are collected from nine interviewees from SAC and SC from different Islamic banks. Thus, the results cannot be generalised to other countries.

Originality/value

This paper highlights Shariīʿah concerns regarding the current application of taʿwidh. Moreover, as it uses primary data, it provides a fresh discussion of taʿwidh, from both the perspective of regulators in Malaysia and the experience of practitioners, particularly in terms of Shariīʿah compliance.

Citation

Ishak, M.S.I. (2019), "Sharīʿah issues on taʿwidh in Malaysia", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 12 No. 4, pp. 523-531. https://doi.org/10.1108/IMEFM-03-2018-0117