The Practice of Late Payment Charge by Islamic Banks in Malaysia

Islamic banking in Malaysia has been facing late payment and default issues for customers cannot be charged interest as opposed to the practices in the conventional banks. To mitigate these issues, the Shariah Advisory Council of Bank Negara Malaysia has issued a resolution for all Islamic banks to use the instruments of ta'widh and gharamah as regulatory alternatives to deal with late repayment and default issues. The imposition of ta'widh and gharamah by Islamic banks on the defaulting customer who fails to meet his obligation to pay the financing as the Islamic banks are prohibited tocharge interest on late loan repayment unlike the practices of conventional banks. This paper aims to examine the practice of ta'widh and gharamah imposed by the Bank Negara Malaysia to overcome the Islamic home financing default; and examine some critical issues related to this practice. Islamic bankinginstitutions in Malaysia need a practical mechanism to overcome the financing default issues. In addition to the negative impact of default issues on their capital, the Islamic banks have to contend with stiff competitions from other established conventional banks.