Shari ah issues on ta widh in Malaysia

摘要

PurposeThis paper aims to investigate the current mechanism of ta?widh (compensation) from the perspective of Shari?ah, which is used by Islamic banking in Malaysia to deal with the issue of late payment.Design/methodology/approachThis study is qualitative in nature, using semi-structured interviews carried out with two types of informant members of the National Shar?ah Advisory Council (SAC) and the Internal Shar?ah committee (SC) with regard to practicing ta?widh.FindingsThe findings reveal ta?widh is an alternative to the interest-based late payment penalty, which is prohibited in Islam. While ta?widh finds justification in the hadith and ma?la?ah, 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/implicationsThis study is limited because it focusses on the extent to which the current practice of ta?widh in Malaysia has complied with Shari?ah 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/valueThis paper highlights Shari?ah concerns regarding the current application of ta?widh. Moreover, as it uses primary data, it provides a fresh discussion of ta?widh, from both the perspective of regulators in Malaysia and the experience of practitioners, particularly in terms of Shari?ah compliance.