Date : 30-10-2019

Question :

A certain organization works on developing villages and small enterprises through giving small loans to villagers. A borrower is given (2500 JDs) to be paid back over a certain period, but he/she must pay (75 JDs) as loan fees, which will be spent on village affairs. What is the ruling of Sharia on this?

The Answer :

Praise be to Allah the Lord of the Worlds.

From the perspective of Islamic Sharia, a loan isn`t a commutative contract. Rather, it is a means of facilitation for the borrower. Therefore, it is religiously unlawful to charge an extra amount on a loan because that is Riba (Usury/interest). Ibn Qhodamah (May Allah have mercy on him) said, "According to scholarly consensus, every loan in which an extra amount is stipulated is forbidden." Ibn Al-Monther said, "Scholars are agreed that if the lender stipulated an extra amount or a gift against the loan then that is Riba."{Al-Moghni, 4/240}. However, if that extra amount was charged against the actual expenses and fees of the loan itself then that is permissible; provided that it is real and equal to the actual cost.

However, scholar are of the view that giving the loan fees to charity doesn`t justify charging them in the first place. Al-Hattab, a Maliki scholar, stated, "The loan which yields a benefit to other than the borrower is forbidden, whether it yields benefit to the lender or someone else."{Mawahib Al-Jaleel, 4/546}.

In conclusion, if the loan fees charged by the above organization are equal to their actual cost, then that is permissible and the lender has the right to spend them as he/she sees fit, but other than that is forbidden. And Allah the almighty knows best.