All perfect praise be to Allah; and may His blessings and peace be upon our Prophet Mohammad and upon all his family and companions.
It is impermissible to charge an increase on a loan because it is considered usury as stated by Ibn Qudamah: “ Every loan conditioned with an increase upon settlement is undisputedly forbidden “ {Al-Moghni/240}.
As regards charging the debtor for these expenses, the Muslim jurists have allowed it, but with conditions:
First: These costs must be real i.e charged against an actual service; therefore, it isn`t permissible to collect a cost against risk since the loan is guaranteed in all situations.
Second: costs must be direct i.e. the ones paid by the creditor in favor of the loan; therefore, it is impermissible to charge the debtor for the indirect costs such as the general expenses of the institution and the wages of employees and the like.
Third: The loan costs shouldn`t be tied to the amount of the loan or its period {as a percentage}, rather, they must be tantamount to the true cost, without any increase.
Fourth: Costs are charged upon providing service; therefore, it is impermissible for the bank to charge periodical fees under the pretext that they are loan costs unless expenditure or service recurred.
Fifth: These costs must be determined by people well-versed in this field such as accountants so as to avoid overestimation.
Sixth: Administrative expenses must be placed in a separate bank account so as to make sure that the surplus is spent in charitable causes, and that the creditor {institution} doesn`t benefit from them.
The Iftaa` Department recommends that loan or credit oriented institutions don`t underestimate the costs imposed on loans because every unreal increase is usury and interest, for Allah Says (What means): “And know that God Knoweth what is in your hearts, and take heed of Him; and know that God is Oft-forgiving, Most Forbearing. “ {Al-Baqarah/235}. And Allah knows best.
