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Search Fatawaa

Fatwa Number : 3133

Subject : Ruling on Considering Bad Debts Part of the Loan`s Expenses

Classified : Usury (interest) &Loans

Fatwa Type : Search Fatawaa

Question :

Is it permissible to consider bad debts part of the loan`s actual administrative expenses?

The Answer :

All perfect praise be to Allah, The Lord of The Worlds; and may His blessings and peace be upon our Prophet Mohammad and upon all his family and companions. Bad debts are debts that are impossible to collect from the debtor for a certain reason such as bankruptcy, and it isn`t permissible to consider them from the loan`s administrative expenses. This is because they aren`t part of the actual expenses and charging the debtor with them is considered forbidden usury. However, charging the debtor with the actual expenses of the loan`s services is permissible and that increase isn`t considered forbidden usury, because the creditor doesn`t benefit from it; rather, the debtor is the one who benefits from it. Moreover, every benefit that the loan brings to the creditor is forbidden usury, as stated by Al-Imam Ar-Ramli(May Allah bless him), "Usury is of different kinds. A loan`s usury is one of them. In it, a certain benefit is conditioned in favor of the creditor."{Nihayat Al-Mohtajj/424}. However, in order for these administrative expenses to be permissible, it is conditioned that they should be a definite amount equal to the actual cost of delivering the loan, without the slightest addition as a profit. This is in order to avoid incurring usury under the pretext of the administrative expenses. Also, actual administrative expenses should be calculated accurately, not approximately. This has been indicated in the book, {Al-Ma`eer Ashar`ia/271}, which states, "Accuracy should be observed when defining the actual expenses, so that they don`t produce a benefit…….actual expenses don`t include indirect expenses such as salaries, rent, furniture, transportation and the like." We would like to point out that it is important to separate the account of the administrative expenses of the loan from that of the loans`. For more details, please refer to Fatwa(3073). And Allah knows best.



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