All praise is due to Allah, and peace and blessings be upon our master the Messenger of Allah ﷺ.

It is forbidden for a debtor who is capable of repaying his debt to procrastinate in doing so. This is based on the statement of the Messenger of Allah ﷺ: "Procrastination (delay) in paying debts by a wealthy person is injustice." (Reported by al-Bukhārī), and his saying ﷺ: "Delay in payment on the part of one who possesses the means makes it lawful to dishonour and punish him" (Reported by Abū Dāwūd). The sharīʿah has granted the creditor the right to demand repayment of his debt when it falls due through appropriate means, without him being entitled to receive anything beyond what is rightfully his.

As for imposing late payment penalties or compensation upon the debtor in lieu of delayed repayment, this runs contrary to the objectives of the sharīʿah. Allah the Almighty says {what means}: "And if someone is in hardship, then let there be postponement until a time of ease; and if you give from your right as charity, that is better for you, if only you knew." [Al-Baqarah/ 280]

The Jordanian Iftaāʾ Board, in Resolution No. (124), stated: "The Board resolved that granting a creditor the authority to obtain and claim compensation when a debtor delays in fulfilling his obligations — known as the 'penal clause' in debts — is a corrupt condition that vitiates the contract, as it constitutes a form of the ribā of the pre-Islamic era (Jāhiliyyah), the prohibition of which is established in the Qurʾān. Allah the Almighty says {what means}: 'Allah has permitted trade and forbidden ribā' [Al-Baqarah/ 275]. That is to say, an increase imposed upon the maturity of a debt is equivalent to stipulating it at the outset of the contract. The Arabs of old knew no ribā other than this: when a debt fell due, they would say to the debtor: 'Either you repay, or you increase' — meaning they would add to the original debt. [See: Tafsīr al-Qurṭubī, Vol. 3/P.275.] The penal clause is therefore an addition to the principal of the debt in exchange for time, and this is a forbidden and void increase — whether stipulated in the contract as a penal clause or imposed only upon the debt's maturity."

It is, however, permissible for a creditor to stipulate that all remaining instalments become immediately due in the event the debtor falls behind in repayment, as there is nothing in the sharīʿah to prevent such a condition. If the debtor agrees to and accepts this condition, he is bound to honour it, for the Prophet ﷺ said: "Muslims are bound by their conditions, except for a condition that makes the lawful forbidden or the forbidden lawful" (Reported by al-Tirmidhī, who graded it ḥasan ṣaḥīḥ).

The Islamic Fiqh Academy, in Resolution No. (51) (2/6), stated: "It is permissible under sharīʿah for a seller who sells on a deferred basis to stipulate that the remaining instalments become due before their scheduled dates in the event the debtor falls behind in paying some of them, so long as the debtor agreed to this condition at the time of contracting."

Furthermore, it is permissible for the creditor from the outset to secure his debt by requesting guarantors or stipulating a pledge (rahn) as collateral.

In conclusion, it is forbidden under sharīʿah to stipulate late payment penalties against a debtor. It is, however, permissible to stipulate the acceleration of all deferred instalments in the event the debtor falls behind in paying some of them. The creditor may also secure his debt by requesting guarantors or stipulating a pledge as collateral. And Allah the Almighty knows best.