Can a bank calculate the mark - up interest along with equated monthly installments as a new amount and then conclude a new refinancing contract to obtain interest and penalize the borrower if they make late payments on loans? - Questions Archive - IslamQuest is a reference for Islamic questions on the internet

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Last Updated: 2011/10/02

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group Laws and Jurisprudence

Summary of question

Can a bank calculate the mark-up interest along with equated monthly installments as a new amount and then conclude a new refinancing contract to obtain interest and penalize the borrower if they make late payments on loans?

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In case, repayment of government loans is delayed under civil partnership, can the bank calculate the mark-up interest along with the delinquent installments as a new amount and then conclude a new refinancing contract? Obviously, the new interest includes all the previous penalties and loan interests.

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The answers received from the offices of the grand jurists are as under:

Office of Grand Ayatollah Sistani (may Allah grant him long life):

Any kind of interest levied on loan is considered to be usury and haram.

Office of Grand Ayatollah Makarem Shirazi (may Allah grant him long life):

The bank can receive the previous interest as it was based on Islamic contracts. Nothing else associated with the loan is allowed.

An answer given by Ayatollah Mahdi Hadavi Tehrani is as under:

1. The penalty for late payment of installments which is calculated on percentage basis is not free of objection.

2. Regardless of the first point, if the previous loans are cleared and then a new loan with equal amount left from the previous loan plus the penalty and interest of the loans are taken together and a new (refinancing) contract is concluded, there would be no problem in it.

Link to Istiftaat Website (code 141) .

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