AN EXAMINATION OF THE PENALTY FOR DELAYED PAYMENT IN FINANCIAL OBLIGATION IN NON-INTEREST FINANCIAL INSTITUTIONS IN NIGERIA

Islamic Finance has distinguished itself from other financial systems by its compliance with Shari’ah principles and rulings. Shari’ah compliance is what distinguishes an Islamic financial institution from a conventional financial institution. The conventional financial system handles default in payment of financial obligation by charging interest on customers. Since charging interest is against the principles of Shari’ah, Islamic financial institutions are not allowed to emulate this mechanism to resolve the issue of delayed payment or default. Although, the recent guidelines issued by the Central Bank of Nigeria (CBN) generally empowers the Advisory Committee of Experts (ACE) to always monitor and supervise the disposal of Non-Permissible Income by the NonInterest Financial Institution (NIFI) in its business operations. However, in cases where the institutions stipulate financial compensation for delayed payment, such decisions are sometimes considered arbitrary and not within the contemplation of Islamic law of commercial transaction. This paper, therefore, adopts a doctrinal method to examine the legality or otherwise of the payment of penalty for delayed payment in Islamic law. It found that there are justifications in Islamic law indicating that penalty can be imposed on a defaulting party especially in cases where the defaulter has the means to pay. The practice of delayed payment penalty in Islamic financial system in Nigeria is classified under the Non-Permissible Income (NPI) which is to be disposed of in charitable activities by Institutions Offering Non-Interest Financial Services.