Islamic finance transactions: Is default interest payable?

Islamic finance transactions are governed by Shariah law. These cater for Islam’s prohibition on charging interest. A court will however apply default interest to such a debt when the debtor has failed to perform a contractual payment obligation under such agreement.

The Supreme Court of Appeal in Lodhi 5 Properties Investments v FirstRand Bank Limited dealt with various claims in relation to the default under an Islamic finance transaction between the bank and its customer. The customer defaulted on its obligations to pay and the bank succeeded in getting awarded mora (default) interest on its claim.

The court reaffirmed that such interest constitutes damages that flow naturally from the contract itself by virtue of a debtor having failed to perform. The court dismissed the debtor’s appeal and upheld the contention that default interest at the prescribed rate for default interest was recoverable despite the loan agreement being governed by Shariah law.