The Legal Nature of the Commitment Fee in Islamic Banking with Emphasis on Judicial Precedents

Abstract

The legitimacy of compensation for delayed payment, following the non-payment or delay in the payment of monetary debts, has long been a subject of dispute. Serious doubts about the presence of usury, the legal scholars’ inclination toward justice and fairness, the protection of vulnerable customers against the more powerful party (the bank), as well as the harm suffered by the creditor due to delay in the debtor's payment, have further complicated the issue. The background of research in this area and the pathway that jurists and legal scholars have taken to address this problem has somewhat resolved the issue. As a result, under current legislation, to avoid the pitfall of usury, banks have no choice but to resort to a commitment fee clause within contracts. The economic and social advantages and disadvantages of the commitment fee, along with the misinterpretation of its nature, have turned it into one of the economic and legal challenges. Judicial courts have not applied consistent rulings when dealing with such clauses, resulting in conflicting judgments stemming from incorrect interpretations and ongoing disagreements. This study aims to critique the current judicial approach and, by utilizing jurisprudential and legal principles related to delay compensation and the commitment fee clause in banking contracts, to reassess the nature of the commitment fee and propose a balanced approach. According to the authors, given that the nature of the commitment fee is a duty-bound obligation, the general conditions of obligations, including the ability to perform them, are relevant. The commitment fee should never be considered as a debt on the borrower’s shoulders, which has been overlooked in judicial practice.