Sale-based contracts

Shart jaza'i (penalty clause in istisna)

An agreed charge on a manufacturer or contractor for late delivery, permitted in istisna and supply contracts.

Shart jaza'i is a penalty clause: an agreed amount payable if a party fails to perform on time. AAOIFI's standard on the procrastinating debtor permits penalty clauses in construction, istisna and supply contracts, while not permitting them for delay in paying a debt. Bank Negara Malaysia's istisna policy document likewise allows parties to agree a late delivery charge on the seller, which may be recognised as income to the purchaser. The distinction matters: a charge for late delivery of an asset is treated differently from a charge for late payment of money.

Sources

Bank Negara Malaysia, Istisna` policy document, 2015: late delivery charge (shart jaza'i)

This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.

Related terms

IstisnaA contract to manufacture or build a specified asset for delivery on a set date, with the price paid in stages or as a lump sum.Parallel istisnaA second, independent istisna in which a bank that has agreed to deliver an asset orders it from a manufacturer or contractor.Ta'widh (compensation for actual loss)Compensation for the actual loss a creditor suffers from late payment, accepted by some authorities and rejected by others.Gharamah (late-payment penalty paid to charity)A penalty for late payment that the creditor may not keep as income and must direct to charitable purposes.