be included in a subsequent agreement concluded before any damage occurs.

Fourth: It is permissible to stipulate a penalty clause in all financial contracts except those in which the primary obligation is a debt, for that would constitute explicit ribā (usury).

Accordingly, such a clause may be inserted, for example, in construction contracts with respect to the contractor, in supply contracts with respect to the supplier, and in istisnāʿ contracts with respect to the manufacturer, if he fails to carry out what he has undertaken or delays in doing so.

Conversely, it is impermissible in instalment sales on account of the purchaser’s delay in paying the remaining instalments—whether the delay is due to insolvency or procrastination—and it is likewise impermissible in an istisnāʿ contract with respect to the commissioning party (mustasniʿ) if he is late in paying what he owes.

Fifth: Compensable harm includes actual financial loss, the real losses sustained by the injured party, and the definite profit he missed. It does not include non-material or moral injury.

Sixth: The penalty clause is not enforceable if the party against whom it was stipulated proves that his breach of the contract was caused by circumstances beyond his control, or if he proves that the party in whose favor the clause was stipulated suffered no harm from the breach.

Seventh: The court may, at the request of either party, adjust the amount of compensation if it finds justification for doing so or if the stipulated amount is excessive.

Recommendations:
The Academy recommends holding a specialized seminar to examine the conditions and measures proposed for Islamic banks to ensure their collection of debts owed to them.

And Allah knows best.