Kazem Mirzaie Nezhad, Zakieh Mohammadi, Ali Shahini
A problem that banks are facing is that the debtors don’t make their payments on time. Bankers argue that this problem inflicts damages on the bank not only because of currency devaluation, but also because of loss of profit. Loss of profit means that if the money was at the bank’s disposal it could gain profits through utilizing it, but now that the loaned money is not at its disposal, the bank has lost the opportunity of obtaining profits from the money. In addition, they believe that if outstanding payments grow large would be harmful for the soundness of the country’s monetary system. Based on banks’ requests, legal enactments have been passed to enforce penalties for delayed payments. However, there are deep disagreements among jurists about legitimacy of these laws. This article considers the problem of late payments in the banks by presenting a history of legislation about late payment penalties and discussing this problem from two points of view: law and jurisprudence; also, gives answers to these questions: 1) What are the potential causes of late payments?; 2) Under what conditions late payments cause banks damages?
Keywords: Bank Loans; Late Payment Damage; Punitive Condition; Financial Punishment; Usury.
Before the Islamic revolution, this issue has been considered in articles 719 to 723 of the Iranian Code of civil procedure, enacted in 1939. According to these articles, the penalty for delayed payments has been determined by the rate of 12 percent. In the mentioned law, the rate of 12 percent was constant, and the parties could not agree on a higher amount. After the victory of the Islamic revolution, and the process of Islamization of laws, usury was prohibited. Considering this prohibition, the banks not only did not demand compensation for delayed payments, but also decreased interest rates as low as four percent, merely as a bank fee, in order to attract public participation and encourage customers to repay their debts. Some people exploited this situation for not paying their debts, which resulted in administrative and financial problems for the banks, which in turn caused the Money and Credit Council to endeavor to achieve legal and religious approval for collecting late payment penalties in order to fix the problem. Accordingly, the Council prepared a plan in which the debtor had to accept a provision that if he fails to pay the debt at maturity, must pay a penalty. Also, the Guardian Council approved that if the borrower accepts the provision, but fails to repay at maturity, must pay a fee equal to 12% of the remaining debt per each year, and it is permissible for the banks to collect that amount of money. (Official Gazette of the Islamic Republic of Iran, No. 11301, 12/13/1983); Having this provision stipulated in the loan contract, the problem was solved for loans after the year 1983; but this permission was not applicable for the years before.
Afterwards the banks were faced with two problems: 1) Prohibition of delayed payment penalty by Imam Khomeini: He had stated that: “What surplus the bank or the non-bank [other financial institutions] obtains in the event of delayed payment from the date of maturity is “haram” [forbidden] and obtaining it is not permissible, even if both parties are satisfied with such compromise.” Considering the religious prohibition of receiving delayed payment penalty, the Guardian Council in 1985 stated that demanding amounts excess of the debts of the debtors in the form of delayed payment damage is not permissible, and articles 719 to 723 of the Code of Civil Procedure, and the like, are against “Sharia” (religious regulations) and are unenforceable (Hosein Mehrpour: A Collection of the Guardian Council’s points of view, Keyhan publications, Tehran, 1992, vol. 3, pp.193 and 198) and penalty payments can be collected only from those people who have accepted this provision through the stipulations of the contract.