From Contractual Compliance to Economic Human Security: A Re-Evaluation of Penalty Clauses in Islamic Banking

Abstract

The long-term resilience of modern financial systems increasingly relies on achieving an appropriate equilibrium between institutional debt enforcement and the economic well-being of borrowers. This study investigates the implementation of penalty provisions and charges for delayed payments within Islamic banking, identifying a marked disparity between traditional Shariah jurisprudence and contemporary institutional practice. Such discrepancies extend beyond matters of regulatory compliance, as financial sanctions may gradually shift from serving as deterrent measures to becoming drivers of socio-economic hardship. Adopting a threefold methodological framework comprising descriptive, inductive, and comparative approaches, the research assesses the implications of prevailing practices adopted by Islamic financial institutions for borrower welfare and overall financial system stability. The findings indicate that fragmented regulatory arrangements and uneven institutional implementation heighten financial vulnerabilities, particularly at the household level. The study advocates the adoption of a unified, borrower-oriented framework grounded in the objectives of Shariah (Maqasid al-Shariah), with particular emphasis on safeguarding wealth and preserving human dignity. It recommends replacing inflexible contractual enforcement with a more balanced approach that simultaneously promotes institutional sustainability and strengthens borrower protection.