In general, ta’weedh (in Arabic تعويض) refers to all types of compensation or remuneration (‘iwadh) charged or paid in relation to a commutative transaction or against damages inflicted on a contracting party due to a wrongdoing or negligence (ihmal) or carelessness by the counterparty.
In the context of financial transactions, it refers to late payment compensation (gharama/ penalty) imposed by a bank (or generally a lender) on a defaulting customer who fails to meet his/ her obligation to repay the principal and pay the agreed-on mark-up (ribh) as in the case of murabaha transactions, for example. The imposition of ta’weedh is impermissible (i.e., it is considered a form of riba) unless some conditions are met:
- The amount of ta’weedh shall not be larger than the actual loss suffered by the bank.
- The default in, and the default of, payment is due the other party’s negligence (ihmal).
- The compensation shall be determined by a third party (such as a regulator or some market agency) rather than the bank itself.
Ta’weedh may also used to refer to the process or act of paying compensation.
