A penalty for not paying an instalment on time is also interest

Question

Question: A firm was operating as a partnership (shirka), but for some reason the partners withdrew from the firm. One partner became responsible for its dealings (what the firm was owed and what it owed), and payment to the other partners fell due in instalments. If the money is not paid in instalments, there will be the right to “make lawful an expense” (?) of one rupee per hundred per month. Kindly answer, therefore: does one rupee per hundred per month not fall under interest?

Answer

This one rupee per hundred per month is interest; taking and giving it is not permissible.

Source: Fatawa Mahmudiyya

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