Question Summary:
Is “Lloyds TSB Planned Overdraft Facility” Shari’ah Compliant?

Question Detail:

Asalaamu alikum,
Thank you for your help. More about the product can be found here http://www.lloydstsb.com/current_accounts/islamic_student_account.asp
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Overdraft is defined as “An extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money.”[1]
The general norm among commercial banks that have interest free overdraft products is to charge additional service/bank fees and charges. Many commercial banks have a buffer zone after which an interest rate is fixed. Many more banks have unauthorized service/bank charges on interest free overdraft facilities.
Nevertheless, we cannot issue a ruling without analyzing the terms and conditions of the facility in reference since there are many issues to consider when analyzing the Shari’ah Compliancy of such a facility.
Kindly submit the relevant documents pertaining to the product in reference.
And Allah Ta’āla Knows Best
Moulana Ismail Desai,
Checked and Approved by,
Mufti Ebrahim Desai.

Answer :

Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
We have analyzed the Shari’ah Compliancy of “Lloyds TSB Planned Overdraft Facility” and hereunder are our findings on the Shari’ah compliancy of the product in reference:
The above product is defined by the bank as follows:
“A ‘Planned Overdraft’ is an overdraft up to a limit that we agree, taking into account your personal circumstances and which you arrange with us in advance. There is a Monthly Overdraft Usage Fee of £5 if you use a Planned Overdraft of more than £10 at any time during your monthly billing period. You’ll only pay this fee once in a monthly billing period no matter how many times you go overdrawn in that month. When you borrow using an overdraft we will also charge you interest. If you have an interest and fee-free Planned Overdraft limit as part of your account you won’t pay the £5 fee or interest if you stay within this limit or exceed it by £10 or less.”[1]
We understand from the above definition that “The bank will charge interest and overdraft fees once the limit (10 pounds) of the interest and fee free planned overdraft limit has been passed.”
The above clause is in violation with the fundamentals and maxims of Islamic Finance and Shari’ah Compliancy.
It is a matter of serious concern that there remains very little difference between conventional Overdraft Facilities and that of “Lloyds TSB Planned Overdraft Shari’ah Product”. 
And Allah Ta’āla Knows Best
Moulana Ismail Desai,
Student Darul Iftaa
Durban, South Africa
 
Checked and Approved by,
Mufti Ebrahim Desai.