An Islamic bank leases machinery to a client under an Ijarah contract. The lessee delays the rental payments and the bank charges a late payment penalty. From a Shariah perspective, what must the bank do with this penalty amount?

Correct answer: C) Donate the entire penalty amount to a charity, as taking it as income is considered Riba

Explanation

In Islamic finance, a penalty for late payment can be charged to deter default, but the bank cannot recognize this penalty as its own income because it is considered Riba (interest). It must be donated to charity.