Islamic Financial Contract

SUPPORTING CONTRACTS

Hiwalah, Muqasah, Ibra’, Wa’d and Ta’widh

HIWALAH
 Definition of Hiwalah

It is derived from the word tahwil which means shifting from

one place to another(intiqal).

According to AAOIFI, hiwalah is technically of two kinds

• i) Hiwalah al-Haqq (transfer of right) ; replacement of a creditor with another

creditor.

• ii) Hiwalah al-dayn ; transfer of debt payable to transferee from the transferor
(muhil) to the payer ( muhal’alayh). Hanafi scholars define it as the transfer of the
right to demand(the debt) from the debtor to another liable person
 Pillars of Hiwalah
The transferor
(al-muhil)

The offer and

The transferee
acceptance
(al-muhal)
(al-sighah)

The debt The payer

(al-muhal bih) ( al-muhal ‘alayh)
 Types of Hiwalah
Restricted Hiwalah ( Hiwalah Muqayyadah)

• It is a transaction where the payer is restricted to settling the

amount of the transferred debt from the amount of financial or
tangible asset that belongs to the transferor and is in the
possession of the payer.

Unrestricted Hiwalah (Hiwalah Mutlaqah)

• It is a kind of transfer debt in which the transferor is not the

creditor to the payer, and the payer undertakes to pay the amount
of the debt owed by the transferor from his own funds, and have
to recourse afterwards to the transferor for settlement, provided
that the transfer for payment was made on the order of the
transferor.
 (B)
(A) 1
The transferee
The transferor
(al-muhal)
(al-muhil) 2

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3
(C)
The payer
Unrestricted Hiwalah: (al-muhal ‘alayh)
1. A owed B an amount of RM5,000.
2. A is supposed to pay his debt of RM5,000 to B.
3. A transferred his obligation to pay the debt to C.
4. C pays the debt (RM 5,000) to B.

Restricted Hiwalah:
The illustration for restricted hiwalah is the same as above with one additional element:
 C was earlier indebted to A. Instead of paying his debt to A, C pays his debt to B
whom A owed him for the same amount.
Basic Rules and Conditions of Hiwalah
1. All contracting parties must be legally competent to act independently.

2. All relevant parties shall give their consent on the hiwalah arrangement.

3. The transferor must be a debtor to the transferee. As for restricted hiwalah, the payer must be the
debtor to transferor.

4. Both the transferred debt and the debt to be used for settlement must be known and transferable.

5. In restricted hiwalah, the transferred debt or the transferred portion of the debt must be equal to the
debt owed to the transferee in terms of kind, type, quality and amount. However, the transferor may
transfer a lesser amount of a debt owed to the transferee, to be settled from a larger amount owed by
the transferor, on condition that the transferee be entitled to be equivalent amount of his debt.
Legal consequences of Hiwalah
1. A valid hiwalah discharges the transferor from any debt liabilities and any claims in
respect of it. In other words, the transferee will have no right of recourse against the transferor for
payment. Nevertheless, if the acceptance of the hiwalah was based on the condition that the payer
must be solvent (not in bankruptcy), then the transferee will have the right of recourse if the payer is
not solvent.

2. The transferee is entitled to have a right of recourse against the transferor in the following situations:

•Death of the payer in bankruptcy.

•Liquidation of an institution, that is, the payer, in the case of bankruptcy before payment of debt.
•The payer denies concluding the hiwalah contract and has taken a judicial oath to this effect and there is no evidence to prove
otherwise.
•The payer is declared bankrupt by a court order.

3. The transferee is entitled to claim the amount of debt assigned to him through hiwalah from the
payer.

4. In restricted hiwalah, the transferor is no longer entitled to reclaim from the payer (who
previously owed to him) an amount transferred to the payer on respect of the debt to be settled.
 Termination of Hiwalah Contract

• Mutual agreement between

contracting parties to terminate
the hiwalah contract
A hiwalah contract
• The settlement of the debt by
comes to an end the payer to the transferee.
under, among others,
the following • The death of the payer and the
transferee inherits his ( the
circumstances: payer) property.

• The debt has been written-off

by the transferee.
MUQASAH
 Muqasah ( set-off )

Definition Other Definition

• Debt settlement by contra- • Al –Dardir – Setting-off a debt
transaction or set-off. that is due to the debtor by a
• Discharge of a debt receivable creditor who is at the same
against a debt payable. time indebted to the debtor
with certain conditions
• Ibn Al-Qayyim- Clearance of
the debt which is due, with a
debt similar in nature and
character
Types of Muqasah & Their Conditions

Mandatory
Set-off

Muqasah

Mandatory
Contractual
Set-off on
Set-off
Demand
IBRA’
 IBRA’

• Mutual estrangement and

removal
• To release, eliminate or
purify and to remove
Definition • An act of absolving or
dropping one’s financial
rights (to collect payment)
from a person who has the
obligation to repay the
amount borrowed from
him
 Legal Effects of Ibra’

The debtors liability for the debt to be

absolved

The creditor has no rights to demand

and his claims relating to ibra is not
entertained
 Conditions for a Valid Ibra’
To the Grantor of Ibra’
• Matured and posseses legal capacity
• Has legal authority
• Consent by voluntarily not coercion
The Recipient
• Must be known and identified

The Subject Matter

• Must be known
• Not be a tangible asset
• Established and confirmed ownership
• Existence of rights
 Waiving of Outstanding Debt with a
Condition of Expediting Settlement

Some jurist did not permit due to Riba

• E.g. Shafi’i: It is similar with usury practiced in the
day of ignorance

Some jurist permitted on the basis of

helping the debtor to get relieve from debt
 Revocation of Ibra’

Hanafi & Hanbali jurist: Cannot be retracted

Maliki & Shafi’i: Can be retracted

WA’D
 Wa’d

Definition: Literally means promise, unilateral promise

Commitment made by one person to another to

undertake a certain actual or verbal disposal beneficial to
the second part

Or a verbal proposition made by someone to undertake

something to the benefit of another person
Basic Rules and Conditions of Wa’d

Latest ruling by OIC Islamic fiqh:

• A mulzim @ binding promise is originally religiously

binding and not legally binding
• A binding promise in a contract like inah and salaf (credit
term) transaction is a trick to riba
• A binding promise is allowed in a situation where the seller
does not possess the object of sale
• A binding promise does not transfer the ownership of the
object of sale before the completion of ijab and qabul
• If one of the parties breaks the promise, he is legally to
compensate / remove the hardship borne by both due to the
breach of contract
TA’WIDH
 Definition of Ta’widh

“Ta'widh” means penalty agreed upon by the

contracting parties as compensation that can rightfully
be claimed by the creditor when the debtor fails or is
late in meeting his obligation to pay back the debt

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 Cont.

According to Shariah Advisory Council, Central Bank

of Malaysia, ta`widh (compensation) may be imposed
on the defaulting customer who fails to meet his
obligation to pay the financing, based on the following
conditions:
• 1. The amount of ta'widh cannot exceed the actual loss
suffered by the financier;
• 2. The determination of compensation is made by a third
party, which is Bank Negara Malaysia; and
• 3. The default or delay of payment is due to negligence on
the part of the customer.
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 Cont.

BNM said the amount of ta’widh received may be recognized as

income by the seller/financier/creditor on the basis it is imposed as
compensation for actual loss incurred by the seller/financier/creditor

The late payment charge mechanism for Islamic banking institutions

would work as a prevention against default cases by customers in
discharging their financial obligation arising from Islamic contracts.

It said the imposition of late payment charges by Islamic banking

institutions that comprise both concepts of gharamah (fine or
penalty) and ta’widh (compensation) is allowable.

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 Cont.

However, gharamah is not allowed to be

recognised as income and it must be channelled to
specified charitable bodies.

Islamic banking institutions may recognise

ta’widh as income on the basis that it is imposed
on customers as compensation for the actual loss
incurred by the Islamic banking institutions.

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Differences between Ta’widh and Riba
Jahiliyah

Ta’widh (Compensation) Riba Jahiliyah

Charged by IFI based on trade-based Charged by Con. Bank based on interest-
transaction based transaction – loan contract which
creating money from money
Should consider customer’s financial Fixed charges
capability
Work as a warning against defaulters and Work as source of income and profit
it also comprise of gharamah which must
be channeled to charitable bodies
THE END OF CHAPTER 3