Wa’ad

BWSS5023 ISLAMIC FINANCIAL CONTRACTS AND

MAXIMS (Group A)

WA’AD & MUWA’ADAH

Presenters:Safinah Binti Abdul Roni 814451Nur Atikah Bt Mohmad Jumat 814551‘Azra Arrmyza Binti Razif 815311

Concept of Wa’ad and Muwa’adah Legal status of Wa’ad Shariah view of Wa’ad

Wa’ad is binding Wa’ad is not binding

Shariah view of Muwa’adah Permissibility of muwaàdah if it is not binding on the parties

involved Permissibility of muwaàdah even though it is binding on the

parties involved Permissibility of muwaàdah for import and export

Financial products which apply al Wa’ad Pronouncement regarding Wa’ad and Muwa’adah

Presentation Outline

Wa’ad = a unilateral promise given by one party to another to perform obligation. E.g.

A customer promise to buy a leased asset upon expiry of the leasing (ijarah) period in the al-ijarah thumma al-bay’ (islamic hire purchase ) transaction.

Other usage of unilateral promise in the form of sale or purchase undertaking can also be found in musharakah mutanaqisah (diminishing partnership), murabahah sale to puchase orderer and sukuk structures.

Concept of Wa’ad

Concept of Wa’adWa’dan = 2 unilateral promises given by

two different parties which are independents from each other and subject

to different independent condition. E.g. In certain islamic-structured product, a

customer promises to sell securities to a bank for an agreed settlement price with certain conditions.

At the same time, the banks also undertakes to buy the securities for certain price with another different condition.

Muwa’adah = bilateral promises that can be conditional or unconditional with or without

consideration Unconditional bilateral promise occurs when

one party undertakes to sell an asset during a particular time, while the other party undertakes to buy it during the same time

Conditional bilateral promises happen when one party promises to sell an asset and another party promises to buy the same asset if certain condition occurs.

Concept of Wa’ad

A promise without any intention of fulfilling it is not permissible (haram)

- Deemed to be a liar and pretentious(munafiq) person who are seriously condemned by the religion. If the same promisor takes an oath to

convince the promissee- Will be subject to Allah’s condemned - A fine or compensation (kaffarah) to relieve him

from his false oath.

Legal Status of Wa’ad

If a promise with an intention of fulfilling it, the jurist are divided whether its fulfillment is obligatory or recommended.

Those who are opine the fulfilling a promise is obligatory are further divided as to whether it is binding by religion (mulzim diyanatan) or enforceable by the court (mulzim qada-an)

Islamic jurist have different views with regard to the liability imposed to the parties of the promise

Legal Status of Wa’ad (2)

Fulfilling a promise is recommended (mandub), not obligatory: otherwise the promisor will be condemned (makruh).

Promise must be fulfilled for the religious reason only and it is a question of morality

Al-Zarqa’-does not initially bind the person who makes it (promisor), and it does not give any right to the promissee.

The Shafi’I, Hanbali and Zahiri Schools recommend the fulfillment of promise, even if it is subject to certain condition.

Legal Status of Wa’ad (3)VIEW 1:

Fulfilling a promise is obligatory by religion: otherwise the promisor is deemed to be sinful. Its non-fulfillment will not be enforced by the court.

Hanafi, Shafi’i, Hanbali and a few from Maliki Schools- a promise made by a person to the other is religiously binding (mulzim diyanantan) but not a legal duty (mulzim qada’an. It is because wa’ad is part of a voluntarily contract (‘aqd tabarru’at). Therefore the judge has no way of such enforcement, because the second party has nothing more than a moral right.

Imam Nawawi-when a person promises another sometheing (provided it is not illegal (he should fulfill his promise .

Al-Qarafi-promise is bot binding at all


Fulfilling a promise is obligatory by religion and can be enforceable by the court

Ibn Al-Arabi-the promise is absolutely binding and must be fulfilled by all means unless if its fulfillment is impossible.

Ibn Shuramah made the fulfillment of promise as compulsory. He said:

i. every concluded promise which does not allow prohibited thing, are not prohibit permissible thing, is binding legally and religiously.

ii. All promises are binding and the promisor is compellable in fulfilling it


When a promise is subject to certain condition, its fulfillment is obligatory and enforceable although the

promissee has not acted upon the promise yet.

Hanafi Schools distinguished between absolute promise and conditional promise.

The latter is binding in contract of exchange to avoid gharar (unknown element) in the subject matter of promise.

This rule is very similar with the concept of guarantee established by the kafalah contract.


When promisor is subject to conditions, its fulfillment is obligatory and enforceable only if the promissee has indeed acted to the basis of the promise and

incurred loss.

Ibn Al-Arabi-if the promise results in the particular consequence, its fulfillment is obligatory, but if it is a promise per se without any consequential effect, fulfilling it is not made obligatory.

The enforceability of a binding promise judicially can be upheld if it entails to the performance of the promisse in reliance to the promise. As such fulfilling the promise is obligatory, or the promisse will suffer loss or difficulties as the result of the non fulfillment . This is preferred opinion in the Maliki School which was expounded by Malik, Ibn Al-Qasim and Sahnun


Wa’ad is Binding Wa’ad is not Binding

SHARIAH VIEW ON WA’AD & MUWA’ADAH

A man ask the Prophet (SAW), “Can I lie to my wife?” The Prophet (SAW) said, “There is no good in lying.” The man said, “Shall I make her a promise and tell her?” The Prophet (SAW) said, “It will not be held against you.”

This Hadith is not acceptable to justify the issue of-nonfulfillment of wa’ad since it is concerned with the issue of whether a husband who lied to his wife is sinful or not.

Zaid bin Arqam (RA) that the Prophet (SAW) said: If you promise something to your brother with an intention to fulfill it, then the thing promised is not brought forward (promise is not fulfilled), so it is not held responsible (onto you).

The other justification is that a wa’ad is like hibah (gift) which is not binding on its promisor except after delivery is taken place

Shariah view on Wa’ad is not Binding

Malik, Ibn Al qasim and Sahnun : A person want to buy a slave if somebody willingly lends him 1000 dirham. If that somebody says “ I will give you a favor by giving you 1000 dirham, therefore, buy yourself a slave,” this kind of promise is binding (upon a second person).

Ibn Shubrumah, Ishak bin Rahawaih and Hassan al – Basri. Surah An –Saff verse 2: ‘O you believe! Why say ye that which ye do not? Grievously odious is it in sight of God that ye say that which ye do not.”

The Prophet (SAW) considered that the breaking of wa’ad was one of the sign of the hypocrite. The Prophet (SAW) said “if he talks he lies, if he promises he will not keep his promise, if he make a covenant, he betrays it and if he entered into quarrel, he is shameless and does not behave fairly.”

Shariah view on Wa’ad is Binding

Permissibility of muwaàdah if it is notbinding on the parties involved

According to Majma` al-Fiqh al-Islami, muwaàdah for

bai` murabahah is allowed. However, khiyar (option) must be offered to one or

both parties involved whether to conclude the contract or otherwise in the future.

If khiyar does not exist, then muwaàdah is not allowed as it resembles the contract of buying and selling itself (bai` murabahah).

Shariah views on Muwa’adah

Permissibility of muwaàdah even though it

is binding on the parties involved

Some contemporary jurists view that muwaàdah is permissible to execute a promise even though it is binding.

According to this view, muwaàdah binds both parties involved, based on the following arguments:

• Rasulullah s.a.w said: Meaning: There should be neither harm nor malice From the above Hadith, it can be understood that if

muwaàdah is not binding, it can be harmful to the parties involved. Therefore, a muwaàdah that binds is necessary.


Permissibility of muwaàdah for importand export

According to Majma` al-Fiqh al-Islami, muwaàdah for import and export activities is permissible where there is a general need (hajat àmmah) to bind the parties involved in accordance to the relevant rules or norms in international trade (al-a`raf al-tijariyyah alduwaliyyah), such as the requirement in the letter of credits (al-i`timad al-mustanadi).


WAAD IN ISLAMIC FINANCIAL CONTRACTS

BUYU’

• MURABAHAH LIL AMIR BISSHIRA

• FUTURE FOREIGN EXCHANGE

IJARAH

• IJARAH MUNTAHIYA BI TAMLEEK

SHIRKAH

• MUSHARAKAH MUTANAQISAH

• MUDHARABAH

occur when a customer makes an application to the bank to buy an item with an agreed specification and price of the item which has not yet become the property of the bank.

for example : customers seeking to buy clothes.

MURABAHA LIL AMIR BISSHIRA

1 3 4

2

CUSTOMER

BANK SUPPLIER

1. the client make application to the bank to buy 10,000 pieces of clothes A at a cost of RM100, 000. At the same time, customers signed waad agreement to buy from the bank at the selling price of RM110, 000

2. bank buy the clothes from suppliers

3. after payments to suppliers are made, the bank sells the clothes to customers

4. customers will make payments to the bank on the maturity date of the contract.

in future foreign currency exchange transactions, customers agree to execute foreign exchange at a specified future date.

Customers also agreed on the exchange amount

for example, customer make a waad agreement to bank on 10/01/2007 to perform exchange transactions equivalent to RM3.40 for USD1 on 1/12/2007. compensation claim can be made by the bank if the customer fails to fulfill its promise.

FUTURE FOREIGN EXCHANGE

1

2 3 4

IJARAH MUNTAHIYA BI TAMLEEK

CUSTOMER

BANK

SELLER

1. customer buys an asset from a seller and pay 10% of the actual price

2. bank buys the asset from customers by making payment directly to seller the remaining 90% of the purchase price

3. customer and the bank signed a lease contract for which the client will lease the asset from the bank for the duration and the amount of rent agreed. at the same time the customer sign a waad document stating to purchase the asset from the bank at the end of the rental period.

4. customers pay rent to the bank for an agreed period.

1

2 4

3

MUSHARAKAH MUTANAQISAH

CUSTOMER HOUSE DEVELOPERS

BANK

1. customer buy a house from developer and pay 10% of the actual price

2. customer and the bank signed a partnership contract (musyarakah) to jointly own the property and the bank agree on the ownership of 90%. at the same time, clients sign a document that is a promise to buy the house from th bank

3. bank make payments directly to the developer equal to the remaining 90%

4. customers make payments and purchases by units that include the payment of rent to the bank this is the unit that is already owned by the customer.

2

% 1 4 3 %

MUDHARABAH

CUSTOMER

BANK

BUSINESS ENTITY

1. customer and the bank signed a contract mudharabah where banks will channel capital to its customers. therefore, the bank will have some equity business is being conducted by the customer. at the same time, the customer is signed a waad agreement to repurchase equity (fixed assets and financial assets) owned by the bank.

2. customers will conduct the business.

3. profit is shared by the client and the bank.

4. Customer will perform waad by buying equity owned by the

Decisions of Fiqh Councils and other fatwas regarding

promises and bilateral promises.

In a promise to buy or an agreement for commercial cooperation in murabahah basis, it is possible to indicate the percent of profit and the duration of arrangement on a yearly basis, and when the contract is effective, the percentage of increase must be given considerations after which the profit must be stipulated without any further increase in case payment period is extended.

It is necessary to stipulate in a contract that the profit in murabahah transactions must be set WITHOUT any possibilities of increase.

Thus it is understood that there is no possibility of reapplying the percentage formula if the number of years increase.

Fatwa of United Shariah Board (HA 93/4)

The Board approved that in agreement of promise to buy , the promisor undertakes the buy the commodity on the basis of yearly percentage **** per annum.

However, the board stress the necessity to define total profit for each transactions at the time of making the contract effective.

Fatwa of United Shariah Board (HSH 96/4)

Therefore, the Board requested clarification of that point by altering the clause to say “The process shall be completed on the basis that the SECOND PARTY shall promised to buy the stipulated commodity fro m the FIRST PARTY for a stipulated profit on each transaction of **** per annum.

**** refers to amount stipulated in the agreement and the amount may varyi.e. : 17.8 % per annum

The promise is binding upon the purchased-orderer (buyer), the bank, or both of them.

Affirming the binding nature of promises is more effective than preserving the benefits of dealings and the stability of transactions

This protects the interest the bank and the client, and affirming the binding nature of promises is acceptable to shariah.

The fatwa of the Second Islamic Banking Conference ( Kuwait, 6th-8th June 1983)

However, each bank is free to adopt its own position on the issue of whether promises are binding as per the decision of its own shariah board.

It is also permissible in the shariah to exchange bilateral promise to conduct sale, after the ownership of the commodity has been passed to the bank and has taken possession of it, and sell it to the purchaser with a profit rate mentioned in the previous promissory agreement.Provided that the responsibility for commodity is borne by the bank in case it is destroyed before the bank delivers it to the customer and as long as the bank accepts the customer’s right to return the commodity due to hidden defects that would entail the right of return for defective merchandise.

Question :

What is the position on a bilateral promise for the purchase of various currencies at their price on the day of agreement (promised) with both the exchanged currencies to be paid at a future date, and with the exchange of both being on the spot at that time?

Fatwa :

If the bilateral promise is binding then it enters into prohibition of selling debt for a debt, and is not permitted. However it is not binding on the other party then it is permitted.

-Fatwa no 13, Shariah Fatwas on Economics, Dallal Barakah pg 83

The First Barakah Conference

Question :

What is the ruling on bilateral promise in currency transactions?

Fatwa :

A bilateral promise in the sale of currencies by delayed payment is permissible if the bilateral promise is not binding. (That was the majority opinion).However, if the bilateral promise is binding, then the transaction is not lawful in the shariah.

-fatwa no 23, Shariah Fatwas on Economics, Dallal Barakah pg 84

The Sixth Barakah Conference

Question :

A bilateral promise to buy a specified amount of a specified currency at a specified price within a specified period, with the seller pledging to deliver the amount.

Answer :

This transaction is not permitted in the Shariah because it is a promise to buy currency. In trading currencies, the sale has to be completed on the spot

(ie : immediate transfer of one form of money for another )

KFH Shariah issue, vol. 2, fatwa no. 96

Kuwait Finance House Shariah Fatwas

The council of IFA in its 5th conference held in Kuwait (10-15 December 1998) has decided that :

First : The unilateral promise that is forwarded by either the purchase-orderer or the bank is binding upon the promisor. It is also legally binding in court of law if it is made conditional upon cause , and if the one to whom the promise are made entailing expense due to the promises.

In such case the binding nature of the promise takes effect either by the actual fulfillment of the promise or monetary compensation for the actual damages incurred as a result of the breach of promise without valid excuse.

Relevant Decisions of the Islamic Fiqh Academy

Second : Bilateral promises (issued by each party to the other) are permitted in sales on the condition that either or both parties have the option to annul the sale; however if there is no such option , such a promise is not allowed because a binding bilateral promise in a contract bears a similarity to the transaction itself.

In that case the condition is laid down that the seller must own the commodity to prevent dispute. This is also based on the prohibition of Prophet SAW that do not sell what we don’t possess.

First : The basic rule for bilateral promises is that they are binding from a religious point of view but are not legally binding.

Second :Bilateral promises and mutual agreements to contractual forms in order to skirt the prohibition of riba, or a bilateral promise to engage in sale combined with a loan is prohibited in the shariah.

Third : There maybe cases where it is impossible due the commodity is not in the possession of the seller while a general need exists to oblige both parties to implement a contract in the future, either by legislation or the recognized practices of international commerce, for example. The latter will be opening a letter of credit in order to import goods. In such cases it is permissible to oblige both parties to fulfill their promises, either thru governmental legislation or by the agreement of both parties to a clause in the agreement that will make the promises binding on each of the two parties.

The IFA of OIC (17th session held in Amman, 24-28

June 2006)

Fourth : The binding bilateral promise in the case describe in Article Three does not take the ruling for sales to be executed in the future, the ownership of the commodity being sold does not transfer to the buyer, the purchase price does not become a debt owed by him, and the sale does not take place until the agreed upon date by the exchange of offer and acceptance.

Fifth : Should one of the two parties fail to keep his promise in the circumstances described in Article Three, he shall be legally compelled to fulfill the contract or to bear responsibility for the actual damages suffered by the other party as a result of breach of promise (but not for any estimated lost opportunity).

It was held in Muscat, Oman – Session 15th, 6-11 March 2004

Musharakah mutanaqisah is uniquely characterized by the presence of binding promise by only one of the two parties to effect multiple purchase contracts by which he/she will gain possession of every portion of the other party’s stake.

The contracts of sale can be concluded using whatever method indicates offer and acceptance.

Decision No 136 Regarding Musharakah Mutanaqisah And Its Shariah Parameters

From the survey of fatwas and decisions just mentioned, it becomes clear that promises in financial transactions are binding particularly in those circumstances in which harm is inflicted by the breach of promise.

THANK YOU

Documents

Wa’ad