Sunday, August 7, 2011


Promise or “Waad” has been featured so prominently for quite sometime in Islamic finance circles such that it has been given more importance than Islamic contract itself. In what is frequently referred to as an effort aimed at helping Islamic finance to grow and be competitive in the world of finance, waad has been employed in structuring many Islamic financial instruments including Murabahah sale, swap and option where in most cases it is the customer who is made to be legally bound by any promise that he may be asked to make in favour of Islamic financial institutions.

The concept invoked in this connection is what is known as the notion of binding promise premised on views as adopted by some mazahibs or Islamic schools of Jurisprudence. Although a great majority of Muslim jurists right from the earliest period of Islamic law have held the view that a promise is undeniably morally binding upon the promisor, but they accepted the view that in a law or judicial term it is not binding in the sense that if the promisor should break his promise he could not be sued in any Shariah court for such a breach.

But the modern approach to Islamic banking and finance has always preferred the view of a small minority of the jurists who hold the opposite opinion when they opine that a promise is also judicially binding on the promisor. Not only that this approach sanctions such a view, if one were to look at many contracts/agreement used by Islamic financial institutions, it will become clear that any breach of promise by the promisor (client) will render him liable for any loss that may have been suffered by the other party (promisee/banks) and be required to fully indemnify the promisee. In many cases, part of the duty to compensate revolves around the need to pay the difference in price of the underlaying asset, to be purchased by the promisee from the bank, and the realized price if the same asset is to be sold to any other party after the breach of the promise by the promisor, i.e., when the promisor negates his promise to purchase the asset from the promisee/bank.

Interestingly, although it seems that the promisee/bank generally accepts the notion of binding promise on the promisor as described, that concept is however not made applicable to the promisee/bank in most of the circumstances where normally the promisee/banks always reserves an absolute discreation whether to conclude the promised contract or not, as the promisee/bank right from the very beginning of the arrangement will not make any similar promise to sell the asset to the client/promisor. It is always claimed that to make this arrangement valid from Shariah perspective, there will always be only a unilateral promise from one of the parties that in most cases as previously said is the customer/client. The rationale for this approach as propounded by the practitioners/and their Shariah advisors is that if the promise to buy and sell was to be made on mutual basis, that will trigger Shariah compliance issue as far as the intended sale is concerned. Take the case of Murabahah for example, if it is allowed for both parties (the bank and the customer) to make mutual promise to buy and to sell at the same time then this arrangement will, as claimed, constitute a sale contract at a time when the asset of the murabahah has yet to be the property of the bank because at the time of the mutual promise the bank has yet to buy it from the distant supplier. This arrangement (mutual promise) if allowed will lead to selling something not in one’s possession or ownership that runs counter to a basic rule of sale.

However, one big question remains to be answered: if it is true that any promise made by a client in favour of a bank is mandatory to be fulfilled by the client in any circumstances in line with the concept of binding promise as decribed, how come the promisee/bank at his absolute discreation reserves a right to himself not to agree to the performance of the promise by the promisor? Because if such a discreation is exercised by the bank/promisee it means that he prevents the promisor from performing his promise as dictated by the concept of binding promise. Hence the big question is, can it be possible for the promisee/bank to resort to such an act while insisting at the same time that the promisor must perform his promise under all circumstances?

The tendency to rely on the concept of binding promise as explained above seems to be motivated by a desire on the part of the strong party/financier to take advantage of the needs of the weaker one/the client more than
a true adherence to the spirit of justice as envisaged by Islam or Shariah.

This analysis shows that what had been accepted by the majority of Muslim jurists on the nature of a promise which is not legally or judicially enforceable is more appropriate to be considered. Imam al- Shafi as one of the earliest jurist to talk about Murabahah for example, opined that should the two parties (in the context of Murabahah) enter into a mutual promise to do murabahah sale, such mutual promise is valid if both parties have option whether to subsequently enter into the murabahah sale or not to enter into it, otherwise the arrangement is not valid in his opinion because if such a promise is binding on them, that effectively will constitute a sale at a time where the seller has yet to own the asset. For him a promise or even a mutual one will have no binding effect on the parties from the judicial perspective.
Hence when the bank/promisee subscribes to the idea of a promise binding only on the promisor but the promisee/bank is free to accept the performance of the promisor or to reject it just because he has not made a similar promise is very absurd indeed.