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Wad - Appendices

Yahya Massoud
By Yahya Massoud
1 month ago
Wad - Appendices

Hadith, Mal, Sunnah

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  1. 18 of 25 Wa `d APPENDICES Appendix 1 Legitimacy of wa`d The legitimacy of a wa`d is derived from the Quran and founded on the Sunnah of Prophet Muhammad (peace be upon him). The Quran The following verse of the Quran implies the general permissibility of wa`d and the obligation to fulfil it: .1 “And be true to every promise - for, verily, (on Judgment Day) you will be called to account for every promise which you have made”.30 .2 “Those who are true to their trusts and pledges”.31 .3 “O you who believe! why do you say that which you do not? It is most hateful in the sight of Allah that you say that which you do not”.32 .4 “Also mention in the Book (the story of) Ismail: He was (strictly) true to what he promised, and he was an apostle (and) a prophet.” 33 30 Surah al-Isra’, verse 34. Surah al-Mu’minun, verse 8. 32 Surah al-Saf, verse 2-3. 33 Surah Maryam, verse 54. 31 Issued on: 2 February 2017
  2. 19 of 25 Wa `d The Sunnah of Prophet Muhammad (peace be upon him) The following hadith implies the general permissibility of a wa`d and the obligation to fulfil it. ‫ آية المنافق‬: ‫ عن النبي صلى هللا عليه وسلم أنه قال‬، ‫عن ابي هريرة‬ .‫ثالث إذا حدث كذب وإذا وعد أخلف وإذا ائتمن خان‬ Abu Hurairah reported that Prophet Muhammad (peace be upon him) said: There are three signs of a hypocrite; when he speaks, he tells lies; when he makes a promise, he breaks it; and when he is entrusted, he betrays his trust.34 34 Muslim, Al-Jami` Al-Sahih, Hadith no. 220. Issued on: 2 February 2017
  3. 20 of 25 Wa `d Appendix 2 Glossary Terms Explanation Bai` al-sarf A contract of exchange of money for money of the same or different type. Hamish jiddiyah A security deposit placed to secure an undertaking to purchase an asset before execution of the sale and purchase agreement contract. Hibah A transfer of ownership of an asset from a donor (wahib) to a recipient (mawhub lahu) without any consideration. Ijarah Lease Kafalah A contract where the guarantor conjoins the guaranteed party in assuming the latter’s specified liability. Mudarabah A contract between a capital provider (rabbul mal) and an entrepreneur (mudarib) under which the rabbul mal provides capital to be managed by the mudarib and any profit generated from the capital is shared between the rabbul mal and the mudarib according to a mutually agreed profit sharing ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the mudarib’s misconduct (ta`addi), negligence (taqsir) or breach of specified terms (mukhalafah al-shurut). Musyarakah A partnership between two or more parties, whereby all parties will share the profit and bear the loss from the partnership. Muwa’adah Two parties give two wa`d with same conditions on the same subject matter. Rahn Pledge or charge. Qard A contract of lending money by a lender to a borrower where the latter is bound to repay an equivalent replacement amount to the lender. `Urf tijari Customary business practice which is acceptable by the community and does not contradict the Shariah principles. Issued on: 2 February 2017
  4. 21 of 25 Wa `d Appendix 3 Illustration of wa`d application Example 1: Wa`d in Murababah for Purchase Orderer (MPO) A customer requires an asset financing (e.g. machinery) via a murabahah. Wa`d is used to ensure the transfer of the asset to the customer. Customer (Promisor) 1 Execution of the wa`d IFI (Promisee) Promisor provides wa`d (e.g. to buy asset once promisee acquires asset) 3 2 Fulfilment of the wa`d Promisor buys asset from promisee (murabahah) Condition is fulfilled Promisee buys asset from supplier Supplier Example 2: Wa`d in Ijarah Muntahiyah Bi Tamlik (IMB) A customer requires an asset financing (e.g. car) under the IMB. Wa`d is used to ensure the transfer of the asset to the customer. In this illustration, the transfer will be effected using a sale contract. 1(i) 1 Execution of the wa`d Wa`d 1: The customer provides wa`d:  To rent the asset; &  To buy the asset at the upon default or early settlement 1(ii) Customer (promisor in wa`d 1 & promisee in wa`d 2) Wa`d 2: The IFI provides wa`d to sell the asset upon end of lease The IFI leases asset to the customer (ijarah) & customer pays monthly rentals 2 Conditions fulfilled 3 Fulfilment of the wa`d Issued on: 2 February 2017 IFI (promisee in wa`d 1 & promisor in wa`d 2) • Wa`d 1: Upon default or early settlement, the customer is obliged to purchase the asset; or • Wa`d 2: At the end of Ijarah, the IFI is obliged to sell the asset to the customer
  5. 22 of 25 Wa `d Example 3: Wa`d in Musyarakah Mutanaqisah (MM) A customer requires an asset financing (e.g. house) under the MM. Wa`d is used to ensure the transfer of the IFI’s share of asset to the customer. Asset 1. The IFI & the customer acquire the asset (i.e. house) jointly based on the musyarakah (joint-ownership). 1 Execution of the wa`d Customer (promisor in wa`d 1 & promisee in wa`d 2) 2 3 • Wa`d 1: the customer gives wa`d to acquire the IFI’s share of asset gradually during financing & wholly upon default • Wa`d 2: the IFI gives wa`d to sell its share of asset to the customer upon early settlement 2. IFI leases its share of asset to the customer based on ijarah. Customer pays monthly rental. Conditions fulfilled Fulfilment of the wa`d • • • IFI (promisee in wa`d 1 & promisor in wa`d 2) During leasing - Gradual transfer of asset ownership from the IFI to the customer Upon default - Customer to purchase asset Upon early settlement- the IFI to sell its share of asset to the customer 3. At maturity, transfer of the IFI’s share of asset to the customer is completed. Example 4: Wa`d in Tawarruq A customer requires a personal financing using the tawarruq. Wa`d is used to mitigate commodity acquisition risk for IFI. 1 Execution of the wa`d 1. The customer requests for financing from the IFI and gives IFI Customer wa`d to purchase commodity from the IFI upon purchase (promisee) (promisor) from Trader 1. 4.Customer sells commodity to Trader 2 on cash. 3 Fulfilment of the wa`d 3. Customer purchases commodity from IFI - creates obligation to pay the IFI on deferred basis (i.e. personal financing). Trader 2 Issued on: 2 February 2017 2 Conditions fulfilled 2. IFI purchases commodity on cash. Trader 1
  6. 23 of 25 Wa `d Example 5: Wa`d in foreign currency forward (Bai’ al-sarf) A customer has to pay USD1m for his imports in 6 months-time (at T6). He enters into foreign exchange (FX) forward with the IFI to hedge risk of increase in USD against MYR. 1 Execution of the wa`d 1. At T0, the customer gives the wa`d to purchase USD at USD/MYR 4.0 at T6. Customer (promisor) 2 IFI (promisee) Conditions fulfilled 2. Maturity at T6. 3 Fulfilment of the wa`d 3. The customer fulfils wa`d & purchases USD at agreed rate (bai’ al-sarf). He hedges FX risks against spot rate of USD/MYR4.2. Example 6: Muwa`adah A customer enters into a forward transaction (using Bai al-sarf & wa`d) to purchase USD and hedge against potential appreciation of USD against MYR. In order to ensure that the IFI will also be obligated to sell the USD, a muwa’adah is used as this create an obligation on both parties to fulfil the wa`d. Customer (Promisor in wa`d 1, promisee in wa`d 2) 1. Wa`d 1: At T0, the customer provides wa`d to buy USD1m at USD/MYR4.0 at T6. 1 2 Execution of the wa`d IFI (Promisee in wa`d 1, promisor in wa`d 2) 1. Wa`d 2: At T0, the IFI provides wa`d to sell USD1m at USD/MYR4.0 at T6. Conditions fulfilled 2. Maturity at T6 3. The customer obliged to buy USD 1m @ MYR4.0 (Bai’ al-sarf). Issued on: 2 February 2017 3 Fulfilment of the wa`d 3. The IFI is obliged to sell USD 1m @ MYR4.0 via Bai’ al-sarf.
  7. 24 of 25 Wa `d Appendix 4 Illustration of fulfilment, breach and revocation of wa`d 1. 2. At T0, promisor provides a wa`d to purchase an asset from promisee upon acquisition of the asset from the supplier by the promisee. The time period for promisor to fulfil his wa`d upon the occurrence of condition is T2. At T1, the wa`d condition is fulfilled when the promisee acquires the asset from the supplier. As such, the promisor is obligated to purchase the asset from the promisee. Scenario 1. Fulfilment of the wa`d Promisor fulfills wa`d (purchases asset from promisee) T0 : Expression of the wa`d by promisor T1 : Condition fulfilled (i.e. promisee acquires asset from supplier) T2 : Deadline for promisor to fulfill the wa`d Wa`d is fulfilled when the promisor purchases the asset from promisee by T2, regardless of whether the promisee invokes the wa`d. Scenario 2. Breach of a wa`d T0 : Expression of the wa`d by promisor T1 : Condition fulfilled (i.e. promisee acquires asset from supplier) Promisor breaches wa`d (does not purchase asset from promisee) Promisee invokes the wa`d T2 : Deadline for promisor to fulfill the wa`d Promisee can claim actual loss Before T2, the promisee invokes the wa`d since he wants to ensure that the promisor fulfils the wa`d. As the promisor fails to fulfil his wa`d by T2, the promisee has the right to claim for actual loss. Scenario 3. Revocation of a wa`d (when the promisee agrees to promisor’s revocation of the wa`d) Promisor requests for revocation of wa`d T0 : Expression of the wa`d by promisor T1 : Condition fulfilled (ie. promisee acquires asset from supplier) Promisee agrees to revocation of the wa`d T2 : Deadline for promisor to fulfill the wa`d Revocation of the wa`d Before T2, the promisor obtains promisee’s agreement to revoke the wa`d. Hence, the wa`d is revoked and no longer valid upon the agreement to revoke. Issued on: 2 February 2017
  8. 25 of 25 Wa `d Scenario 4. Revocation of a wa`d (when the promisee does not invoke the wa`d) Promisor does not fulfill the wa`d (does not purchase asset from promisee) T0 : Expression of the wa`d by promisor T1 : Condition fulfilled (i.e. promisee acquires asset from supplier) T2 : Deadline for promisor to fulfill the wa`d Revocation of the wa`d By T2, the promisor does not fulfill the wa`d and the promisee does not invoke the wa`d. Hence, wa`d is revoked and no longer valid after T2. Issued on: 2 February 2017