International Journal of Islamic and Middle Eastern Finance and Management

Bilateral rebate (ibra’ mutabadal) in Islamic banking operation: a critical appraisal

Mohamed Fairooz Abdul Khir
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To cite this document:
Mohamed Fairooz Abdul Khir , (2016),"Bilateral rebate (ibra’ mutabadal) in Islamic banking operation: a critical appraisal",
International Journal of Islamic and Middle Eastern Finance and Management, Vol. 9 Iss 3 pp. -
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 BILATERAL REBATE (IBRĀ’ MUTABĀDAL) IN ISLAMIC BANKING
OPERATION: A CRITICAL APPRAISAL

1. INTRODUCTION

Rebate is granted by the creditor to the debtor in many circumstances; amongst others are,
when the debtor fails to fulfil his contractual obligation, and when he fulfils it before the
agreed date of settlement. The first occasion signifies that the debtor has defaulted,
intentionally, when he is able to pay the amount due, or unintentionally, when he is unable
to pay the debt. The second occasion entails the debtor’s willingness to pay back the debt
before the agreed date of settlement in hope of getting a rebate from the financier.
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However, this is not binding on the financier as it is based on his discretion. In an interest-
bearing loan, the debtor is usually granted a rebate of the unearned profit from the bank,
but the borrower is bound to pay compounding penalty charge. This seems that the usual
practice of granting rebate in the event of default by not claiming the unearned profit is
compensated with the compounded amount imposed on the defaulter. The usual practice of
giving rebate by deducting the unearned profit is a clear reflection of bilateral rebate rather
than unilateral. The questions to ponder upon is if the Sharīʿah permits this type of rebate
and if it is deemed permissible, what are the guidelines or parameters that needs to be
complied with, and how to prevent opening the floodgates to prohibitive elements such as
interest (ribā), excessive uncertainty (gharar), excessive overcharging or over-pricing
(ghabn fāḥish), deceit (ghish), gambling (maysir)and so forth. The above scenario seems to
be even-handed to both contracting parties, but the compounding element makes it purely
interest bearing through charging the borrower; merely, on the basis of time. The pertinent
Sharīʿah issue arising from this situation is if it is permissible to give rebate on a
compulsory basis by making it a condition in the financing agreement. It is of great
importance to note that the permissibility of bilateral rebate will definitely result in two
Sharīʿah issues:

(1) The issue of two selling prices in one deal.

(2) The issue of ribā al-nasī’ah arising from the concept of “reduce and hasten payment
(ḍaʿ wa taʿajjal)”.

It is extremely important to accentuate the above Sharīʿah issues as bilateral rebate

seemingly bear a resemblance of conventional rebate in an interest bearing loan. Hence, it
is worthy to thoroughly examine the salient distinctions between bilateral rebate and
unilateral rebate from the Sharīʿah and conventional perspective. If the Sharīʿah permits
bilateral rebate, there should be a substantial justification that reflects the principle of
justice in Islamic financial transactions as each financial transaction in Islam is essentially
built upon the principle of equality and fairness particularly in the exchange-based
contracts such as the sale contract and lease contract.

2. SHARĪʿAH VIEWPOINT ON BILATERAL REBATE

Bilateral rebate assumes two distinctive features that make it different to unilateral rebate.
Firstly, it is binding on the seller in the event of default and early settlement, and secondly,
1
 it involves exchange of time with money which is embedded in deferment (ajal) or grace
period of payment. In Islam, the above situations may transpire in two different contracts,
namely, the deferred sale and the loan contract. The question is if the same Sharīʿah ruling
for bilateral rebate is applicable to both financial transactions as both are different with
regards to their underlying Sharīʿah principle as well as their fundamental purpose for
which they are legalized by the Sharīʿah. In Islamic jurisprudence, bilateral rebate can be
traced to scholars’ debate on the principle of ḍaʿ wa taʿajjal (reduce and hasten payment)
as to its permissibility or impermissibility. There are multitudes of jurisprudential literature
which expound on the concept of bilateral rebate. Hence, this part is dedicated to a
thorough examination on the scholars’ view on the principle of ḍaʿ wa taʿajjal. Al-Subkī
(n.d) spelt out the reality of this debatable issue:
“One(who) has a deferred debt, then the debtor said to the creditor: ‘reduce some of
the debt, and I will pay the rest of the debt earlier’, or the creditor said to the debtor:
‘settle your payment earlier, and I will drop the remaining’”
Generally, there are three opinions of scholars with regard to the Sharīʿah ruling for ḍaʿ wa
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taʿajjal which can be summarized as follows:

i. It is, absolutely, not allowed, whether it is conditional or unconditional. This is the

view of a large majority of scholars from the salaf (Muslim predecessors) and
khalaf.
ii. It is, absolutely, allowed, whether it is conditional or unconditional. This view is
attributed to a few scholars from among salaf and the khalaf.
iii. It is allowed if it is unconditional and not allowed if it is conditional. This is the
view of some scholars from the Ḥanafī and Shāfiʿī schools of law.
iv. It is allowed on written debt (dayn al- kitābah). This is the opinion of some
scholars from the Hanafi and Hanbali schools of law (al-Jaṣṣāṣ,1985).

Considering the above opinions and the application of ibrā’ in the context of contemporary
Malaysian Islamic banking and before ibrā’ was made mandatory by the Central Bank of
Malaysia in 2010 , this paper classifies bilateral ibrā’(ḍaʿ wa taʿajjal)into the following
types:

i. Waiving (ibrā’) a part of the debt of a deferred sale at the banks absolute discretion
stipulated in a binding agreement.
ii. Waiving (ibrā’) a part of the debt of a deferred sale by way of stipulating it in the
contract as a binding agreement based on a specific ibrā’ formula.
The first type of ibrā’ was conspicuously applied in the banks’ practice of granting
ibrā’prior to BNM’s pronouncement on mandatory ibrā’. This type of ibrā’ is
granted on a voluntary basis (tabarruʿ) to a client who made an early settlement of
debt without any stipulated condition or prior agreement between the two
contracting parties; the bank and the client (Aznan Hasan, 2008).As a case in point,
a customer is indebted to the bank through a contractual arrangement of deferred
sale whereby the debt must be paid by instalment within the grace period of ten
years. However, in year five, the customer wants to make full payment of the debt.
In this case, the bank may grant ibrā’ at its absolute discretion to the customer for
early settlement, even though there is no proclamation of rebate made by the client
or stipulation of ibrā’ in the agreement of the financing facility which tantamount
to its abidingness.

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 It is worth noting that the application of unilateral ibrā’ in the above context is allowed by
a large majority of Ḥanafī and Shāfiʿī scholars. Al-Jaṣṣāṣ (1985) of Ḥanafī school of
thought argued that there are among the salaf scholars who allow the creditor to say to the
debtor: “expedite the payment, and I will grant you a rebate”. It is acceptable that they
allowed it if it is not stipulated as a condition where the (seller) grants a rebate
unconditionally and the other party (the buyer) hastens the remaining payment
unconditionally.”

In contrast, Imām Mālik does not permit any form of waiving (ibrā’) due to early payment
of the debt (whether it is conditional or unconditional). His argument is based on the
principle of sadd al-dharāiʿ (blocking the means) of ribā.The opinion of ShāfiīʿSchool of
thought can be seen clearly in al-Subkī’s Fatāwā (al-Subkī, no date) as follows:

“The ḍaʿ wa taʿajjal case... if it is given in the case of non-written debt, Imam Mālik
(Allah’s blessing be upon him) said: it is absolutely void, whether it is stipulated as
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condition or not because of tuhmah (blame). That is the principle held by his school.
Others (majority of scholars) said: it is void if it is done conditionally, but if it is not
conditional (stipulated as condition) whereby the payment (of debt) is hastened without
prior condition, and the other party (the seller) waived his right to (giving rebate) the debt
and both of them willingly did so, it is permissible. This is the opinion of our schools. The
nullifying condition is the condition associated (muqārin) (with the contract), while if the
condition is stipulated earlier (in the contractual agreement prior to hastening the payment
to reduce the debt), then it is not void.”

The opinion of Imām Mālik is also elucidated in a scholarly work of Mālikī School of
thought titled al-Kāfī fī Fiqh Ahl al-Madīnah al-Mālikī:

“It is not allowed to take the counter value out of it (debt) lesser than the
(actual) debt before it (the debt) is due even if it is its attribute, because it is
considered “hasten the payment and I give you a rebate”. That is ribā.
Extend this to all that are in the same subject with it and it is not permissible
for you to take a part of the counter value before its time and you take out of
the remaining from it as price. That is not allowed according to Mālik.”

In this context, it is argued that the opinion of the majority of Ḥanafī and Shāfiīʿ
scholars’ is considerably stronger than that of the scholars of Mālikī School. This is
underpinned by a legal maxim that reads: “The original ruling of contracts is mutual
consent of both contracting parties, and its legal effect is what is stipulated by both of them
upon themselves through contractual agreement.”(Ibn Taimiyah, 1951).

This opinion is also adopted by theOIC Fiqh Academy in its resolution no. 66/2/7 on
deferred sale (al-bayʿbi al-taqsīṭ). This resolution was agreed in its 7th meeting held from 9
to 14 May, 1992 (7-12 Zulkaedah 1412):
Giving rebate on the deferred debt due to acceleration of payment, whether it
is upon the request of the creditor or debtor, (ḍaʿ wa taʿajjal) is permitted by
Islamic law. It does not fall under the category of prohibited ribā, provided
that it is not based on prior agreement, and as long as the relationship
between the creditor and the debtor is bilateral. If a third party enters (to

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 moderate), it (ḍaʿ wa taʿajjal) is not permissible, because in this regard it
takes the ruling of bill discounting (selling debt to the third party).

It is obvious that the above type of ibrā’ is unilateral and discretionary in nature
whereby the bank may agree to grant ibrā’ to the clients who make early settlement.
However, this agreement does not have any binding effect as ibrā’ is given at the bank’s
absolute discretion. The example of this ibrā’ can be seen in most of the Islamic financing
facilities offered by Islamic Financial Institutions (IFI) in Malaysia before ibrā’ was made
mandatory by the Central Bank (see figure 1). Usually, an ibrā’ clause is clearly mentioned
in the product terms and conditions or Letter of Offer as shown in figure 1.

Figure 1: Example of ibrā’ clause in the Islamic financing facility

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BANK A

“Grant a rebate for early settlement or rescheduling of facility at its discretion”.

BANK B

“The bank at its absolute discretion, grant a rebate to the Customer(s)who makes redemption or
ealry settlement or rescheduling of facility at its discretion.”

Source: Result of ISRA discussion

The application of ibrā’ through a non-binding agreement has no mention in

classical literatures of fiqh, but it has been the practice of Malaysian Islamic banking
institutions prior to the issuance of the Sharīʿah ruling by BNM on the obligation to grant
ibrā’ in the event of early settlement.
In this case, the court cannot take any action against the bank should the bank
refuse to grant rebate to the clients because the bank assumes absolute rights to grant ibrā’
at its sole discretion, even though the giving of rebate is mentioned in the contractual
agreement. The giving of conditional rebate in this context is unilateral which in turn
seems to be in favour of the bank as the client is still obliged to settle the selling price in
full despite the fact that he has lost the benefit of deferment in the event of default.

The second type of rebate is conditional and operationalized via stipulation of enforceable
conditions in a binding contractual agreement. Its legality is grounded in the permissibility
of the practice of ḍaʿ wa taʿajjal which is disputed by the scholars, particularly in the event
that it is pre-arranged and pre-conditioned in the contractual agreement. An example of
pre-conditioned ḍaʿ wa taʿajjalis that the bank mutually agrees in the contract that it is
obliged to grant rebate to the debtor on account of prepayment of debt or early settlement
of debt. Scholars who vehemently disagree and opine the absolute prohibition of ḍaʿ wa
taʿajjal are, amongt others, ibn ‘Umar, Zayd b. Thābit, al-Miqdād, Saʿīd b. al-Musayyib,
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 Sālim, al-Ḥasan, Ḥammād, al-Ḥakam, al-Thawrī, Isḥāq, Mālik, some Shāfiīʿ jurists, and
an opinion narrated from Imām Aḥmad (ibn Qudāmah, 1405; Zakariyyā al-Anṣārī, no date;
Ibn Qayyim al-Jawziyyah, no date).This group of scholars put forward the following
argumentations and justifications for their opinion:

i. Ḥadīth narrated by al-Miqdād b. Al-Aswad:

“al-Miqdād b. al-Aswad said: I lend a man one hundred dinār, and then I am chosen by
lottery to join in a troop sent by the Messenger of Allah I said to him (debtor): pay 90
dinar early and I will rebate 10 dinar. He mentioned this case to the Allah’s messenger,
and then Allah’s Messenger said: O, Miqdād, you have eaten ribā and feed it to others”
(Al-Bayhaqī).

Inference from the above ḥadīth that al-Miqdad has consumed ribā and fed it to others
obviously indicates the prohibition of ḍaʿ wa taʿajjal. However, authenticity of this ḥadīth
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is debatable among some jurists on the ground that credibility of the narrators in the chain
(sanad) of ḥadīth is being questioned, such as Yaḥyā b. Yaʿlā al-Aslamī (Abū Jaʿfar al-
ʿAqīlī, 1984; al-Dhahabī, 1995; Abū al-Ḥajjāj al-Mizzī, 1980; ibn Ḥajar, 1986). In
addition, there are some athar referred by this group of jurists to support their opinions on
the prohibition of ḍaʿwa taʿajjal, among others, are the following:

ii. Athar narrated by Imām Mālik:

”From ʿUbayd Abī Ṣāliḥ mawlā al-Saffah that he said: I sold my clothes to the people of
Dakhlah on a deferred (basis), then I went out to Kūfah and then they offer me to rebate
the debt and they will pay it early. I asked Zayd b.Thābit about it, and then he answered: I
do not order you to eat this (ribā) and do not feed it to others.” (Mālik b. Anas,1997).

iii. Athar narrated by ʿAbd al-Razzāq:

"From ibn al-Thawrī from ibn Dhakwan from Busr b.Saʿīd from Abū Ṣāliḥ said: I have
sold on a deferred (basis), then my friends (the buyers) offered me to expedite the payment
and I will rebate their debts. I asked Zayd b.Thābit about this, he replied: "Do not eat it and
do not to feed it to others."(Abū Bakr ʿAbd al-Razzāq, 2000).

iv. Athar narrated by ʿAbd al-Razzāq:

"Maʿmar told us from al-Zuhrī from ibn al-Musayyib andibnʿUmar, said: who has the right
of deferred debt on a man, and then the man paid part of it earlier and he (creditor) reduced
half of the debt. Hence, it is ribā, Maʿmar said: I do not know any person before us but he
does not like it"(Abū Bakr ʿAbd al-Razzāq, 2000).

v. Rational argument
The rational argument can be categorized into two parts, rational arguments related to the
substance (maʿnā) of ribā and rational arguments related to the form (surah) of ribā.

a. The substance of ribā in ḍaʿ wa taʿajjal:

Example1:If the lender asks the debtor to hasten the debt payment and he (in return
of that) waives the remaining of the debt, in this case, he actually has exchanged al-
ʿajal (deferment) for the waived amount of debt, because the actual ribā is just like
someone who exchanges al-ʿajal for excess or increment (ziyādah) on the principle
loan. When the debt is due, he said: “Defer and increase”. This is similar to one’s
5
 saying: “Hasten the payment and I reduce the debt” (Ibn al-Qayyim, no date).The
rational argument put forward by the majority of jurists is based on qiyās al-
shabah. However, the argument is refuted by some scholars based on substantive
justification that will be discussed at length later in their rational arguments for
absolute permissibility of ḍaʿ wa taʿajjal.
b. Form (ṣūrah) of ribā in ḍaʿ wa taʿajjal.
Example1: It is stated in al-Muntaqā Sharḥ al-Muwaṭṭa’ that the above concept is
prohibited because the creditors who have lent 100 dirham (for example) is
considered to have purchased the 100 dirham on deferred payment basis (mu’ajjal)
from the debtor who makes an early repayment of the debt with the waived amount
of 50dirham payable on cash basis (ʿājil). This is not allowed by the Sharīʿah
because of two reasons, namely, the existence of tafāḍul (access) and the existence
of nasā’(deferment) in the exchange of two ribāwi (fungible) items of the same
genus, which is in this case dirham (al-Bājī, 1999).
Example 2: What can be perceived from Imām Mālik’s opinion regarding this case
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is that ḍaʿ wa taʿajjal is considered ribā. A person who hastened the repayment of
debt, which is not obligatory on him, is treated as a muqrid. In this case, he actually
givesa cash loan of 100 dirham so that he could pay off the deferred debt of 50
dirham (al-ʿajal). This case falls under the prohibition of a loan with added benefit
to the lender (al-Bājī, 1999).

Scholars who argue that ḍaʿ wa taʿajjal is absolutely permissible

Those who permit the rebate constitute a small number of jurists amongst others are ibn
ʿAbbās, al-Nakhaīʿ, Abū Thawr, al-Shawkānī, ibn Taymiyyah and ibn Qayyim al-
Jawziyyah. This group of scholars premise their argument upon the following evidences
(adillah):

i. Ḥadīth narrated by ibn ʿAbbās:

Ibn ʿAbbās narrated: “When the Prophet S.A.W. gave the order to chase Banī al-Naḍīr
from Medina some people among them met him. They said: O Messenger of Allah, you
have ordered them to go out while people owed them a debt which is not yet due, and then
the Messenger of Allah said: Cut off (the debt) and pay now.”

According to ibn Qayyim al-Jawziyyah, the above ḥadīth indicates that a person who pays
less than the total amount he owes on a debt before the debt is due, and then he (creditor)
granted a rebate voluntarily, both the creditor and the debtor are not sinful. However, the
majority of the jurists based on the following justifications repudiates the argument
inferred from the above ḥadīth. The above ḥadīth is painstakingly reckoned as weak (ḍaʿīf)
and hence it cannot be used as proof or form a basis of argumentation in any case related to
the lawful (ḥalāl) and the prohibited (ḥarām). Al-Daruquṭnī mentioned all narrations and
chains of this ḥadīth in his Sunan, and said that Muslim b. Khālid al-Zanjī (one of the
transmitters of the ḥadīth) suffered from un retentive memory and hence he is
consideredḍaʿīf (ʿAlī b. ʿUmar al-Daraquṭnī, 2003). Thus, ibn Qayyim’s opinion that the
isnād of the ḥadīth is thiqqātis utterly proved unacceptable, while al-ʿUthmānī’s opinion
that this ḥadīth assumes the status of ḥasan is also rejected. Ibn Qayyim al-Jawziyyah
mentioned that Abū ʿAbd Allah al-Ḥākim regarded the ḥadīth as authentic in its chain
6
 (ṣaḥīḥ al-isnād) while Muslim b. Khālid al-Zanjī is a thiqqah as Imam Shāfiīʿ himself
accepted his narration and made it a judicial basis of argumentations. In his scholarly work
of al-Mustadrak, al-Hākim considered the ḥadīth as ṣaḥīḥ. In addition, the ḥadīth was also
elevated to the category of ḥasan by dint of its reinforcement with the narration (Zafar
Aḥmad al-Tahānawī, 1997).
According to the majority of jurists, although the above ḥadīth is authentic (ṣaḥīḥ), it
cannot be held as evidence under any condition, because its meaning does not reflect
stipulation of condition (mushāraṭah) by both the creditor and the debtor on giving rebate.
Al-Bayhaqī opined that the ḥadīth merely depicts that the rebate was granted on a
voluntary basis and it was not pre-conditioned (Aḥmad al-Bayhaqī, 1995).

Majority of scholars also argued that the ḥadīth came before the prohibition of ribā as the
prohibition of ribā occurred during the conquest of Khaybar. However, the event of ijlā’
Banī al-Naḍīr took place six months after the battle of Badr (Zafar Aḥmad al-Tahānawī,
1997). Thus, the revelation of the Qur’anic verse that prohibits ribā during the battle of
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Khaybar abrogated (naskh) the above ḥadīth. Nevertheless, this argument was discredited
by those who permit ḍaʿ wa taʿajjal on the premise that ḍaʿ wa taʿajjal is not ribā, and
hence it is not abrogated (mansūkh) by the Qur’anic verse.

Apart from the above ḥadīth, they also argued that the permissibility of ḍaʿḍao argued t is
supported by the following ḥadīth narrated by Kaʿab b. Mālik: "Narrated by ‘Abd Allah b.
Kaʿab b. Mālik that he has demanded his debt on Abū Hadrad in the mosque, then the
voice of both became louder until The Messenger of Allah heard that, while he was in his
house. The Messenger of Allah went outtothemtillhis curtains was opened, he S.A.W. then
called: OKaʿab, He (Kaʿab) replied: O, Messenger of Allah, At your beck and call, and at
your pleasure. The Messenger of Allah said: Drop (waive) half of your debt then he
pointed to him the half. Kaʿab said affirmatively: I have done so. The Messenger of Allah
replied: stand and pay (the debt)".(ībn Ḥajar al-ʿAsqalānī, 2003).

According to al-Shawkānī, the above ḥadīth serves as legal evidence on the permissibility
of al-taʿjīl bi sharṭ ḥaṭṭ al-baʿaḍ (accelerating settlement of debt with the condition of
waiving part of the debt). He said: “There is no objection from Sharīʿah and reason to
hasten repayment of debt on the condition that the amount of debt is cut off as long as it is
done based on mutual consent (tarāḍī) of both parties. This is because the creditor agreed
to get back only part of the debt and waive the remaining amount of the debt. If it is
permissible for the creditor to completely waive the whole debt voluntarily, the
permissibility of waiving part of the debt is more evident.

Some athar narrated by ʿAbd al-Razzāq signify that ibn ʿAbbās clearly allowed ḍaʿ
wa taʿajjal for a person who has a deferred debt in the liability of others. The creditor then
said to the debtor: “accelerate your debt settlement and I give you rebate”. However, the
debt in the above tābiʿīn and tābiʿ al-tābiʿīn athar was not specified as to whether it had
arisen from a loan or a deferred sale. This indicates that the above ḍaʿ wa taʿajjal could
have arisen from either a loan contractor deferred sale contract.
In addition, the majority of scholars argued that ibnʿAbbās wasthe only companion
who allowed the above ḍaʿ wa taʿajjal while others such as ʿAbd Allahb. ʿUmar
andZaydb.Thābit did notallowit (Muḥammad al-Sharīf, 1998). In this case, there is a
possibility that the ḥadīth that affirms the prohibition of ḍaʿ wa taʿajjal is not known to the
salaf scholars who subscribe to athar of ibn ʿAbbās while those among the tābiʿīn dan
7
 tābiʿ al-tābiʿīn who allowed it could have imitated (taqlīd) ibn ʿAbbās opinion. In fact,
ibnʿAbbās’s view was built upon his common thought that something is not considered
ribā except if it falls under the category of ribā al-nasī’ah. However, it was reported that
he has evidently retracted his view and accepted the opinion of the majority of
companions. Hence, his view on this case is not a valid source of judicial argumentation
(Zafar Aḥmad al-ʿUthmānī, 1997; Muḥammad ʿAbd al-Ghaffār al-Sharīf, 1998).
The above argument put forward by the majority of scholars can be counteracted
because even though ibn ʿAbbās is the only companion who has been reported to have
allowed ḍaʿ wa taʿajjal, it does not mean that the opinion of other companions, which is
against ibn ʿAbbās’s opinion, is better. Their argument that ibn ʿAbbās has retracted his
view regarding ribā al-nasī’ah is not relevant. In fact, the debated problem in the ḥadīth
narrated by ibn ʿAbbāson ribā al-nasī’ah is the exclusion of ribā al-faḍl from the
prohibition of ribā in the ḥadīth while ḍaʿ wa taʿajjal does not fall under the issue of ribā
al-faḍl, but rather it is appertaintoribā al-nasī’ah as postulated by the majority of scholars
(Aḥmad b. ʿAlī ibn Ḥajar al-ʿAsqalānī, 2001).
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iv. Rational argument

The rational argument can be construed in two aspects as follows:
a. Actually, the concept of ḍaʿ wa taʿajjal is clearly antithetical to the concept of ribā
in legal texts because the prohibited ribā implies an excess or increment (ziyādah)
on the principle loan. Increment in this regard, is a counter value (ʿiwaḍ) which is
exchanged for deferment (ʿajal).This indicates that the application of ḍaʿ wa
taʿajjal benefits both parties; the debtor and the creditor without any detriment.
Apparently, this situation obviously varies from ribā, as ribā causes harm to the
debtor while benefit is enjoyed only by the lender. Thus, the substance of ribā does
not actually exist in the application of ḍaʿ wa taʿajjal(ibn Qayyim, no date).
b. Argument that the meaning of ribā does exist in ḍaʿ wa taʿajjalin the form of
reduction of grace period in exchange for reduction of counter value (ʿiwaḍ) is
similar to extension of grace period in exchange for an increment on counter value
remains contentious and disputable. This is because the above argument is applicable
in qarḍ and not in deferred sale (bayʿ mu’ajjal) unless if the element of “give me time
and I pay you more” apparently arises from the debt of bayʿ mu’ajjal when it is due.
This is because the above argument pertains to the meaning of ribā that can
be construed as the exchange of deferment for a specific property (mubādalah al-
ʿajal bi al-māl) which is further subsumed into two different parts:
i. Direct exchange of deferment for a specific property (mubādalah al-ʿajal bi
al-māl mubāsharatan)
ii. Indirect exchange of deferment for a specific property (mubādalah al-ʿajal
bi al-māl ghayr mubāsharah)
It is worth noting that deferment can only be exchanged for a specific asset
provided that it is attached to the price of the transacted commodity. In this regard,
it is not permissible to exchange deferment with an asset in a direct (mubāsharah)
or independent (istiqlālan) manner without being associated with the price of the
commodity. For example, in a deferred sale, deferment assumes a monetary value
which is associated with the original, or cash price of the contracted commodity
and hence it earns a portion in price as substantively expounded by the majority of
jurists.
In a deferred sale, deferment is valued in association (tabaʿan) or (ḍimnan)
with the price of the commodity and not independently (istiqlālan) because the
8
 intended item which serves as matbūʿ (a thing being associated with) or maqṣūd (an
intended thing) does exist. This situation differs from ribā al-nasi’ah which
acommodates the essence of mubādalah al-ʿajal bi al-māl
mubāsharatan/istiqlālan/qaṣdan due to the absence of the intended goods, as it is a
mere exchange of money for time. Table 1 illustrates the difference between a mere
exchange of money for time and the exchange of time for money in which the price
of the time is incorporated into the original price of the commodity.

Exhibit 1: Difference of direct and indirect exchange of time for money

Types of exchanging time Differences between the two types of exchanging

for money
1) Mere exchange of
money for time
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time for money
This leads to making of money out of money which is
the essence of ribā al-nasī’ah. Hence, the traditional
function of money is corrupted because money in this

case is intended in itself. It does not act as a medium

2) The exchange of time
for money in which the
price of the time is
incorporated into the cost
price of the commodity
of exchange.
This does not lead to making of money out of money
because the transaction involves a commodity
intended by the party to the contract. Hence, the
traditional function of money as medium of exchange
remains intact because money in this case is not
intended in itself.

The aforementioned discussion implies that the substance of ribā which lies
in a direct exchange of deferment for money can take place only in a qarḍ ribawī
(lending on interest), since the essence of qarḍ ribawī is to assign counter value to
time (al-ʿitiyāḍ ʿan al-zaman) without being associated with the price of the
commodity.
“Indeed, ribā is as someone said: “give me more time and I pay you more (than
what is required). It is not (as someone said): “Hasten the payment and your debt
will be discounted" (ʿAbd al-Razzāq 1403H).
Ibn al-Qayyim commented on the element of fāriq in the above anology by
saying that,giving discount due to acceleration of payment (al-waḍʿ min al-dayn)
is totally different from ribā, because ribā contains ziyādah on one of the counter
values (badal) in exchange for deferment, while ḍaʿ wa taʿajjal contains freedom
of debtor’s liability(barā’at al-dhimmah) from obligation to pay half of the debt as
a compensation or counter value for the waived period of deferment (al-ajal).
Therefore, the waived counter value (ʿiwaḍ) is equivalent to part of the waived
period of deferment. As a result, both parties obtained equal benefit from ḍaʿ wa
taʿajjal. There is not an iota of evidence to substantiate the existence of ribā in this
situation either in its substance, in a literal depiction of the word (lughatan), or
traditional connotation (ʿurfan).
c. Imposition of increment in ribā due to consideration of time, which is in this case
deferment, constitutes a means (dharīʿah ) to a greater harm as the value of one
dirham becomes a thousand dirham which in turn adds more burden to one’s
liability without any benefit. In contrast, in ḍaʿ wa taʿajjal the debtor’s liability will
be free from debt obligation, while the creditor also earns benefit from the pre-
payment of the debt by the debtor.
9
 However, the above rational arguments are disputed by the majority of scholars
as the ḍaʿ wa taʿajjalin fact, shares a common denominator with ribā. It embodies the
actual substance of ribā whereby the difference between the waived amount and the
increased amount of money are the exchanged counter value for time, whether the time
is extended (mazidah) or cut off (musqatah).
Ibn al-Qayyim counteracted the above argument by saying that if the master is
allowed to hasten the release of his slave (mukātab) by giving him rebate on the
grounds that this action secures a maÎlahah in the form of hastening the release of his
slave and freeing his liability from debt obligation, the same should apply to other than
dayn al-kitābah.
Although the concept of “daʿ wa ta’ajjal” is viewed by the majority of scholars
as similar to ribā, it still aligns with the noble purpose of the Sharīʿah, because the
principles of justice as the foundational basis for a sale contract is evidently manifest in
the application of “ḍaʿ wa taʿajjal”. If the price of a commodity in a deferred sale can
be increased on account of deferment as the jurists agreed that deferment assumes an
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economic value, the same argument should apply to discounting on account of

acceleration (al-‘ʿajal).

Having critically and extensively explored the polemics and arguments put forward by
both groups of scholars, the view that allows “ḍaʿ wa taʿajjal” is the most preferred in this
study. It is preferred based on the following justifications:

1. The evidence that form the basis of juridical inferences for the preferred opinion such
as the ḥadīth and athar of the companions are more conformable to the principle of
combination of specific texts and general objectives of Sharīʿah (al-jamʿ bayn al-
nuṣūṣ al-juzi’yyah wa al-maqāṣid al-kulliyyah). This is because the preferred opinion
is built upon the explicit meaning of the relevant legal texts and the objective of
Shari’ah in the prohibition of ribā. As a result, the concept of “ḍaʿ wa taʿajjal” is
totally free from ribā either in subtance (ma‘nā) or in form (ṣūrah).
2. The substance of ribā which is said to have existed in “ḍaʿ wa taʿajjal” is not a matter
of consensus, but rather it is disputable among the scholars, particularly if it embraces
both loan and sale contracts. In fact, it is crucial to differentiate between the two
financial contracts, as both are formed upon different basic principles where a sale
contract is based on‘adālah (justice) while a loan contract is based on iḥsān
(benevolence). Those who view that it is not considered ribā argued that it is free from
exploitative and oppressive elements.
3. Ibn al-Qayyim’s opinion is asserted by Rafīq Yūnus al-Maṣrī as he opined that the
legal position on “ḍaʿ wa taʿajjal” should be distinguished between its application in a
sale contract and in a loan contract so that its application is in compliance with the
aforementioned underlying principle of both contracts.
4. In a sale contract, particularly a deferred sale, the debt created out of it is the
obligation of the debtor and the right of the creditor that must be fulfilled by the debtor
within the agreed period of time. If the debtor paid the debt the later than the agreed
period, he in fact has done an injustice to the creditor and if the creditor demanded his
debt before it is due, then he has done an injustice to the debtor. Injustice to the debtor
who has made early payment of the debtor may be transformed into justice by way of
paying less than the remaining debt (al-Maṣrī, 1990). In short, the pre-agreed
reduction of debt on account of acceleration of payment and increment of debt on
account of deferment can only be applied in deferred sale, while in a loan contract; it
10
 is illegitimate since it contravenes the principle of iḥsān. In contrast, if it is applied in
a deferred sale, it does not contravene the principle of justice which serves as the
underlying principle in all sale contracts.
5. In fact, al-Maṣrī’s opinion is also the opinion of some Ḥanafī scholars as elucidated in
Takmilah al-Durr al-Mukhtār:
If the debt is yet to be due, then the debtor has settled it before its due time,
the creditor should be compelled to accept the payment as stated in al-
Khāniyyah: His saying: “He should not take (the profit) from a murābaḥah
contract”. Its scenario is: A person purchased something at 10 on cash basis
and he then sold it to someone else at 20 on a deferred payment basis. The
payment is deferred to a fixed period of 10 months. If he settled the debt
after the deferred period or he died after it, he can take 5 (as profit) and leave
(the other) 5 (of the profit). Al-Ḥanūtī argued that this is justified to avoid
suspicion of ribā as suspicion of ribā in the chapter of ribāis regarded as
actual ribā. The inference is that the profit arises on account of deferment,
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because though deferment is not a property, and hence cannot be equivalent

to any price, but rather they considered it a real property in a murābaḥah
contract if deferment is stipulated as compensation for increment in price. If
he took full payment before its due time, then what he took is in fact without
counter value (which is deemed ribā) (Ibn ʿĀbidīn, 1998).
Briefly, the preferred opinion in this paper regarding legality of ḍaʿ wa taʿajjal
entails that the concept of ḍaʿ wa taʿajjal is allowed even though it is pre-agreed
upfront as long as it is applied in a sale contract and not a loan contract.

3. CONSIDERATION OF TIME VALUE OF MONEY (TVM) IN BILATERAL

IBRĀ’
It is crucial to know that there is unanimity among scholars on the acceptance of
TVM, but with certain guidelines and requirements must be fulfilled to distinguish it
from conventional TVM. The most notable issue in TVM lies in its being the basis of
interest rate that should not be the same in Islamic concept of TVM. Hence, this
section attempts to explicate the Islamic concept of TVM and its application in
bilateral ibrā’. Some classical texts of jurisprudence on TVM are examined to
establish the conceptual foundation of TVM particularly those that emphasize on the
superiority of the present value to the future value. In this regard, al-Dasūqī (1996)
argues that the seller in a (contract) should explain the deferred period that he bought
from as it earns a portion in the sale price. This significantly implies that a markup in a
deferred sale is considered legitimate compensation for the deferment because the
deferred price certainly has less financial value than the spot price. Ibn ʿĀbidīn (1994)
explains an example of this case in regard to treachery in a murābaḥah contract
whereby if a person purchased a commodity for 1000 on a deferred payment basis and
sold it at a mark-up price of 1100 without disclosing to the buyer that the first
transaction was conducted on deferred payment basis, the buyer should be given the
option [to annul] (khiyar). He asserts that the basis of this ruling is that the price is
increased because of deferment which indicates that the seller in this case bought two
things (the deferral and the commodity) for 1000, and he sold one of them at the
[combined] price of both through murābaḥah. Thus, al-Kāsānī (2000) stipulates that if
someone bought something on a deferred basis, he cannot sell it using murabahah
unless he clarifies the (deferred period). This is because the deferred period is
11
 ambiguously similar to the object of the sale, although it is not actually an object of
sale. Hence, deferment assumes similarity (of the object of sale) that requires it to be
part of the price. In fact, al-Sharbīnī (2003) urges that the period of deferment has to
be fixed because deferment is compensated with a portion of the price.

Similarly, monetary reduction that lies in acceleration “al-ʿajal” of payment does

not amount to making money out of money as the former did, because there is a
commodity that acts as an intended thing in the contract. This implies that the price of the
commodity is not discounted merely as counter value for “al-ʿajal” as the discounting is
embedded in the selling price of the contracted commodity.
In fact, if the above is not given due consideration, the whole transaction would
resemble a ribā bearing transaction. Ribā, which is embedded in this transaction is actually
known in classical jurisprudence as ribā al-fadl(increase without counter value) since this
transaction involves stipulated excess without any counter-value in a sale contract. Hence,
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it is clear from the above discussion that the idea that bilateral ibrā’ is considered ribā is
counteracted with the above argument which postulates that if bilateral ibrā’ is not
allowed, then a form of ribā known as ribā al-faḍl will arise without doubt. On another
occasion, Ibn ‘Ābidīn asserts that deferment on either one of the counter values is in fact
an implicit excess (faḍl hukmī), which is exchanged for nothing: He said: “Indeed,
deferment on either one of the two counter values is an implicit excess without equal
counter value. Since deferment is intended for an increase of the counter value as
explained in (the forgoing discussion) on murābaḥah contract, it is valid to describe
deferment as an implicit excess over the property.”(Ibn ʿĀbidīn, 2000).

4. CONTEMPORARY FATWĀ ON ḌAʿ WA TAʿAJJAL

Majority of contemporary fatwā issuing bodies and standard setting bodies are not in
favour of the legality of bilateral rebate if the contracting parties at the inception of the
contract mutually agree it. This implies that it is legally acceptable provided that it is not
conditional and pre-agreed. The International Fiqh Academy resolved that: “Reduction of a
deferred debt in order to accelerate its payment; be it a requisition from the debtor’s side or
the creditor, is permissible under Sharīʿah. It does not constitute forbidden ribā if it is not
agreed upon in advance and so as long as the creditor-debtor relationship remains bilateral.
If; however, a third party is involved it becomes similar to the discount of bills
(International Fiqh Academy, Resolution no. 64 (2/7).AAOIFI Sharīʿah Standard stipulates
that the legal validity of paying less than the value of the paper, when the transaction is
between the holder and the first beneficiary, is that it belongs to the category of the issue
known as “negotiating a deferred debt for part of it paid promptly.” This is what is known
as ḍaʿ wa taʿajjal (reduce the amount for hastening payment), and according to one
opinion it is permissible to undertake such a transaction (AAOIFI 1425-6H (2004-2005).

.
In contrast, the Sharīʿah Advisory Council of Central Bank of Malaysia in its 101stmeeting
held on 20 May 2010 resolved that in line with the need to safeguard maṣlaḥah (public
interest) and to ensure justice to the financiers and customers, Islamic banking institutions
are obliged to grant ibrā’ to customers for early settlement of financing based on buy and
sell contracts (such as bayʿ bi thaman ʿājil or murābaḥah ). In order to eliminate
uncertainties pertaining to customers' rights in receiving ibrā’ from Islamic banking
12
 institutions, the granting of ibrā’ must be included as a clause in the legal documentation
of the financing. The determination of ibrā’ formula will be standardised by Bank Negara
Malaysia (Bank Negara Malaysia, 2010).

The incorporation of the ibrā’ clause is made mandatory on the basis that it is obliged by
BNM as authority which means that ibrā’ is originally discretionary. Hence, BNM,
through its Sharīʿah Standard on Murābahah issued on 23 December 2013 under the
heading of “Incorporation of rebate (ibrā’) in murābaḥah contract” stipulates the
following:
“18.1 The seller may consider waiving part of the outstanding debt in the form of a
discount to the purchaser upon pre-payment and/or early settlement.” This para is labelled
“G” which means that it is a recommendation to be adopted by the IFI. However, in para
18.2 which is labelled “S” states that “A rebate clause shall be incorporated in the
murābaḥah contract provided that it is a requirement imposed by the authority.” “S” means
that it is a requirement whereby the clause clearly states that ibrā’ shall be incorporated if
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it is obliged by the authority. (BNM Shariah Standard on Murabahah, Page 22)

5. APPLICATION OF BILATERAL IBRĀ’ IN ISLAMIC FINANCE

In contemporary Islamic finance, bilateral ibrā’is significantly applied in handling pre-

payment of debt and early settlement of debt, particularly, in the (1) event of default and
(2) non-commitment to terms and conditions of the facility. This is to ensure that Islamic
banking products and services are competitive with that of their conventional counterparty.
For instance, in conventional banking, the customer is not obliged to pay the full
outstanding amount of his debt, but rather, the amount due shall exclude the unearned
profit for the remaining period, which seems just to the customer. In contrast, Islamic
financing facility requires the customer to pay the full contracted selling price, which
includes the cost price and the profit margin for the whole tenure of the facility. This term
reflects that the customer has to pay accrued profit, but unearned. However, the effect
would be different if bilateral ibrā’ is stipulated in the financing agreement as explained in
the next part.

However, it is undeniably argued that bilateral ibrā’ may tantamount to the prohibition of
two sale prices in one deal. The effect of two sales in one deal is that it will lead to dispute
between the two contracting parties. This can be eliminated by two measures: (1) Having
specific ibrā’ formula and (2) Having a transparent and clear payment schedule agreed
upon by the parties where the buyer knows the amount that he has to pay if he prepays the
debt or expedites the payment of debt. In addition, the seller also knows the rebate amount
that he shall have to pay if the buyer accelerates payment. This can be understood from the
following illustration of a payment schedule for the financing amount:

Schedule of
Payment
Monthly Deductions Outstanding
Date Outstanding Deferred
No Instalment Selling Price
COF Profit
COF Profit on
Payment Cost
(POC)
13
 0 30-06- - - - 400,000.00 200,000.00 200,000.00
09
1 31-07- 1,250.00 520.00 733.00 398,750.00 199,480.00 199,267.00
09
2 31-08- 1,250.00 523.00 731.00 397,500.00 198,957.00 198,536.00
09
3 30-09- 1,250.00 526.00 730.00 396,250.00 198,431.00 197,806.00
09
4 31-10- 1,250.00 527.00 728.00 395,000.00 197,904.00 197,078.00
09
5 30-11- 1,250.00 530.00 726.00 393,750.00 197,374.00 196,352.00
09
6 31-12- 1,250.00 531.00 724.00 392,500.00 196,843.00 195,628.00
09
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7 31-01- 1,250.00 533.00 722.00 391,250.00 196,310.00 194,906.00

10
8 28-02- 1,250.00 535.00 720.00 390,000.00 195,775.00 194,186.00
10
9 31-03- 1,250.00 537.00 718.00 388,750.00 195,238.00 193,468.00
10
10 30-04- 1,250.00 539.00 716.00 387,500.00 194,699.00 192,752.00
10
11 31-05- 1,250.00 540.00 714.00 386,250.00 194,159.00 192,038.00
10
12 30-06- 1,250.00 544.00 712.00 385,000.00 193,615.00 191,326.00
10

Illustration on the application of formula for early settlement of financing

Schedule of
Deductions
Payment Monthly COF Profit Outstanding Outstanding Deferred
No
Date Instalment Payment on Selling Price COF Profit
Cost
(POC)
30-06-
0 - - -
2009 400,000.00 200,000.00 200,000.00
31-07-
1 1,250.00
2009 520.00 733.00 398,750.00 199,480.00 199,267.00
31-08-
2 1,250.00
2009 523.00 731.00 397,500.00 198,957.00 198,536.00
31-05-
47 1,250.00
2013 617.00 640.00 396,250.00 198,340.00 197,896.00
30-06-
48 1,250.00
2013 620.00 635.00 395,000.00 197,720.00 197,261.00
14
 31-07-
49 1,250.00
2013 621.00 633.00 393,750.00 197,099.00 196,628.00

Customer approached the Islamic Bank for early settlement at the 48th instalment and
extract of the payment schedule is as follows:

No Item Description
1 Deferred profit RM 197,261.00
2 Outstanding selling price RM 395,000.00
Instalment due but unpaid (48th instalment
3 RM 1,250.00
based on EPR)

Formula
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Ibra’ at settlement = Deferred Profit - Early Settlement Charges

= 197,261.00 - 0.00
197,261.00

Settlement = Outstanding + Instalments + *Other - Ibra’ at

Amount Selling Price due Amount Settlement
Due Payable
395,000.00 + 1,250.00 + 0.00 - 197,261.00
=

198,989.00
=

*Amount Due Payable i.e. Late Payment Charges, Legal Fee, Postage Fee, Repossession cost and
others related cost.

In a term deposit using tawarruq, depositors agree to specified terms and conditions that
require them not to withdraw their money prior to the agreed period. However, depositors
may withdraw their money at any time, as the regulator does not allow the bank to lock the
deposit. This is in line with the nature of deposit; it is subject to withdrawal on demand by
the depositors. In this product, depositors agree with the bank that the bank has to pay them
the selling price (principal+profit) on the agreed schedule. In the event of early withdrawal
by the depositors, the bank has to ensure that the funds are available, while in fact, the
bank has utilized the deposited money. From a liquidity perspective, this situation entails
that the bank sources funds from its normal sources such as the Islamic Interbank Money

15
 Market (IIMM) at a certain cost to be borne by the bank. In this case, what would be the
best Sharīʿah solution to ensure justice to the bank? Originally, if the depositors breach the
terms by way of early withdrawal, the bank should not pay the debt, but this seems to be
against the criteria of deposit. Hence, the best alternative could be either of the following:
(1) Bilateral rebate (ḍaʿ wa taʿajjal)
The bank and the depositors can pre-agree to ḍaʿ wa taʿajjal, which means that the
depositors in their capacity as creditors to the bank under tawarruq arrangement must give
rebate to the bank in the event that they want the bank to prepay the debt as a result of
early withdrawal.
(2) Promise to grant rebate (al-waʿd bi al-ibrā’)
Alternatively, the depositors can provide waʿd that they will give ibrā’ to the bank in the
event that they would like to make early withdrawals. Consequently, the depositors cannot
claim the full selling price, but rather only claim the profit based on the agreed schedule
less the rebate amount.
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In Sukuk Issuance, the sukuk holders in subscribing to the Sukuk Murabaḥah consent to
grant rebate to the purchaser. If the Sukuk Murabahah are redeemed before maturity upon
the declaration of anevent of default, the rebate shall be the aggregate of:
(i) Unearned periodic payments (in the case of Sukuk Murabahah issued with periodic
payments); and
(ii) Unearned discounted amount (in the case of Sukuk Murabahah issued at discount),
However, the deferred sale price payable by the purchaser upon declaration of an event of
default is an amount calculated by the facility agent in accordance with specific formula to
avoid uncertainty of price or two prices in one deal that may lead to dispute. The formula is
as follows:

"The deferred sale price as at the issue date less the aggregate of periodic payments (in the
case of Sukuk Murabahah issued with periodic payments) and nominal value paid (if any)
less rebate (if any)."

If the Sukuk Murabahah are redeemed pursuant to early redemption, the rebate is
calculated in accordance with the following formula:

"Rebate shall be the deferred sale price as at the issue date less the aggregate of periodic
payments and nominal value paid (if any) less the early redemption amount."
In this regard, the deferred sale price payable by the purchaser pursuant to early
redemption shall be equal to the early redemption amount.

With regard to the above practice, the SAC at its 30th meeting on 8 November 2000 and its
45th meeting on 7 March 2003, discussed the usage of ibrā’ (partial surrender of rights) in
Islamic securities and resolved that (Resolutions of the Securities Commission
Shari’ah Advisory Council Second Edition, 2006, h. 46):
(a) Holders of Islamic securities may offer ibrā’ to the issuer based on the application
made by the issuer of the securities concerned;
(b) The formula for the computation of early settlement may be stated as a guide to the
issuer; and
(c) The ibrā’ (rebate) clause and the formula for the computation of early settlement may
be stated in the main agreement of the Islamic securities contract which is based on ʿuqūd
al-muʿāwaḍāt (exchange-based contracts). However, the ibrā’ clause in the main
16
 agreement shall be separated from the part related to the price of the transacted asset. The
ibrā’ clause shall only be stated under the section for mode of payment or settlement in the
said agreement.

6. CONCLUSION
The forgoing discussion sheds light on the fact that bilateral rebate in a deferred sale is all-
important to avoid ribā al-faḍl (unlawful excess in the exchange of two counter values).
This is because the event of default in a deferred sale involves an element of time value of
money (TVM) that must be favourably taken into account since Islam recognizes, beyond a
shadow of doubt, its legitimacy. However, TVM is allowable in the sale transactions on the
condition that it does not lead to making of money out of money. Instead, bilateral rebate is
also significant to uphold justice and fairness in sale transactions, because the jurists have
stipulated that justice and fairness are the cardinal principles in financial transactions.
Hence, if a customer defaults and his debt automatically becomes due, he is liable to pay
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the entire selling price despite no deferment given to him to settle his debt; he actually
suffers injustice in the form of ribā al-faḍl. This is because in a deferred sale, the mark up
price is due to the bank because of the deferred payment. Subsequently, if deferment is no
longer effective, because the debt became due, the seller -in fact -has exchanged the profit
accumulated for the period of deferment after the default date, which is termed as unearned
profit against nothing, and hence leads to ribā al-faḍl. The unearned profit collected by
IFIs in the event of early settlement of a deferred sale price is considered ribā because it is
a stipulated excess without a counter-value in a sale contract. Granting of ibrā’ by IFIs is
essential for Islamic financial institutions to remain competitive with their conventional
counterparts, as conventional financial institutions allow customers to pay the principal and
accrued interests up to the date of early settlement only.

17
 References

‘Abd al-Razzāq, (2000).Al-Muṣannaf. Beirūt: Dār al-Kutub al-‘Ilmiyyah.

Abd al-Raḥman al-Aṭram, (2008). Al-Ibrā’ fī al-Tamwīl al-Islāmī: Takyfan wa Taṭbīqan, Al-
Qaḍāyā al-Muʿāṣirah fī al-Tamwīl al-Islāmī: Munāqashah fī al-Nadwah al-ʿĀlamiyyah li
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