Topic: Essay 1

A comment about Hawalah based on Shariah Standard

FIN 5200 ISLAMIC FINANCE

DR.Abdul Ghafar Ismail, PhD

WU YONG GS62823

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 TABLE OF CONTENT

1.Introdcution.......................................................................................3

2.Background.....................................................................................4--5

3.Analysis and Discussion................................................................ 6-11

3.1 Basic rules and conditions..............................................................................6-9

3.2 Terminations of Hawalah..............................................................................10-11

4.Conclusion.......................................................................................12

5.Reference..................................................................................... 13--14

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1.0 Introdcution

There are many types of Islamic financing contracts that are recognized by law

and Hawalah contract is one of the concepts widely used in Islamic finance.(Bank

Negara Malaysia, 2006). However, abuse or abuse of the Hawalah concept to

legitimize it also exists(Bunt, 2008; Shanmugam, 2005; Wilson, 2002). Some

violations of the law occurred due to ignorance or misunderstanding of the concept.

Raisi et al.( 2016 ) also illustrated that there is a general lack of understanding of the

Hawalah concept and details used by Islamic banks. Although Shari’ah Law strongly

prohibits interest(Riba), the staff is ignorant of the basic concepts of Hawalah.

Similarly, (“Message from the Editor,” 2013) considered that Hawalah contracts are

relatively new in Islamic finance literature and greatly strengthen the public’s

awareness of it is a urgent mission. Moreover, a large number of papers have

conducted in-depth research and analysis of Hawalah on the basis of Shari’ah

Standard (Islamic law). It claims that Hawalah is not only of great significance for

solving debt issues, but is mainly used by individuals, companies, and certain banking

systems to transfer their funds respectively(Ayub, 2007). However, Kasri, R., & Dewi,

M. K. (2011) pointed out the practical applications of Hawalah in real life still have

certain limitations could not be ignored due to the uncertainty of Hawalah in Shariah

Standard. Most importantly, the Hawalah contract is closely related to our lives.

When we are burdened with debts but are unable to repay them, we want to transfer

the debt to others but do not understand or misunderstand the content of contract will

lead to a lot of disputes and conflicts of interest. Therefore, to fill these gaps, based on
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personal understanding, this essay will not only analyze the concept of Hawalah, but

also mainly involves in discussing and commenting contents stated on Shariah

Standard which include types of Hawalah, basic rules and conditions, And the paper

is organized into several sections. Section 2 will review the backrground of Hawalah,

section 3 discusses and analysis the specific clause of Shariah Standard and

conclusion and reference will be presented in section 4 and 5.

2.0 Review the Background of Hawalah

Mughal, Munir Ahmad (2012) claimed that the word Hawalah in Arabic means

shifting a thing from one place to another. Technically, as a term of Islamic law, it

means the shifting or assignment of debt from the liability of original debtor to the

liability of another person. According to the Accounting and Auditing Organization

for Islamic Finance Institutions (AAOIFI) Shariah Standard (2010) No.7

(item2) :Hawalah , which precisely defined Hawalah as transfer of a debt liability

from the transferor to the payer. Moreover, certain previous researches also indicated

that the Hawalah is a debt transfer made by one person to another who owes him

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based on mutual approval and acceptance (Nizaruddin, 2013 and Nurazizah,2008 and

Novanda Eka, 2020). Therefore, it can be concluded that Hiwalah is a contract which

caused the transfer of debt from one party to another.There is one thing need to be

noticed it is similar to the sale of debt but is not sale, it also resemble Kafalah and

Wakalah. The clause in Shariah Standard No.7 is article 3/1 approved it, which

states:“Hawalah is a legitimate and an independent contract made out of courtesy and

is not a contract of sale.”

In addition, there are three important parties in the Hawalah contract, which are

transferor( debtor), transferee and payer(new debtor) respectively. And the form of

Hawalah contract can be summarized that the transferor provides an offer to

transferee, the transferee and payer accepts the offer, as well. What’s more, transfer of

debt is not same as transfer of right.Transfer of right is a contract between a creditor

and another person, where the creditor transfers his right towards the debtor to another

person.

Furthermore,as the Shariah Standard mentioned, Hawalah contract could be

divide into two categories: Restricted Hawalah and Unrestricted Hawalah. In next

session, there is a specific explanation will be given based on the basic rule and

condition and termination of Hawalah.

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3.0 Analysis and discussion

3.1 Basic rules and conditions

To talk with the basic rules and conditions, there are some certain terms or

phrases make me confused or i think some of them could be supposed to be stated

specifically. For example, at the page of 178 and article 6/1 of the Shariah Standard

No.7 stated that “ The permissibility of Hawalah requires the consent of all parties,

namely the transferor , the transferee and the payer.”. Although the law stipulates

that in order to maintain the validity of the Hwalah contract, all three parties must

agree.However, i think in some cases, the Hawalah procedure may not require the full

consent of all parties. For example, When a third party concludes a debt assignment

contract with the debtor, it must be approved by the creditor. Because the creditor may

not recognize the creditworthiness of the transferee and feel that he does not have

enough credit to complete the Hawalah contract, which may affect the risk that the

creditor agrees to take. And If the third party does not have sufficient capacity to

perform the debt, the interests of the creditor cannot be guaranteed. At the same time,

the debtor also has the right to determine how to repay his debt to creditor in any form,

therefore, Hawalah contract will be invalid without his consent. However, the

permissibility of Hawalah contract may not require the consent of the transferee.

Hanbalis also regarded that creditor and transferor are told that debt transfer is

sufficient. they believed that the consent of the transferee is not required because they

thought the debtor may collect debts from the transferee by himself or through an

agent. In this regard, the main debtor has designated the creditor act as its agent for

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collecting debts from the transferee.In this regard, which does not require the consent

of the ultimate debtor (the transferee in this case).

In addition, most people think that the agreement of the principal debtor will

affect the validity of the Hawalah contract. For example, a famous jurists , Al-Buhūtī

agreed that only the consent of principal debtor can be considered as a condition of

making Hawalah contract to be valid and also concluded that transferee and creditor

are responsible for accepting the contract (3rd printing(Hanbal¯,vol.3,p.374.)

However, in my opinion, the progress of the hawalah contract also may not require

the consent of debtors. We know that if the debtor transfers all or part of the contract’s

obligations to a third party, the creditor’s consent should be obtained. This is different

from the transfer of creditor’s rights, which is a clear requirement of the law for the

purpose of protecting creditor’s rights. If the creditor expressly disagrees, the debt

contract cannot take effect. Under normal circumstances , it should be noted that a

third party enters into Hawalah contract with the debtor and is accepted by Shariah

Standard with the consent of creditor. Nevertheless, there is another situation in which

a third party concludes a Hawalah contract with the creditor. According to judicial

practice, the debtor’s consent is not required in principle at this time, but notification

of the debtor is still required.

Specially, The same views of some classical and contemporary jurists coincide

with mine. According to a popular view of Hanafi, which pointed out that “a transfer

of debt is valid without the consent of the principal debtor, since the transferee’s

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acceptance of transferring liability to himself is a personal matter than only

benefits and does not harm the principal debtor”(Al-Kasani(Hanafi),vol.6,p.15).

In general, no matter what the circumstances, the validity of a Hwalah contract

cannot be separated from the consent of the creditor.To obtain the consent of the

creditor is necessary condition, and the consent of the debtor and transferee must be

determined on the basis of specific circumstances.

Overall speaking, i think this clause in Shariah Standard is not detailed enough,

and these special circumstances are not taken into account, which is quite different

from the actual application of Hawalah. Therefore, in order to make this clause of the

Hawalah contract easy to understand, I suggest adding to the clause that obtaining the

creditor’s consent is a necessary condition for the Hawalah contract to be valid, and

the transferee’s and debtor’s consent is not necessary in some situation and explain

each special situation in detail.

In addition, at the page of 178 and article 6/5 of the Shariah Standard No.7 stated

that “ It is a condition in Hawalah that both the transferred debt and the debt to be

used for settlement be known and transferable.”. Based on this clause, I think its

description is not complete enough. And there is no detailed description of the nature

of the transferable debt.It is not clear about what kind of debt can be defined as

transferable. If the debt that the creditor requires to be repaid can only be in cash, but

the new debtor repays the debt in other forms, such as online payment, share payment,

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etc., then such debt should belong to non-transferable debt, so the Hwalah contract

will also be invalid. Most importantly, the transferable debts must be consistent with

the transferee’s debts to the transferor in terms of kind, type, quality and amount. This

condition is also mentioned in the article 6/6 of Shariah Standard .If there is any

difference of debt, it is is no longer a debt transfer, and classify it as prohibiting the

exchange of one debt for another debt, Riba is more likely to occur in such situation.

On the other hand, jurists have permitted that the debt assigned in Hawalah must

be transferable and fungible. If debt is non-fungible, it will invalidate the contract

since the transfer of liability may only be effected for fungibles.However, even if the

transferable debt meets these two requirements, but in my opinion, under certain

special circumstances, the debt cannot be transferred to a third party and the Hawalah

contract cannot be formed. For instance, the first situation is that if the debt is closely

related to the person of a specific debtor, it needs to be fulfilled by the debtor in

person, alimony payment is one category of special debt that must be repaid by

himself, so shariah law does not take it into consideration.

The second situation is that the parties specifically agree that the debts that

cannot be transferred and the obligations of omission can only be borne by the agreed

or specific parties, and cannot be transferred to others. For example, company B owes

company A $500,000. In the debt contract, company A clearly stated that it would not

accept the debt transfer, and company B can only perform its responsibilities, because

company A has cooperated with company B for many years, and the trust between

them is very high, company A do not believe in the credit and ability of the third party,

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and fear that the transfer of debt will bring about loss of profit and unnecessary

troubles.

To summarize that, the transfer of debt not only depends on the consent of the

creditor, but also on the nature of the debt itself. In addition to the creditor’s

disapproval of the assignment and the inability to form a Hawalah contract due to the

non-transferability of the debt, it is more important to specify the non-transferability

of the debt. In addition, when the contract is signed, the parties clearly agree that this

debt can not be transferred, so the debtor also has no right to transfer the debt. In the

terms of Shariah Standard, I did not see any specific instructions. Therefore, based on

personal understanding, I suggest that the detailed description of relevant laws and

regulations should be strengthened to avoid misunderstandings.

3.2 Terminations of Hawalah

There are many factors will cause the termination of the Hawalah contract.And

the termination of the Hawalah contract is clearly mentioned in the Shariah Standard

at the page of 180 and section 11, which states:“A Hawalah liability will come to an

end by settlement of the debt or by a mutual agreement to terminate it or by the debt

being written-off by the transferee.”. It clearly stated that A Hawalah contract could

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be terminated if parties make an agreement or the debt was paid back completely by

debtor.In addition to these circumstance that will lead to the termination of contract, i

think there are some other reasons that will also cause the termination of the Hawalah

contract. For example, cancellation of the contract is also a way to terminate the

contract. However, according to the section 10/2 states ： “A Hawalah transaction

shall not be annulled due to the death of the payer or the liquidation of the

Institution acting as payer. ” Normally, the transferee will have the right to recover

the payer’s inheritance, and the personal guarantor, or liquidated pre-allocated assets.

Therefore, in such a normal situation, a Hawalah contract still could be valid. But, i

think if the payer dies in bankruptcy, is insolvent and has no immediate family

members or a guarantor or institution, the contract will also be terminated. Because

the creditor is unable to recover from the payer, he only can require the original

debtor to repay the debtor.For the debtor/transferor, the death of the payer and the

absence of anyone to recover directly lead to the termination of the Hawalah. It can be

concluded that such an extreme case is relatively rare, but it also exist. Therefore, in

order to make the Shariah Law more stringent, I suggest adding payer requirements to

the conditions of the Hawalah contract. For example, the payer is required to have a

good faith guarantor or institution to guarantee its debt repayment ability and ensure

that the creditor’s debtor can be repaid normally, and to avoid contract disputes.

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4.0 Conclusion

Finally, based on my views and arguments about the Hawalah contract of

Shariah Standard, it can be summarized by following three points and given some

recommendations.

1. The validity of the Hawalah contract may not require the consent of all

parties.(the clause of section6/1, p178)

Recommendation: It is possible to collect similar special cases that have occurred in

the past to sum up the results of the adjudication, because special cases should be

treated specially to facilitate the judgment of the same special events in the future, and

at the same time to prevent the public from taking advantage of legal loopholes to

acquire unlawful benefits.

2. The description of transferable debtor is not specific enough, there are many

controversial situations need to be distinguished carefully.(the clause section6/5,

p178)

Recommendation: Define and explain the essence of transferable debt in detail.To

judge the disputed situation and give relevant explanation will be a good method to

solve the confusion of public about transferable debt.

3. The reason for the termination of Hawalah contract is not complete enough.

And it is not considered that in extreme cases, the death of the payer will also lead to

the termination of the contract.(the clause of section 10 and 11)

Recommendation: Comprehensively consider whether the death of any party will

affect the termination of the Hawalah contract in the future.

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5.0 Reference

AAOIFI (2010), Accounting and Auditing Organization for Islamic Financial

Institutions. Bahrain: Dar Al Maiman.

Al-Zuhayli, Wahbah.(2007), Financial transactions in Islamic Jurisprudence, Vol

2, Dar alFikr, Syria.

Al Raisi, A. K. S. D.; Rodriguez, I.; Tustikbayev, M.; Omarova, N.; Abdul Rahman,
A. W.; Muneeza, A.(2016), "Implication of Ḥawālah in Islamic Finance
Practice", International Journal of Management and Applied Research, Vol. 3, No.
3, pp. 109-119. https://doi.org/10.18646/2056.33.16-009

Bank Negara Malaysia (2006), Islamic Banking [Online] Available at:

https://www.bnm.gov.my/index.php?ch=174&pg=467&ac=370

Dewi, M. K. and Kasri, R. A. (2011), “SMEs Financial Innovation: Application of

Hawalah in Islamic Cooperative”, International Journal of Excellence in Islamic
Banking and Finance, Vol. 1, No. 2, p. 1-15.

Message from the Editor. (2013). The International Journal of Excellence in

Islamic Banking and Finance, 3(2), 1–4. https://doi.org/10.12816/0001421

Muhammad Ayub(2007).Understanding Islamic Finance, Vol.5,No.2, pp.99-128.

https://onlinelibrary.wiley.com/doi/book/10.1002/9781119209096

Mughal, Munir Ahmad (April 8, 2012).What is a Contract of Hawalah? (‫)حوالۃ‬

Available at SSRN: http://dx.doi.org/10.2139/ssrn.2036635

Nizaruddin. (2013). Hiwalah dan Aplikasinya dalam Lembaga Keuangan

Syari’ah. Adzkiya : Jurnal Hukum Ddn Ekonomi Syariah, 1(2).

https://ejournal.metrouniv.ac.id/index.php/adzkiya/article/view/1051
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Nurazizah, N. E. (2008). Implementasi Akad Hiwalah dalam Hukum Ekonomi

Islam di Perbankan SyariahTafaqquh: Jurnal Hukum Ekonomi Syariah Dan

AhwalSyahsiyah,5(2),59-74.http://ejournal.kopertais4.or.id/sasambo/index.php/t

afaqquh/article/view/3977

Shanmugam, B. (2005), “Hawala and money laundering: a Malaysian

perspective”, Journal of Money Laundering Control, Vol. 8, No. 1, pp. 37 – 47.

https://doi.org/10.1108/13685200510621181

Wilson, J. F. (2002), Hawala and other informal payments systems: an economic

perspective. International Monetary Fund [Online] available from:

https://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/wilson.pdf

Wan Nor Aisyah WanYussof (2016), “DOES THE PARAMETERS OF GROUP

LENDING POLICY SUFFICIENT?”, Journal of Global Business and Social

Entrepreneurship (GBSE) Vol. 1: no. 1, pp 40-47.

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