Unit 9

Dha’ Wa Ta’ajjal and Ibra’
Unit 9 | 1

Unit 9
Topics in This Unit
9.1- Introduction
9.2- Dha’ wa ta’ajjal
9.3- Ibra’
9.4- Concept of ibra’
9.5- Early discussion on ibra’
9.6- Current practice of ibra’ in Islamic banks
9.7- Review and analysis of the opinions of jurists and their justifications
9.8- Ibra’ resolution of SAC, BNM
9.9- Ibra’ guidelines in Malaysia
9.10- Late payment charges (ta’widh and gharamah)
Unit At the end of this unit, you should be able to:

Objective
• Determine how ibra’ has been applied in Islamic finance.
• Ability to deal with ibra’ as a clause in a legal
documentation .
• Ability to evaluate and calculate ibra’ in Islamic finance
facilities.
SH5023 Shariah Issues in Islamic Finance

© INTERNATIONAL CENTRE FOR EDUCATION IN ISLAMIC FINANCE 2014/1435 AH
Unit 9 | 2
Key Terms
Ibra’
Discount
Discount and receive soon
IBRA’ & LATE PAYMENT CHARGES
Ibra’ is a form of tanazul provided by Islamic financial

institutions when the customer wants to make an
early settlement of his financing facility.
The issue that needs to be addressed is whether
banks have the right to grant ibra’ to the client at its
own discretion and whether clients have the right
to request that ibra’ be stipulated in the contractual
agreement.

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Unit 9.1 INTRODUCTION
This unit focusses on one specific issue related to some applications in Islamic finance. The
issue arises when the client wants to make an early settlement and apply for a discount, i.e.,
whether or not he is eligible for that discount. This unit addresses this issue by discussing its
concept, how the discounting process is understood and applied by the Islamic bank. The unit
also presents the different views of the scholars on this matter within the concept of dha’ wa
ta’ajjal.
Unit 9.2 DHA’ WA TA’AJJAL
Dha’ wa ta’ajjal is the action of a creditor writing off part of the debt when the debtor settles the
balance of his debt earlier. Generally, the dha’ wa ta’ajjal principle is important in developing
Islamic corporate bonds in a secondary market. Islamic bonds issued are based on the concepts
of ijarah, istisna’, murabahah, musharakah, and mudarabah. To enable the trading of these
bonds in the secondary market, securities holders will sell them at a lower price based on the
concept of dha’ wa ta’ajjal.
Unit 9.2.1 DHA’ WA TA’AJJAL PRINCIPLE
The principle of dha’ wa ta’ajjal is permissible. This is based on the following hadith of the
Prophet (p.b.u.h.):
Narrated from Ibnu ‘Abbas who heard the Prophet (p.b.u.h.) order the Bani Nadhir to leave
Medinah and was then duly informed that there were still many in the city who owed them
money. Said the Prophet (s.a.w). “Give a discount on the debt and hasten the payment.”
Ka’ab narrated that he had a debt owed to him by Ibnu Abi Hadrad; whereby they were discussing
the debt in a mosque when their raised voices reached the ears of the Prophet (p.b.u.h.) who

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was at his house. He called out to Ka’ab and Ka’ab answered, “Yes, Messenger of Allah.” The
Prophet (p.b.u.h.) said, “Lessen your debt (indicating to lessen a part of it).” Answered Ka’ab,
“I have done so, oh Messenger of Allah”. The Prophet (p.b.u.h.) immediately said (to Ibnu Abi
Hadrad), “Arise and settle your debt.”
Unit 9.2.2 VIEWS OF THE SCHOLARS
Ibn ‘Abbas is of the opinion that dha’ wa ta’ajjal is permitted with the following argument:
“It (dha’ wa ta’ajjal) is permitted because it concerns claiming part of one’s right and
relinquishing another.”
Past Islamic jurists differed in their views on dha’ wa ta’ajjal. Generally, there were two main
views regarding this issue.
The first view permitted dha’ wa ta’ajjal. Among those advocating this view were Ibnu ‘Abbas,
al-Nakha’i, Zufar, Abu Thaur, Ibnu al-Qayyim and Ibnu Taymiyyah. Their argument was based
on the prophetic sayings explained earlier.
The second view did not permit dha’ wa ta’ajjal . This was the view of the majority of Islamic
jurists. Their argument was that there is a similarity between the concept of dha’ wa ta’ajjal and
riba, in the prohibition of the increase in payments. The similarity lies in using time/duration
to determine the price. This is made clear when an extension in time results in an increase in
price, and vice versa, i.e., when a reduction in time results in a reduction in price.
Ibnu Qayyim reinforced the view of the first group permitting dha’ wa ta’ajjal with the following
conclusion:
“Riba is not present in this issue whether in reality, language or urf.
As a matter of fact, riba is something that increases whereas this does not happen in dha’ wa
ta’ajjal. Those who have forbidden it have compared it to riba, whereas there is a clear difference
between the two in the words used:
• Either you increase the payment (due to late payment), or settle the debt (in time)
– this is riba; and

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• Quickly settle your debt with me and as an incentive I will discount part of it – this
is dha’ wa ta’ajjal.”
Unit 9.3 IBRA’
The Malaysian Islamic banking industry is considered to be a highly regulated market which is
one of the key features that makes Malaysia a transparent and competitive market compared to
other jurisdictions. However, while regulation has brought excellence and harmony in practice,
on the other hand, it has raised many issues, particularly Shari’ah related issues. One of the
new regulations that has raised some Shari’ah concerns is the binding nature of ibra’ which has
been issued recently by Bank Negara Malaysia in the case of early settlement in a bay bithaman
ajil (BBA) financing.
Background
The issue of ibra’ has been discussed by classical Muslim jurists, especially during the middle
ages of Islam. The classical Islamic fiqh literature that deals with the comparative fiqh, especially
within the four widely practiced juristic schools of thoughts, has dealt with the issue in detail.
In conformity with the classical approach, the topic is discussed with the opinion from each
school along with their justifications. In general, classical jurists hold the position that ibra’, in
which the creditor waives his right (fully or partially) in a debt contract, is allowed as long as it
is not mandatory, or in other words, ibra’ should remain discretionary.
There are many resolutions have been passed on this issue. Bank Negara Malaysia’s Shari’ah
Advisory Council has issued a resolution on ibra’, where it considers it mandatory to have
a unilateral promise from the financier. However, the International Islamic Fiqh Academy’s
resolution considers it permissible only if it is discretionary.

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Unit 9.4 CONCEPT OF IBRA’
Ibra’ is derived from the Arabic root of baraa’ or baria’ which means to be released or be fee from
something. Abra’a means to release something or to free. The classical jurists have defined ibra’
in accordance with their different schools of thoughs. Normally, ibra’ has been discussed under
the chapter of debts (duyun) and rights (huquq). Since there are some differences regarding the
origins of debt in the different schools of law, particularly between Hanafi and the others, we
will discuss the definition given by the Hanafi school of law and one of the others.
According to Hanafi scholars, ibra’ takes place “when the creditor waives his rights on the debt
and transfers the ownership”. Hence, ibra’ according to the definition given by Hanafi scholars
contains two meanings: waive of rights and transfer of ownership. This is in conformity with
the Hanafis’ understanding of debt as they consider it as property and therefore, the creditor
can give this property to someone else and when the creditor gives rebate, whether fully or
partially, this is as if he is giving a gift (of the debt) to the debtor. The difference between gift
and waiving is that for the former, the counterparty’s acceptance is conditional to complete
the transaction whereas for the latter, it is solely the discretion of the creditor and the debtor’s
consent is no more a condition.
Having looked at the Shafi’i scholars’ definition of ibra’, one could say that there is an evaluation
in the process. The student of the juristic history of the Shafi’iI school of law knows that
normally the Shafi’i scholars have two opinions: one is called qadim (earlier) and the second
is jadid (later). Shafi’i scholars, in their earlier opinion considered ibra’ as a sole right of the
creditor and hence it is just isqat (waive of rights). However, in their later opinion, they have
joined the Hanafi scholars in their definition of ibra’ and considered it a tamlik (transfer of
ownership) as well.
To conclude, the term ibra’ contains the meanings of both isqat and tamlik, according to
the majority of classical jurists. However, according to Hanbali scholars, ibra’ only contains
the meaning of isqat and the consent of the debtor is no more a condition as it is at the sole
discretion of the creditor. But if we consider the meaning of tamlik as well, then we have to take
into consideration the consent of the debtors too.
There are many different types of ibra’ that have been discussed by the jurists in the classical
fiqh books. Ibra’ according to the jurists, could be given fully, or partially. It also possible for it

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to be a general type or a particular type. It applies for the material as well as for the corporeal.
The classical books even talk about giving more time for the debtor as ibra’ mu‘aqqat, where the
debtor has not been freed completely from the debt, but instead, he is given more time to settle
the debt than originally stipulated in the contract.
Unit 9.5 EARLY DISCUSSION ON IBRA’
The general verses of the Al-Qur’an and many traditions of the Prophet (p.b.u.h.) have
emphasised not only the permissibility of ibra’, but also highlighted it asa noble deed; the doer
is rewarded for his doing good. The Al-Qur’an says, “If the debtor is in a difficulty, grant him
time till it is easy for him to repay, but if you give up the loan as charity, it would be better for
you if you only knew”. The verse starts with encouraging the creditor to grant the debtor more
time if he needs it, and then ends up saying that it is better if you remit the debt and release
the debtor.
Classical jurists have discussed ibra’ in two different areas. The first involves a discussion of the
concept and the kinds of riba, whereas the second discussion is on normal debt contracts and
the settlement of debts. As for the kind of riba, it falls under the title of da’ wa ta’ajjal (pay early
and take a discount). It happened during the time of the Prophet (p.b.u.h.) when the Muslims
expelled the Bani al-Nadhir, a Jewish tribe from Medina. They had debts owed to the Muslims.
The Companions of the Prophet (p.b.u.h.) asked him about their debts. The Prophet (p.b.u.h.)
asked them to ask the debtors to pay early and give the debtors discount (da’ wa ta’ajjal) P
(p.b.u.h.) . However, the scholars of hadith have questioned the authenticity of this narration.
The second issue raised regarding this hadith is that the Jewish tribe was expelled from Medina
during the early period of Islam, and this happened before the ruling prohibiting riba came
into existence. It is known that the ruling came at a later period in Medina, precisely at the time
of the farewell hajj (hajjatul wad’i) which occurred in the 10th century of Hijrah.

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Unit 9.5.1 THE DIFFERENCES OF OPINION IN THE ISSUE

OF IBRA’ AND ITS REASON
The issue with ibra’, in the relation to the aforesaid hadith, has nothing to do with the mandatory
rebate as some of the contemporary jurists have portrayed it. It is just a rebate the creditor is
asked to give in order to receive his debt before the departure of the Jewish tribe. However,
the jurists have debated on the issue and had differences of opinion. Ibn Rushd has further
elaborated the issue along the reasons given by each groups. According to him, the reason
the jurists prohibited it is because since it is not permissible to increase the amount due to
the increment in the time, and similarly, it is also not permissible to decrease the amount by
considering the time factor. The time value of money should not be taken into consideration
when dealing with the money.
Taqi Othmani had a good discussion on the topic, in his article on instalment sale. He
differentiated between the deferred debt and the debt which is due (al-dayn al-hal). For the
debt which is due, according to him, the opinion of the majority is that it is allowed for the
creditor to forgo some of his rights, and give rebate on it purely at his own discretion. However,
if the debt is deferred and it is not due yet, then it is not permissible for him to give a discount
by considering the time factor. Another reason for the prohibition of da’ wa ta’ajjal, according
to him, is that for a deferred debt, it is not permissible to discount the debt for the sake of early
payment if it is conditional. However, if the creditor discounts the debt at his own discretion,
considering it as a donation from his side, then it is allowed.
One could conclude the earlier jurists’ opinion regarding ibra’ is that generally, it is permissible
to give rebate on debt. However, it is not permissible to make the discount conditional as the
time factor will then come into picture which deems the process invalid. The reason why it
is not permissible to make it conditional once the debt has been established is that it is the
creditor’s sole right, and the debt then belongs to him. Therefore, he cannot be forced to forgo
his right fully or partially, unless he does so with his own will. In Islam, it is not allowed to take
the property of any Muslim except with his own consent.
Normally, the classical jurists are talking about debt that arises from the benevolent loan. That
is why giving a loan and then granting rebate if the debtor is in difficulties has been considered
a noble and charitable deed, where the creditor is rewarded because of his merciful act, and no
one cannot be forced to do charity.

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Unit 9.6 CURRENT PRACTICE OF IBRA’ IN ISLAMIC BANKS
Unit 9.6.1 THE NEED OF IBRA’
Ibra’ in modern baking transactions is utilised where debt is created. Islamic banks are
theoretically framed in a way that promotes equity finance, and at the same time it also approves
debt financing. Islamic banking in Malaysia began with the great emphasis on equity finance.
However, due to the bitter experience, the industry moved towards debts financing. Either way,
the point is, the more debt financing grows, the more the need of ibra’ is recognized.
Unit 9.6.2 IBRA’ CLAUSE
Even though most of Islamic banks in the world do not explicitly include ibra’ as a clause in
the documentation due to its discretionary nature, in certain Islamic legal documentation, the
inclusion of an ibra’ clause in sale contracts involving the element of debt such as bay bithaman
ajil, bay al-‘inah, murabahah and tawarruq is widely practised. A,lmost 80% of Islamic banks in
Malaysia, apply the ibra’ clause whether it is expressly or impliedly stipulated in the contract.
Unit 9.6.3 DIFFERENT RESOLUTIONS OF GOVERNING BODIES
Looking back at the classical books, it was clear as mentioned earlier, that classical jurists have
considered ibra’ as the sole right of the creditor and hence, it should be discretionary. However,
due to the complex nature of modern financial transactions, various contradicting resolutions
have been issued. Some of the contemporary jurists still hold the classical position and consider
that it should remain discretionary, whereas others have proposed it to be mandatory. Both of
them have their reasonings and justifications. The following is the detailed discussion of both
of these theirpositions regarding ibra’.

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Unit 9.6.4 INTERNATIONAL ISLAMIC FIQH ACADEMY
The International Islamic Fiqh Academy (IIFA) is a subsidiary of the Organization of the Islamic
Conference (OIC), the second largest political organisation after the United Nations. IIFA is the
largest body of Muslim jurists and has issued many resolutions in different fields including
financial transactions. As for the issue of ibra’, the IIFA approves the concept of dha’ wa taajjal
to discount the debt; it does not matter whether the request is from the debtor or the creditor.
However, it has put some conditions; such as the third party should not get involved in this
process, and the contracting parties should not have any pre-agreements regarding the ibra’.
The contract is invalid if these conditions are not fulfilled.
IIFA’s resolution holds the classical position on the issue, except that they opened the door
widely for dha’ wa ta’ajjal, albeit with some restrictions. But it remains of the opinion that
rebate should be discretionary and no party is forced to give the rebate or in other words, the
rebate cannot be made mandatory. The justification of this resolution is all that we have already
discussed regarding the opinion of classical jurists and there is no need to repeat the topic.
Unit 9.6.5 THE RESOLUTION OF THE SHARI’AH ADVISORY

COUNCIL OF BANK NEGARA MALAYSIA
Bank Negara Malaysia (BNM) is the central bank of Malaysia. The Shari’ah Advisory Council of
BNM is the highest Shari’ah authority in Malaysia that issues Shari’ah resolutions for Islamic
banks and takaful companies. The SAC has issued its resolution on ibra’. According to the
SAC, the binding nature of ibra’ has been approved. The resolution of SAC is slightly different
from that of the others . Due to its peculiarity, it is good to discuss the resolution in detail to
comprehend the issue and the surrounding realities properly before giving any opinion on it.
The following is the text of the resolution:
The Council in its 24th meeting, held on 24 April 2002/11 Safar 1423, resolved that an Islamic
banking institution may incorporate the clause on undertaking to provide ibra’ to customers
who make early settlement in the Islamic financing agreement on the basis of public interest
(maslahah). This clause shall be stipulated under the method of payment.
With the inclusion of the ibra’ clause in the financing agreement, the bank is bound to honour
that promise. This approach mirrors the concept of giving discount on price or reducing the
debt of the customers who make an early settlement based on the concept of dha’ wa ta’ajjal

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which is acceptable in Shari’ah. The confusion on the issue of uncertainty of price (gharar) does
not arise if the clause on the promise to give ibra’ is stated clearly in the financing agreement.
Unit 9.6.6 DISCUSSION ON THE RESOLUTION
There are many issues in it, which shall be discussed in detail. The main theme of the resolution
is that the mandatory nature of ibra’ is justified on the basis of public interest (maslahah).
What is the meaning of this maslahah? And what are the public interests that are achieved if
the clause of ibra’ is in included in the agreement? Is the concept of dha’ wa ta’ajjal accepted
by Shari’ah in the way it is presented in this resolution or are there some further issues to
be resolved? Is the uncertainty in price (gharar) dissolved by clearly stating the ibra’ in the
financing agreement as it has been claimed? These are the issues that will be discussed in the
following sections
Unit 9.6.7 THE WAY IBRA’ IS GIVEN IN ISLAMIC BANKS
It is known that the question of ibra’ arises when there is an established debt. Ibra’ is given
on the debt in two ways: firstly, in the case of early settlement, and secondly, for the monthly
instalments if the effective rate is lower than the ceiling price. In the conventional system, the
principle loan amount and the amount of interest is computed separately. In the case of early
settlement by the client, the bank charges only the principle amount and waives the interest,
but it also imposes some early settlement charges. This is a different issue where the bank
always tries to take its profit first; i.e,. during the early instalment. For that, the bank has some
complex amortisation computation formula.
The same applies to Islamic banks. However, it remains the absolute discretion of the bank to
give ibra’, which means banks still have the right not to give a rebate on it. And if ibra’ is not
granted, the Islamic bank seems more expensive than that of its conventional counterpart.
That is how it creates a real and significant reputational risk for the newly emerging industry
of Islamic banking and finance. However, with this SAC resolution, it could be binding on the
bank to grant a rebate for early settlement.
The second way of giving a rebate in Islamic banks is on monthly instalments. This is exclusive
to the Islamic banks and the conventional banks do not need it. To explain this, readers must
be aware that Islamic banks benchmark most of its financing based on the conventional banks’
benchmarking system. However, in many Islamic banks, this ceiling rate is used just to fulfil the

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requirements of the sale contract in Shari’ah. The real effective rate would hardly reach that of
the ceiling rate. The difference between the ceiling rate and the effective rate is granted as ibra’.
This is called floating rate BBA/Murabahah.
Let say, if the base financing rate (BFR) for today is 6.66%, and the highest the bank could charge
is 9.99%. The bank would give financing of 9.99% to the client (normally, banks give discount
on the current BFR which varies from client to client). The bank tries to put the highest charge
possible, so that at any time throughout the tenure, if the BFR goes above the ceiling price, the
bank shall not bear the loss. However, if the Islamic bank charges the exact amount fixed while
concluding the contract, it will definitely be higher and more expensive than the other banks
in the market. Due to this, the bank normally charges only the rate that prevails in the market.
This is for the monthly instalments. The difference between this effective rate and the ceiling
rate is given and it is known as ibra’.
Unit 9.6.8 ISLAMIC BANKS WILL BE MORE EXPENSIVE IF

IBRA’ IS NOT GIVEN
It has been clear now from the previous discussion that if ibra’ is not given in both the case
of early settlement and for monthly instalment for a floating rate BBA, the Islamic bank will
be more costly for the clients than that of the conventional ones. And it is very likely that
Islamic banks might not give ibra’ since the bank has no legal or regulatory obligation to do so.
That is how Islamic banks create the perception that Islamic banking is more expensive than
conventional banking, which definitely casts a reputational risk for the Islamic banks. This is
one of the justifications that is given for imposing mandatory ibra’ on Islamic banks in both
cases, i.e., early settlement and monthly instalments.
Unit 9.6.9 DISCRETIONARY IBRA’ AND LEGAL DISPUTE
Discretionary ibra’ could raise a dispute between the bank and the client. Due to the dominant
practice in conventional banking, clients are of the opinion that it is their absolute right to
claim for ibra’ in the case of early settlement as they do in conventional practice. However, if
banks still consider it as their discretion, they will always have the chance not to grant ibra’ even
in the case of early settlement. Therefore, the issue could go to the court. According to the some
of the report, most of the disputed issues in the court regarding the Islamic banks are related
to the early settlement..

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The above discussion was the detailed explanation of the justifications of those who consider
ibra’ to be mandatory on Islamic banks and it was the maslahah which has been presented
in the SAC’s resolution. However, by considering ibra’ mandatory, some Shari’ah issues could
arise and to resolve this issue, these Shari’ah concerns should be solved.
Unit 9.7 REVIEW AND ANALYSIS OF THE OPINIONS OF

JURISTS AND THEIR JUSTIFICATIONS
Until now, this unit has discussed the explanations behind the opinions of those who consider
ibra’ should be mandatory in current Islamic banking practices. However, this unit has not
yet discussed the validity of these justifications from the Shari’ah point of view. First, we shall
discuss the issue of maslahah and its implication since it is the main point of this opinion and
it has also been used as a justification to many other rulings.
Unit 9.7.1 THE MASLAHAH AL-SHARI’AH
In current Islamic banking practices, maslahah has been the basis of many rulings issued by
the different Shari’ah bodies and councils. Maslahah is a term which has been discussed in
detail in the classical books of usul al-fiqh. There is no doubt that all the rulings of Shari’ah have
been given to the people for their own benefits. By following the Shari’ah, a believer attempts
to achieve the benefits of both this world and the hereafter. The Holy Qur‘an says, “He has
chosen you and has imposed no difficulties on you in the religion”. Imam Ibn al-Qayyim in his
magnum opus, Ilam al-Muwaqqin, has some beautiful words on the maslahah and maqasad
of the Shari’ah. He laments on those who ignores the core and the higher objectives of the
Shari’ah, and then he said, “The core of the Shari’ah is based on the interests and benefits of the
people. It is all about the justice, mercy, public interests and wisdom. If there is any issue that
goes against it, it is not from the Shari’ah.”
However, the question arises while discussing the benefits and maslahah in Shari’ah. What
kind of benefits are they talking about? Is it something that one would perceive in his mind
and would consider it maslahah for himself? And how should it be dealt with if there is a
contraction between the perceived maslahah and Shari’ah or at least if requirements of the
Shari’ah are not fulfilled if the so-called perceived maslahah is achieved?

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Islamic jurists explained three different types of maslahah. The first is one that is approved by
the Shari’ah, and the second, one that is rejected by the Shari’ah and the third, neither rejected
nor approved by the Shari’ah, which is known as maslahah mursalah. So, whenever the jurists
talk about maslahah, they refer to this third kind. One of the key issues or a condition that the
usuli puts forward while talking about it is that maslahah no matter which type, should not
contradict the Shari’ah. If the maslahah contradicts the Shari’ah, then it should not be taken
into consideration
After having read the texts of the jurists who discussed maslahah and the higher objectives
of the Shari’ah, one could say that the jurists are not talking about the objectives which is
perceived, such as one’s whims or desires, it is the Shari’ah objectives itself, which is, what is
directly derived from the Shari’ah. In other words, what they are saying is that the law and the
rules of the Shari’ah in itself is the maslahah which can be achieved by following and applying
them.
This point is clear from the Al-Gazali categorisation of maslahah. He clearly mentioned that
if the maslahah contradicts the Shari’ah, it is thus, rejected. It becomes more obvious if we
read the text of Ibn al-Qayyim mentioned earlier regarding maslahah and the objectives of the
Shari’ah. He clearly stated that Shari’ah and its ruling in itself is the maslahah that should be
achieved by following them.
So, before making maslahah as the basis of any ruling, one should look at whether it contradicts
the Shari’ah or whether the requirements of the Shari’ah are fulfilled, if the perceived maslahah
is taken into consideration. In other words, the other Shari’ah issues should be addressed first
before making the maslahah the basis of any ruling. In the next sections, this unit will highlight
the Shari’ah issues that exist if ibra’ is made mandatory.
Unit 9.7.2 PRICE FIXING: THE ISSUE OF GHARAR

(UNCERTAINTY) IN THE CASE OF MANDATORY
IBRA’
Sale with deferred payment has some initial controversies, however, the majority of jurists from
all four schools of law agree that deferred payment sale or sale with instalments is allowed, even
if the deferred payment sale price is higher than the cash payment. However, there are some
fundamental conditions which should be fulfilled while concluding the deferred payment
sale. One of the main conditions is specifying the price while concluding the sale. The sale
becomes invalid if the price is not fixed at the time of the sale or if there is more than one price.

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In mandatory ibra’, there are two fundamental Shari’ah issues. The first fundamental issue is
that since ibra’ is a voluntary contract, it is not permissible to force any party to take part in a
voluntary contract. The second issue is that of price fixing.
The first issue has been addressed by giving an example from the era of the Prophet (p.b.u.h.)
where some acts, which are voluntary in nature, were made mandatory due to the needs of the
people. During the early period at Medina, the Prophet (p.b.u.h.) ordered his Companions to
not keep the meat of sacrificed animals for more than three days. The reason behind this order
was the presence of the nomadic people in Medina who came from the different lands and
they were in dire need. The meat was distributed to the nomadic people The point here is that
charity is a voluntary deed; however, it was made mandatory due to the needs of the people.
And when there were no more nomads in Medina, the mandatory order was no longer relevant
and the Prophet (p.b.u.h.) allowed the the meat to be kept for more than three days.
The question remains unclear if whether the Prophet (p.b.u.h.) prohibited the practice only
because of the very same reason stated or if there were some other justifications for it. The
question arises since there were many temporary rulings at the time of the Prophet (p.b.u.h.)
since the ahkam was being revealed gradually. It is known that the rulings of Islam were not
given in a lump sum, but came in instalments.
However, whether or not the issue of optional charity and mandatory charity is resolved, the
main issue of price fixing in a sale contract still remains According to the resolution of the SAC,
there will be no more issues of uncertainty in price (gharar) if the clause on the promise to give
ibra’ is stated clearly in the financing agreement. In practical terms, the issue is not solved there
yet, but it raises one more issue and violates one of the basic conditions of the sale contract with
deferred payment. Generally, there are five basic pillars of a sale contract in Islamic law; and
one of them is the specification of the price. Ambiguity in any one of these pillars shall make
the contract void.
It is permissible to talk about the different price while discussing the contract. It is also
permissible to present a different price according to the different terms and tenure. However,
while concluding the contract, both parties should agree on one single price. Mandatory ibra’
will definitely violate this condition and accordingly, the debtor will have multiple choices for
the price, i.e., if he pays early, he will pay less and if he pays on time, he has to pay full amount.
Unit 9.7.3 THE CORE OF THE ISSUE

Unit 9 | 16
The issue arises because of the problem in the benchmarking system. Islamic banks not only
benchmark their products based on the conventional interest rate, but they try to give the
highest rate possible for customer , so they could mitigate the possible market risk if the base
lending rate (BLR)/BFR goes up in the future. It creates two fundamental problems which are
explained in the following paragraphs.
According to the Islamic law, the price is what is agreed by both contracting parties; which
means they could agree on any price they want. However, it is unfair to charge a price which is
too different than that of the prevailing market price. This is where the first problem occurs.
In the traditional books of Islamic fiqh, it is called gubn fahish, which is condemned by the
Shari’ah.
The second issue is that, even though the price is fixed in the contract with deferred payment
(this is with ibra’), in reality, it creates a phenomenon where the client always has multiple
choices when it comes to payment. To explain it, the client normally would not agree for a price
that is too high if he knew that he has to repay this amount, but when he deals with the bank
for a similar contract, the bank informs him that this rate is only chargeable if the BLR reached
that rate. Otherwise,e customer would only pay the prevailing market rate and the difference
between it, bank will give you as ibra’.
In practical terms, it creates a two-price phenomenon; one is the ceiling price which has been
agreed only on paper in order to show that the price is fixed and there is no more gharar in
the contract, and the second is what is called the effective price which is paid by the customer
according to the prevailing marker rate along with the bank’s policy towards each individual
customers.`

Unit 9 | 17
Unit 9.8 SAC ’RESOLUTION ON IBRA’
There is a, SAC resolution on ibra’ and it reads as follows:
Unit 9.8.1 IBRA’ IN ISLAMIC FINANCING
Most Islamic financial institutions do not include an ibra’ clause in the financing agreement
entered with their customer due to the concern that this will give rise to the issue of uncertainty
(gharar) in the selling price. However, the exclusion of the ibra’ clause from the agreement may
also lead to a dispute between the customer and Islamic financial institution regarding the
customer’s entitlement to ibra’ arising from early settlement of outstanding debt.
In line with the need to preserve public interest (maslahah) and to ensure fair treatment between
the financier and the customer, the SAC was referred to on the proposal to mandate Islamic
financial institutions to accord ibra’ to customers who settle their debt obligations under sale-
based contracts (such as bay bithaman ajil or murabahah) prior to the agreed settlement period.
Resolution
The SAC, in its 101st meeting dated 20 May 2010, resolved that Bank Negara Malaysia, as the
authority, may require Islamic financial institutions to accord ibra’ to their customers who
settled their debt obligations arising from the sale-based contracts (such as bay bithaman ajil
or murabahah) prior to the agreed settlement period. Bank Negara Malaysia may also require
the terms and conditions on ibra’ to be incorporated in the financing agreement to eliminate
any uncertainty with respect to the customer’s entitlement to receive ibra’ from the Islamic
financial institution. The ibra’ formula will be determined and standardised by Bank Negara
Malaysia.
Basis of the Ruling
Foregoing of rights is closely associated with ibra’ and dha’ wa ta’ajjal in the context whereby
Islam encourages the financier to waive his right to claim the settlement of a debt (either
partially or wholly). The debt obligation is recognised as a liability (zimmah) that is to be settled
by the debtor to the financier. Dha’ wa ta’ajjal is a term used to refer to an act of reducing partial
amounts of a debt in the event where the debtor makes an early settlement. The evidence on

Unit 9 | 18
waiving of the right to claim part or total amount of the debt existed during the lifetime of
Rasulullah (p.b.u.h.) as stated in the following hadith:
Rasulullah (p.b.u.h.) once ordered the people of Bani Nadhir to leave Medina, then he received
delegates from the people who said: “Oh Rasulullah! You ordered us to leave Medina while we
have outstanding debts that must be settled with the local people.” Then Rasulullah (p.b.u.h.)
replied: “Give discount and accelerate the settlement.”
Some scholars are of the view that dha’ wa ta’ajjal is not permissible since it is similar to the
practice of riba. They argued that since the increment in value of the debt due to an extension
of the repayment period is considered as riba, hence, the reduction in the value of the debt
arising from shortening the repayment period should also be regarded as riba.
Besides that, there are some arguments stating that the provision on dha’ wa ta’ajjal in a debt
transaction is not allowed as it will create gharar in the selling price. Some scholars are also
of the opinion that the provision on dha’ wa ta’ajjal in a debt transaction is not permissible
because this practice resembles the characteristic of bay atain fi al-bai’ah, a transaction which
is forbidden by the Sunnah.
However, some scholars are of the view that dha’ wa ta’ajjal is permissible and it is not
appropriate to equate dha’ wa ta’ajjal with riba given the essence of both subjects are distinct
from one another. Considering the views of scholars that allow the full adoption of dha’ wa
ta’ajjal and those who allow it on a provisional basis, it is concluded that there is no restriction
on the authority to mandate the implementation of such a practice to be compulsory. This
is because the directive issued by the authority to implement such permissible practices is
intended to safeguard the interests of all related parties. Such an action is consistent with the
resolution adopted by the classical scholars, of which the settlement value of the debt that is
paid prior to the agreed settlement period should commensurate with the duration prior to its
settlement. Ibnu ‘Abidin wrote on this matter as follows: “If a debtor settles his debt before it is
due or if he passes away and a proportion of his estate is claimed (to settle the debt).” To this,
the contemporary scholars replied: “Verily, none shall be taken from the murabahah between
them except the amount that commensurates with the duration prior to its settlement.”

Unit 9 | 19
Unit 9.8.2 TWO FORMS OF IBRA’ IN A FINANCING

AGREEMENT
In view that ibra’ is a unilateral waiver of right by a party, an Islamic financial institution may
promise to provide ibra’ based on suitable methods. In this regard, the SAC was referred to on
a proposal by an Islamic financial institution to adopt two different methods of ibra’ in a bay
bithaman ajil financing agreement that is structured based on a variable rate. The first method
is formulated to address early settlement of the debt and the second method is the monthly
ibra’ in order to match the effective profit rate with the current market rate.
Resolution
The SAC, in its 32nd meeting dated 27 February 2003, has resolved that both methods of ibra’
(namely ibra’ for early settlement and monthly ibra’ to match the effective profit rate with
current market rate) in a financing agreement are permissible.
Basis of the Ruling
In the context of ibra’ for early settlement, the SAC has taken into consideration the following
views of contemporary scholars: “Whenever a debtor settles his debt before it is due, or passes
away, thus the debt is matured due to his death. In the latter situation, the debt is settled by
claiming from his estate. However, none shall be taken from murabahah except for the amount
that commensurate with the duration of the debt before it was settled.” This was the reply
provided by contemporary scholars (of the Hanafi school of law), Qunyah, and the fatwa from
the Mufti of Rome, i.e., al-Marhum Abu Sa’ud Afandi. The effective cause (‘illah) that was given
is al-rifq (compassion) for both parties. (He said: None shall be taken from the murabahah),
its illustration: A person bought something for the cash price of 10, dirham and then he sold it
to another person for 20 dirham with a deferred payment of 10 months. If the buyer settled the
payment after five months or passed away after the period, the seller should only take five and
waive the remaining five.
For monthly ibra’, the SAC referred to the discussion among the scholars on the types of ibra’.
Two types of ibra’, which closely resemble the aforesaid practice are ibra’ muqayyad and ibra’
mu’allaq. An example of ibra’ muqayyad is as follows: “I will give you ibra’ if you do such and
such actions…” On the other hand, an example for ibra’ mu’allaq is: “If you do such a deed, I will
give you ibra’.” Some of the Hanafi scholars view that the aforesaid ibra’ is not permissible if
the condition in giving the ibra’ becomes a normal practice (muta’arafan)while the schools of

Unit 9 | 20
Maliki and Imam Ahmad allow such ibra’. Ibra’ mu`’llaq, as illustrated by some fiqh scholars,
is viewed as identical to the method of monthly ibra’. This is because ibra’ which is given on a
monthly basis is also subjected to certain rate changes. This clearly indicates that the application
of ibra’ may be extended in accordance with current needs as long as it does not contradict with
general principles of Shari’ah. Besides that, offering of ibra’ is a right of the financier. Thus, the
financier may apply ibra’ in whatever forms at his discretion.
Unit 9.8.3 IBRA’ IN HOME FINANCING PRODUCT LINKED

TO A WADIAH OR MUDARAH DEPOSIT
ACCOUNT
An Islamic financial institution would like to offer a home financing product. One of the
special features of the product is that the customer will receive ibra’ on the monthly installment
amount if he links the home financing to a wadi’ah deposit account or a mudarabah deposit
account. Under this mechanism, ibra’ on monthly instalments will be accorded to the customer
based on the outstanding balance of the deposit in a wadi’ah or mudarabah deposit account.
In this regard, the SAC was referred to on the issue as to whether the structure of the product
complies with Shari’ah.
Resolution
The SAC, in its 63rd meeting dated 27 December 2006, has approved the proposal on a home
financing product linked to a mudarabah deposit account with the condition that the cost
associated with the ibra’ shall be borne solely by the Islamic financial institution. However,
the SAC, in its 64th meeting dated 18 January 2007, resolved that the proposal to link the home
financing product with a wadi’ah deposit account is not allowed because of the concern that its
nature is shubhah to riba.
Basis of the Ruling
The existence of a linkage or relation between home financing and a wadi’ah or mudarabah
deposit account will consequently benefit the depositors. In the case of a mudarabah deposit,
the element of benefit is not an issue in Shari’ah. However, for a wadiah deposit (which applies
the ruling of qard), the element of conditional benefit is forbidden.

Unit 9 | 21
Unit 9.9 IBRA’ GUIDELINES IN MALAYSIA
Ibra’ refers to an act by a person relinquishing his rights to collect payment due from another
person. In Islamic banking, the concept of ibra’ applies to the financier that foregoes his right
over the debt owed by its customers. It is a common practice for Islamic banking institutions
to grant ibra’ to its customers, especially in the case of early settlement of sale-based financing
such as murabahah and bay bithaman ajil (BBA).
In a sale-based financing, a customer is required to settle the selling price amount (principal
and profit) as stipulated in the contract, regardless of whether the contracted payment is on
deferred or spot basis. As such, an Islamic banking institution has the right to claim from the
customer the outstanding selling price that also includes the outstanding accrued profit, even
when an early settlement is made. However, it is desirable for the banking institution to grant
ibra’ by foregoing the banking institution’s right over the debt of the remaining unaccrued profit
portion to its customer in the case of early settlement. The granting of ibra’ by Islamic banking
institutions is an important consideration for the banking institutions to remain competitive
with conventional banking institutions, as it allows customers to pay the principal and accrued
interest up to the date of the early settlement only.
Given that ibra’ is a discretionary consideration of the Islamic banking institution, the right
to grant ibra’ remains with the banking institution. Hence, it has been observed that while a
number of banks grant discretionary ibra’ and include such commitments in the offer letter and
legal documents of the financing, there are also some banks that are silent on the certainty of
granting ibra’. The different practices among the Islamic banking instiutitons are confusing to
the customers and therefore warrants greater transparency and clarity on the implementation
of ibra’ by the banks to ensure that the rights of customers are protected.
The Shari’ah Advisory Council (SAC) of Bank Negara Malaysia has issued a resolution on ibra’
in 2000. The resolution states that Islamic banking institutions may incorporate a clause on
the undertaking to provide ibra’ to customers who make an early settlement in the financing
agreement on the basis of public interest (maslahah). With the inclusion of the ibra’ clause in
the financing agreement, the Islamic banking institution is required to honour the undertaking
or promise to grant ibra’ to its customers. In line with the need to safeguard maslahah (public

Unit 9 | 22
interest), and to ensure that customer protection is carried out consistently, the SAC in its 101st
meeting on 20 May 2010 further resolved the following:
1. The bank may obligate Islamic banking institutions to grant ibra’ to customers of sale-
based financing;
2. In order to eliminate uncertainties pertaining to customers’ rights in receiving ibra’
from Islamic banking institutions, the granting of ibra’ must be included as a clause in
the legal documentation of the financing; and
3. To enhance the transparency between contracting parties, Islamic banking
institutionainstitution shall provide a payment schedule that discloses the amount
owed by the customer and the estimated ibra’ that might be received at a certain date to
its customers.
The purpose of the Guidelines on Ibra’ is to set out the requirements regarding the application
and implementation of ibra’ to provide a transparency and equitable mechanism of granting
ibra’ by Islamic banking institutions. The guidelines specify the requirements to grant and
incorporate the ibra’ clause in the financing documentations, standard formula for the
calculation of ibra’, disclosure and transparency requirements related to ibra’.
Applicability
This guideline is applicable to:
• Islamic banks licensed under the Islamic Banking Act 1983 (IBA);
• Banks participating in the Islamic Banking Scheme licensed under the Banking
and Financial Institutions Act 1989 (BAFIA); and
• Banks participating in the Islamic Banking Scheme licensed under the
Development Financial Institutions Act 2002 (DFIA).
• All the institutions thereafter referred to as Islamic banking institutions (IBIs).
The guidelines apply to all financing based on sale contracts, except for salam and istisna’
contracts. Financing shall include both fixed and floating-rate finance structure based on
the deferred payment basis, unless stated otherwise. Credit card facilities shall be excluded
from these guidelines. Credit card financing is governed under the Credit Card-i Guidelines. In
practice, all credit card customers of sale-based contracts would be automatically given a full
rebate (which is similar to ibra’) for a credit card facility that is terminated prior to maturity and
in the implementation of a tiered pricing structure.

Unit 9 | 23
Legal Provision
The guidelines is issued pursuant to section 53A of the Islamic Banking Act 1983 (IBA) and
section 126 of the Banking and Financial Institutions Act 1989 (BAFIA) and Development
Financial Institutions Act 2002 (DFIA). The guidelines shall be read together with:
• Guidelines on Product Transparency and Disclosure issued by Bank Negara

Malaysia;
• Guidelines on Late Payment Charges for Islamic Banking Institutions be issued by
Bank Negara Malaysia; and
• Other relevant regulations, guidelines or circulars that Bank Negara Malaysia may
issue from time to time.
Effective Date
The effective date of the guidelines was 1 January 2011.
POLICY REQUIREMENTS
Principle Requirements
IBIs are required to grant ibra’ to all customers who settle his or her financing before the end of
the financing tenure. Settlement prior to the end of the financing tenure by the customer shall
include, but is not limited to the following situations:
1. Customers that make an early settlement or early redemption;

2. The settlement of the original financing contract due to a financing restructuring
exercise;
3. The settlement by the customer in the case of default; and
4. A recall of the financing facility due to non-delivery or non-possession of an asset by
the customer.
In the case of floating-rate financing, a customer that settled his financing prior to the end
of financing tenure shall be granted ibra’ if there is a difference between the effective profit
rate and the contracted profit rate (ceiling profit rate) at each instalment. For financing that
remains until maturity, the IBIs are required to grant ibra’ on the difference between the total
selling price and the total instalment payable at the end of financing tenure. The IBI shall grant

Unit 9 | 24
ibra’ to all customers that have entered into a financing contract with the IBIs prior to, or after
the effective date of this guideline.
Commitment to Provide Ibra’
To assume legal certainty of providing ibra’, IBIs are required to incorporate in its offer letter
and any other legal documentation of financing a clause on its commitment to provide ibra’.
The provision on ibra’ shall, at the minimum, specify the following:
1. The situations where ibra’ shall be granted by the IBI;

2. The formula of ibra’ for each situation, where relevant; and
3. Operational and administrative policies relating to ibra’ including the processes, terms
and conditions on the implementation of granting ibra’ to the customer.
The incorporation of the previous provisions on ibra’ shall be applicable to new financing
arrangements made after the effective date of these guidelines. For financing contracts entered
prior to the effective date of these guidelines, IBIs are required to inform the customer on
the applicability of ibra’ via notices. IBIs shall incorporate its commitment to provide ibra’ in
the Statement of Claim in case of litigation to recover payments from a financing facility and
in the redemption statement issued by IBIs. The provision is applicable to new Statement of
Claim filed and new redemption statement issued after the effective date of these guidelines. It
shall, at the minimum specify the formula of ibra’ as well as the operational and administrative
policies relating to ibra’, including the processes, terms and conditions on the implementation
of granting ibra’ to the customer.
Formula on Ibra’
In principle, IBIs may grant ibra’ up to the total amount of the outstanding financing or selling
price (total amount of outstanding debt) to the customer. Nevertheless, upon the settlement
of financing by the customer, the IBIs would normally claim the outstanding cost of purchase
that represents the outstanding principal amount from the customer. As such, the amount of
ibra’ that may be granted by the IBIs to the customer is the amount of unaccrued profit at the
point of settlement of the financing.
Ibra’ = Unaccrued profit

IBIs are allowed to take into account relevant cost, fees and charges incurred by the IBIs in
the course of settling the financing. Consequently, this will reduce the total amount of ibra’
to be granted to the customers. The relevant cost, fees and charges incurred by the IBIs may

Unit 9 | 25
comprise late payment charges and settlement cost of financing. Settlement cost refers to the
actual cost incurred by IBIs for handling the settlement of the financing prior to its maturity.
In determining the settlement cost, the following parameters shall be taken into consideration:
• Actual cost incurred by the IBIs for the early settlement of financing within a
specified time period (for example, within a lock-in period) by the customer;
• Phone calls, SMS reminders, reminder letters, redemption statements, legal
notices and other actual cost borne by the IBIs for the purpose of settlement; and
• Costs that are excluded: overhead expenses (utilities), salary expenses, cost of
outsourcing collection agent, depreciation, impairment of assets, IT expenses and
other costs not directly related to the settlement of financing.
The formula of ibra’ to be applied by the IBIs for early settlement by customers prior to the end
of the financing tenure is as follows:
Ibra’ = Unaccrued profit – (Late payment charges + Settlement cost (if any))
Late payment charges are applicable for customers who are not prompt or have defaulted in
the payments of the financing and shall address both pre-judgement debt and post-judgement
debt. The imposition of late payment charges on overdue instalments (pre-judgement debt)
shall not be made simultaneously with late payment charges on a post-judgement debt. In
addition, any late payment charges on a post-judgement debt as decided by the court should
not be compounded on the outstanding judgement debt. There are also financing facilities
being recalled due to the non-delivery or non-possession of the asset by the customer; it may
comprise cases such as abandoned projects (for housing under construction), mandatory
purchases by government and seizures of assets by custom.
In the case of non-possession of asset by the customer and where there is a portion of the
principal amount yet to be disbursed as in the case of an abandoned project (for housing under
construction), the IBI is not allowed to claim the undisbursed principal amount. IBIs may claim
only up to the disbursed principal amount and the accrued profit and should grant ibra’ on the
unaccrued profit and undisbursed principal amount as per the following formula:
Ibra’ = Unaccrued profit + Undisbursed principal amount – (Late payment charges +

Settlement cost (if any))

Unit 9 | 26
The accrued profit portion that IBIs may claim is subject to the following time limit, whichever
is earlier:
• The date of the last amount disbursed to the contractor;

• The date of the first sign of inability to deliver asset, i.e., when the project is
categorised as “late” or the pronouncement of a court order to stop construction;
and
• The facility is recalled either by the IBI or customer.
IBIs are expected to perform their due diligence as a counterparty of the sale contracts/
transactions involving assets that are under construction or manufacturing. IBIs are expected
to establish a monitoring mechanism to identify signs of non-delivery of assets. For the
settlement of a variable rate financing executed before the end of the financing tenure, the IBI
is not allowed to reclaim the difference on the profit between the effective profit rate and the
contracted profit rate (ceiling profit rate) that has been rebated (ibra’) at each instalment.
Payment Schedule at the Point of Entering a Contract
IBIs are required to provide a customised payment schedule to customers at the point of
entering contract under Schedule II, Paragraph 1.2 (b), Guidelines on Product Transparency and
Disclosure. As part of the disclosure on the application of the ibra’ formula for the customer’s
reference, IBIs are required to disclose the following additional items in the payment schedule:
• Amount to be paid for each instalment. For variable rate financing, IBIs are to
disclose the contracted profit rate (CPR) and the prevailing effective profit rate
(EPR) and the amount to be paid for each instalment under CPR and prevailing
EPR;
• Apportionment of the principal and profit payment in each instalment;
• Outstanding principal and outstanding selling price after each instalment; and
• Unaccrued profit.
IBIs are required to provide the payment schedule from the first instalment until the last
instalment for the fixed rate financing (inclusive of fixed multi tier rate financing). For the
variable rate financing, given that the effective profit rate would be subject to periodic changes,
the IBIs shall provide payment schedule that reflects a 12-month instalments to serve as a guide
to the customer. IBIs are expected to specify the circumstances that may trigger changes in
any amount provided in the payment schedule. Examples of such triggers are changes in the

Unit 9 | 27
effective profit rate (for variable rate financing) and promptness of the instalment payment by
the customer.
General and Administrative Policy
IBIs are required to put in place clear and comprehensive internal policies and procedures to
govern the ibra’ implementation, particularly for foreclosure and litigation cases. The internal
policies should include, but are not limited to the following:
• A list of approved actual costs for the settlement cost;

• Processes and procedures for the determination of ibra’.
The processes should clearly specify the coordination between the departments involved (i.e.,
legal, recovery, litigation departments and Shari’ah unit within the IBIs) for the determination
of ibra’, especially in litigation cases and non-delivery of assets.
Shari’ah Board’s Role
The Shari’ah Committee of an IBI is expected to perform an effective oversight over the ibra’
implementation. In particular, the Shari’ah Committee is expected to undertake that they are
satisfied with:
1. The IBI’s internal policies and procedures for each scenario of ibra’ and its implementation;
and
2. The determination of the settlement cost.
3. The management information and accounting system put in place by the IBI to ensure
that an accurate and reliable amount of ibra’ is given to the customer
4. .The IBI’s payment schedule and redemption statement to ensure that it is given to the
customer in a timely manner
5. The effective profit rate used for each financing facility (for variable rate financing); and
6. Actual cost for the purpose of identification of the settlement cost.
Management role
IBIs shall ensure that the legal documentations are prepared and litigation cases are handled
by qualified and skilled personnel. In this regard, the IBIs must ensure that the personnel
possess the necessary and adequate understanding of the ibra’ policy and its implementation.

Unit 9 | 28
Illustration on fixed-rate
The following provides an illustrations of the application of the ibra’ formula and settlement
amount formula for a fixed -ate bay bithaman ajil (BBA) home financing-i. An IBI enters into a
contract with a customer with the following terms:
Selling price : RM 365,136.00
Contracted profit rate (CPR) : 9.0%
Financing period : 180 months (15 years)
Cost of Purchase/Principal (COP) : RM 200,000.00
Instalment mode : Monthly
Illustration
Full settlement of financing
Customer approached the Islamic Banking Institution for early settlement at the 60th instalment. Extract of the
payment as follows:
Profit COP Outstanding Outstanding Unaccrued
No Payment date Instalment
payment Payment Selling Price COP Profit
0 30/06/2009 - - - 365,135.97 200,000.00 165,135.97
1 31/07/2009 2,028.53 1,500.00 528.53 363,107.44 199,471.47 163,635.97
59 31/05/2014 2,028.53 1,213.29 815.24 245,452.70 160,957.20 84,495.31
60 30/06/2014 2,028.53 1,207.18 821.35 243,424.17 160,135.84 83,288.13
61 31/07/2014 2,028.53 1,201.02 827.51 241,395.64 159,308.33 82,087.11
Unaccrued profit RM 83,288.13
Outstanding selling price RM 243,424.17
Instalment due but unpaid at 60th instalment RM 2,028.53
1. Ibra’ = Unaccrued profit = 83,288.13

2. Settlement amount = Outstanding selling price + Instalments due but unpaid - Ibra’
= 243,424.17 + 2,028.53 - 83,288.13
= 162,164.57

Unit 9 | 29
Illustration
Full settlement of financing
Customer approached the Islamic Banking Institution for early settlement at the 60th instalment. Settlement cost
incurred amounted to RM 300.00 (amount stated is for illustrative purposes only). Extract of the payment as follows:
Payment Profit COP Outstanding Outstanding Unaccrued
No Instalment
date payment Payment Selling Price COP Profit
0 30/06/2009 - - - 365,135.97 200,000.00 165,135.97
1 31/07/2009 2,028.53 1,500.00 528.53 363,107.44 199,471.47 163,635.97
59 31/05/2014 2,028.53 1,213.29 815.24 245,452.70 160,957.20 84,495.31
60 30/06/2014 2,028.53 1,207.18 821.35 243,424.17 160,135.84 83,288.13
61 31/07/2014 2,028.53 1,201.02 827.51 241,395.64 159,308.33 82,087.11
Late payment charges RM 0.00
Settlement cost RM 300.00
1. Ibra’ = Unaccrued profit - (Late payment charges + Settlement Cost)

= 83,288.13 0.00 300.00
= 82,988.13
= 243,424.17 + 2,028.53 - 82,988.13
= 162,464.57

Unit 9 | 30
Illustration
Customer approached the Islamic Banking Institution for early settlement at the 60th instalment. Extract of the
payment as follows:
No Instalment
0 30/06/2009 - - - 365,135.97 200,000.00 165,135.97
1 31/07/2009 2,028.53 1,500.00 528.53 363,107.44 199,471.47 163,635.97
59 31/05/2014 2,028.53 1,213.29 815.24 245,452.70 160,957.20 84,495.31
60 30/06/2014 2,028.53 1,207.18 821.35 243,424.17 160,135.84 83,288.13
61 31/07/2014 2,028.53 1,201.02 827.51 241,395.64 159,308.33 82,087.11
Late payment charges RM 929.74 (amount is for illustrative purposes only)
11 instalments + 60th instalment
Instalment due but unpaid = 12 x RM 2,028.53
= RM 24,342.36
1. Ibra’ = Unaccrued profit - (Late payment charges + Settlement Cost)

= 83,288.13 929.74 300.00
= 82,058.39
= 243,424.17 + 24,342.36 - 82,058.39
= 185,708.14
Since the proceeds from the auction is less than the settlement amount to be payable by customer, the bank may still
claim the difference: Amount claim = 185,708.14 - 185,000.00 = 708.14

Unit 9 | 31
Illustration
Non-delivery of a house due to abandoned project
At the 13th instalment, a house under construction was abandoned. Islamic Banking Institution has only reimbursed
RM 80,000.00 out of RM 200,000.00 of the principal amount. Extract of the payment schedule is as follows:
No Instalment
0 30/06/2009 - - - 365,135.97 200,000.00 165,135.97
1 31/07/2009 1,500.00 1,500.00 - 365,135.97 200,000.00 163,635.97
12 30/06/2010 1,459.00 1,459.00 - 247,318.57 200,000.00 147,318.57
13 31/07/2010 1,459.00 1,459.00 - 345,859.57 200,000.00 145,859.57
14 31/08/2010 1,459.00 1,459.00 - 344,400.57 200,000.00 144,400.57
Outstanding selling price RM345,859.97
Undisbursed
Ibra’ = Unaccrued profit + - (Late payment charges + Settlement Cost)
principal
= 145,859.57 120,000.00 0.00 300.00
= 265,859.57
Outstanding Instalments due

Settlement amount = + - Ibra’
selling price but unpaid
= 345,859.97 + 1,459.00 - 265,859.57
= 81,459.40
Illustration on variable rate
The following illustrates the application of the ibra’ formula and settlement amount formula
for a variable rate BBA home financing-i with the following terms:
Contracted profit rate (CPR): 9.0%
Effective profit rate (EPR) : 3.5% (prevailing rate at point of contract)

Unit 9 | 32
Cost of Purchase (Principal): RM 200,000.00
Illustration
Full settlement
Customer approached the Islamic Banking Institution for early settlement at the 60th instalment. Settlement cost
incurred amounted to RM 300.00 (amount stated is for illustrative purposes only). Extract of the payment as follows:
No 0 1 2 59 60 61
Payment
30/06/2009 31/07/2009 31/08/2009 31/05/2014 30/06/2014 31/07/2014
date
Instalment
- 2,028.53 2,028.53 2,028.53 2,028.53 2,028.53
(CPR)
Instalment
- 1,139.54 1,139.54 1,223.74 1,223.74 1,400.68
(EPR)
Contracted
Profit Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
(CPR)
Effective
Profit Rate - 3.5% 3.5% 3.0% 3.0% 4.0%
(EPR)
Profit
Repayment - 1,500.00 1,496.04 1,213.29 1,207.18 1,201.02
(CPR)
COP
- 528.53 532.50 815.24 821.35 827.51
Repayment
Outstanding
365,135.97 363,107.44 361,078.91 245,452.70 243,424.17 241,395.64
Selling Price
Outstanding
200,000.00 199,471.47 198,938.97 160,957.20 160,135.84 159,308.33
COP
Unaccrued
165,135.97 163,635.97 162,139.93 84,495.31 83,288.13 82,087.11
Profit
At the 60th instalment, an Islamic Banking Institution has allocated cumulative monthly rebate of RM 47,086.42
arising from the difference between instalments based on the contracted profit rate and instalments based on the
effective profit rate.
Selling price balance RM 243,424.17
Instalment due but unpaid at 13th instalment based on EPR RM 1,223.74

Unit 9 | 33
Ibra' at settlement = Unaccrued profit - (Late payment charges + Settlement Cost)
= 83,288.13 0.00 300.00
= 82,988.13
Settlement amount = Outstanding selling price + Instalments due but unpaid - Ibra’
= 243,424.17 + 1,223.74 - 82,988.13
= 161,659.78
Essentially, the bank has granted total ibra’ of:
Total Ibra’ = Cumulative monthly Ibra’ + Ibra’ at settlement
= 47,086.42 + 82,988.13
= 130,074.55
Illustration on payment schedule
1. Fixed rate BBA home financing-i:

Selling Price (RM) : 365,135.97
Contracted Profit Rate (CPR) : 9.0%
Financing Period : 15 years (180 months)
Cost of Purchase (COP) / Principal : RM 200,000.00
(see the schedule)
2. Variable rate BBA home financing-i (12 months):-

Contracted Selling Price (RM) : 165,136
Contracted Profit Rate (CPR) : 9.0%
Financing Period : 15 years (180 months)
Cost of Purchase (COP) / Principal :RM 200,000.00
(see the schedule)

Unit 9 | 34
Unit 9.10 LATE PAYMENT CHARGES (TA’WIDH AND

GHARAMAH)
The Islamic banking operation has materialised through financing transactions undertaken
between the financier and customer. Both parties are expected to observe specific obligations
stipulated under the financing contract. The financier is obliged to provide financing to the
customer as stipulated in the contract and the customer is obliged to settle the total amount of
financing within the stipulated period. If the settlement is not made within the specified period,
the financial activity of the financier will inevitably be affected. The discussion on the methods
to claim compensation for losses in Islamic financial activities in Malaysia covers the aspects of
default in the settlement of debt, judgement debt and early settlement of debt. In the context
of financing, ta’widh refers to the claim for compensation arising from actual loss suffered by
the financier due to the delay in payment of financing/ debt amount by the customer, while
gharamah refers to penalty charges imposed for delayed financing/debt settlement, without
the need to prove the actual loss suffered.
Unit 9.10.1 IMPOSITION OF TA’WIDH AND GHARAMAH IN

ISLAMIC FINANCING FACILITY
In the conventional financial system, the problems associated with default in loan repayments
are controlled by charging interests or riba on customers. Since the imposition of interests
or riba is prohibited by Shari’ah, Islamic financial institutions do not adopt this mechanism
to address cases on customers’ default in settling their financial obligations under Islamic
contracts. The SAC was referred to ascertain a Shari’ah compliant mechanism to deal with this
issue.
Resolution
The SAC, in its 4th meeting dated 14 February 1998, 95th meeting dated 28 January 2010 and
101st meeting dated 20 May 2010, resolved that the late payment charge imposed by an Islamic
financial institution encompassing both concepts of gharamah (fine or penalty) and ta’widh
(compensation) is permissible, subject to the following conditions.
Ta’widh may be charged on late payment of financial obligations that resulted from exchange
contracts (such as sale and lease) and qard;

Unit 9 | 35
1. Ta’widh may only be imposed after the settlement date of the financing became due as
agreed between both contracting parties;
2. Islamic financial institutions may recognise ta’widh as income on the basis that it is
charged as compensation for actual loss suffered by the institution; and
3. Gharamah shall not be recognised as income. Instead, it has to be channeled to certain
charitable bodies.
Basis of the Ruling
The permissibility of imposing ta’widh on a defaulted customer is considered based on the

following evidences and arguments:
1. The following hadith of Rasulullah (p.b.u.h.) that considers intentional delay in debt
payment by a person, who is able to pay, is tyranny: “From Abi Hurairah who said that
Rasulullah (p.b.u.h.) had said: ‘Delay by a rich person (in payment of debt) is a tyranny.’”
2. There is also a fiqh maxim extracted from a hadith relating to this matter: “Neither
harming nor reciprocating harm (in Islam).” Based on this maxim, the delay in payment
by the customer will create harm to the Islamic financial institution as the financier
will suffer actual loss in terms of incurring additional expenditure, such as the cost of
issuing notices and letters, legal fees and other related expenses. These issues should
be avoided in order to ensure that business transactions are conducted according to the
principle of market efficiency (istiqrar ta’amul).
3. Late payment of a debt is analogous to usurpation (ghasb). Both share the same ‘illah
which is tyrannically obstructing the use of the property and exploiting it. In the case of
ghasb, Imam Shafi’i and Hanbali are of the view that the benefit of the seized property is
guaranteed and shall be compensated. In the case of a delayed payment of the financing
amount, the financier is also unable to utilise the fund for other business purposes, of
which should be settled within stipulated period. Therefore, the customer should pay
compensation to the losses suffered by the financier.
4. Fiqh maxim: “Whatever harm should be removed.” Based on the aforesaid fiqh maxim,
the imposition of ta’widh and gharamah on the delayed payment of debt is an appropriate
approach to mitigate the harm suffered by the financier, and at the same time instill
discipline in the customer to make the payments according to the stipulated schedule

Unit 9 | 36
Unit 9.10.2 IMPOSITION OF COMPENSATION ON

A CUSTOMER WHO MAKES AN EARLY
SETTLEMENT
The SAC was referred to on the issue as to whether an Islamic financial institution may impose
compensation on a customer who makes early settlement in an Islamic financing.
Resolution
The SAC, in its 24th meeting dated 24 April 2002, has resolved that an Islamic financial
institution is not allowed to claim compensation from a customer who makes early settlement
in an Islamic financing.
Basis of the Ruling
Compensation charges imposed by an Islamic financial institution on a customer who makes

early settlement in an Islamic financing is not consistent with the objective of Shari’ah since
Islam encourages early settlement of any kind of debt. regardless of whether or not there is
any compensation given Furthermore, there is a hadith of Rasulullah (p.b.u.h.) that considers
intentional delay by a debtor in a debt payment despite his ability to pay as tyranny. Imposition
of compensation charges for early settlement of Islamic financing is also considered as an
inappropriate practice given that Islamic financial institutions may use the fund for investment
or to provide financing to other customers. With respect to a customer who had enjoyed certain
privileges at the initial stage of the financing facility, the Islamic financial institution may deal
with this issue by reducing the amount of ibra’.
Unit 9.10.3 METHOD OF LATE PAYMENT CHARGE ON

JUDGEMENT DEBT
The existing procedural law provides the court with the power to impose an interest charge
on the judgement debt as decided by court. This interest charge is imposed on the judgement
debt at a rate of 8% per annum of the total judgement amount, which is calculated from the
date of the judgement until the judgement debt is settled by the judgement debtor to the
judgement creditor. With respect to Islamic finance cases, such claims existed but the court
normally exercises its discretion by not imposing any interest charge since the mechanism is
based on riba. If the claim is made in court for fixed-rate financing cases such as murabahah or

Unit 9 | 37
bay bithaman ajil, the judgement creditor will submit a claim for the total outstanding balance
of the selling price, subject to the amount of rebate (ibra’), if any.
In this regard, the SAC was referred to ascertain the mechanism to avoid delay in settling the
judgement debt for Islamic finance cases.
Resolution
The SAC, in its 50th meeting dated 26 May 2005, 61st meeting dated 24 August 2006 and 100th
meeting dated 30 April-1 May 2010, has resolved that the judge may impose a late payment
charge on a judgement debt as decided by the court rules in cases of Islamic banking and takaful
based on the methods of gharamah and ta’widh on actual loss, according to the following
mechanisms:
1. The court may impose a late payment charge at the rate stipulated by the procedures of
the court. However, from this rate, the judgement creditor (Islamic financial institution)
is only allowed to receive a compensation rate for actual loss (ta’widh);
2. To determine the compensation rate for actual loss (ta’widh) that may be applied by the
judgement creditor, the SAC agreed to adopt the “weighted average overnight rate” of
Islamic money market as a reference; and
3. The total compensation charge shall not exceed the principal amount of debt. If the
actual loss is less than the applicable rate for judgement in current practice, the balance
shall be channelled by the judgement creditor to charitable organisations as may be
determined by Bank Negara Malaysia. If the judgement creditor is an individual (for
example, the payment of takaful benefits by a takaful company to the participant),
the judgement debtor shall only be obliged to pay ta’widh to the judgement creditor in
addition to the judgement debt. The judgement debtor needs to channel the excess of
the late payment penalty charge (if any) directly to charitable organisations as may be
determined by Bank Negara Malaysia. For judgement debt in cases which involve the
payment of takaful benefits by a takaful company to the participant, the late payment
compensation after the judgement date shall be paid from the shareholders’ fund.
Basis of the Ruling
Al-Zaila’i view that the creditor may bring an action against the debtor in court if the latter
intentionally delays the payment of debt despite his affordability to do so. If such intentional
delay is proven, the judge may sentence an appropriate penalty on the debtor.

Unit 9 | 38
AS RESULT
Islamic banking and finance is an emerging industry in the world. Even after four decades fof
existence, it is still in its infancy. The notable difference between the theory of the Islamic
finance and the practice of the industry exist in many ways. Ibra’, for instance, is one of the
issues that has raised many legal and Shari’ah concerns.
Ibra’ is a charitable work done by the creditor with the purpose of giving a helping hand to
the debtor in case he is in need of it. However, in the current banking practices, debt is not
only needed by a person in dire need, it is also needed for business and other purposes. The
following points summarise this unit:
1. Ibra’ has been practiced and is considered throughout history as a voluntary deed of the
creditor to the debtor by giving him rebate whether fully or partially.
2. Discretionary ibra’ has created some legal and practical issues especially when the
creditor (the bank) does not give rebate since it considers it as its own decision and the
client does not have the right to demand it by force.
3. Due to this problem and the potential reputational risk for Islamic financial institutions,
some regulatory bodies have attempted to make ibra’ mandatory on Islamic financial
institutions.
4. Ibra’ is given by Islamic financial institutions in the case of early settlement and for
monthly instalments, if the current market rate is lower than the ceiling (contracting)
price agreed at the time of the contract agreement.
5. The issue of uncertainty (gharar) has been resolved by stating the clause of ibra’ in the
contracting agreement.
6. In practical terms, the current practice of computing charges and profit for Islamic
financial institutions has created a situation where the price is not fixed from the
practical perspective.

Unit 9 | 39
SUMMARY
• Ibra’ is one of the issues that has been raised as a result of the client making an early
settlement The issue is how to address this request by the client within the Shari’ah
and legal framework.
• The issue arises because ibra’ is regarded as a charitable action by the creditor that is
done with purpose of giving a helping hand to the debtor in case he is in need of it.
• Ibra’ was developed to suit the Islamic banking environment, where many adjustments
have been made which put the issue under debate and argumentation.

Unit 9 | 40
CASE STUDY
You have facts as follows:

Contracted profit rate (CPR) : 9.0%
Cost of Purchase/Principal (COP): RM 200,000.00
Illustrate the rebate in the above case.

Unit 9 | 41
QUESTIONS AND PROBLEMS
Question 1.
What is the meaning of ibra’?
Question 2.
Discuss the view of scholars on ibra’.
Question 3.
What ibra’ aspect has been debated in Islamic law?
Question 4.
Why has ibra’ become an issue in Islamic finance?
Question 5.
Discuss the different practices of ibra’ in Islamic finance.
Question 6.
What is the practice of ibra’ in Malaysia? Why has such a position been taken?

Unit 9 | 42
• al-Zuhayli, Mahmoud A. El-Gamal (tr), Financial

Transactions in Islamic Jurisprudence, Vol. 1, Dar al-Fikr al-
Mu’asir, Beirut, 2003.
• Muhammad Taqi Usmani, An Introduction to Islamic

Finance, Idaratul Ma’arif, Pakistan, 1999.
• Shari’ah Standards. Accounting and Auditing Organization

for Islamic Financial Institutions. 1425-6H/2004-5, Sharia
Standard No. 10, pp.159 – 174.
• Nabil A.Saleh, Unlawful Gain and Legitimate Profit in

Islamic Law, Riba, Gharar and Islamic Banking, Cambridge
University Press, 1986, pp.71 – 76.
• Muhammad Al-Bashir Muhammad Al-Amine, “Arbun, Risk

Management and Options”, Journal of Islamic Banking and
Finance, The International Association of Islamic Banks,
Karachi, Vol. 17, No. 4, pp. 7–32, at pp.19-20.
• Nazih Hammad, Aqd al-Salam fi al-Shariah al-Islamiyyah,

Dar al-Qalam, Damshiq, 1993.
• Razali Nawawi, Islamic Law on Commercial Transactions,

CT Publications, Malaysia, 1999, pp. 99-96.
• Abdullah Alwi Hassan, Sales and Contracts in Early Islamic

Commercial Law, Kitab Bhavan, New Delhi, 1997, pp. 66-73.
• Dr. Nik Norzrul Thani, Mohamed Ridza Mohamed

Abdullah, Megat Hizaini Hassan, Law and Practice of
Islamic Banking and Finance, Thomson Sweet & Maxwell
Asia, 2003, pp. 39–42.
• Mohammad Hashim Kamali, Islamic Commercial Law: An

Analysis of Futures and Options, Ilmiah Publisher, Kuala
Lumpur, 2002.
• Accounting, Auditing and Governance Standards for Islamic

Financial Institution, Financial Accounting Standard No.
10, Istisna’ and Parallel Istisna’, AAIOIFI, 1425-6H/ 2004-5.

Unit 9 | 43
• Shari’ah Advisory Council, Bank Negara Malaysia, Second

edition.
• al-Nawawi, Yahya bin al-Sharaf, al-Majmu SharÍ al-

Muhadab, Maktabah al-Irshad, Makkah al-Mukarramah.
• Ibn Qudamah, al-Maqdis, al-Mugni, Dar alam al-Kutub, al-

Riyad.
• Ibn Rushd, Mohammed bin AÍmed al-Qurtubi, Bidayat al-

Mujtahid wa Nihayat al-Muqtasid, Dar al-Marifah.
• Othmani, Taqi Mohammed, An Introduciton to Islamic

Finance.
• Othmani, Taqi Mohammed, Ahkam al-Baya bi al-Taqsit
• Marjan Mohammed, The Implementation of Ibra’ in Islamic

Banking and Finance: An analysis in terms of banking
operations and Maqasid al-Shari’ah, by ISRA International
Journal of Islamic Finance.
• Al-Zuhaili, Wahah, al-Ibra’ min al-Dayn, Dar al-Maktaba,

Damascus, Syria, 1998AD/1418AH.


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Dha’ Wa Ta’ajjal and Ibra’

Dha’ Wa Ta’ajjal and Ibra’

Topics in This Unit

9.2- Dha’ wa ta’ajjal

9.4- Concept of ibra’

9.5- Early discussion on ibra’

9.6- Current practice of ibra’ in Islamic banks

9.8- Ibra’ resolution of SAC, BNM

9.9- Ibra’ guidelines in Malaysia

9.10- Late payment charges (ta’widh and gharamah)

Unit At the end of this unit, you should be able to:

SH5023 Shariah Issues in Islamic Finance

Discount and receive soon

IBRA’ & LATE PAYMENT CHARGES

Ibra’ is a form of tanazul provided by Islamic financial

SH5023 Shariah Issues in Islamic Finance

Unit 9.1 INTRODUCTION

Unit 9.2 DHA’ WA TA’AJJAL

Unit 9.2.1 DHA’ WA TA’AJJAL PRINCIPLE

SH5023 Shariah Issues in Islamic Finance

Unit 9.2.2 VIEWS OF THE SCHOLARS

“Riba is not present in this issue whether in reality, language or urf.

SH5023 Shariah Issues in Islamic Finance

Unit 9.3 IBRA’

SH5023 Shariah Issues in Islamic Finance

Unit 9.4 CONCEPT OF IBRA’

SH5023 Shariah Issues in Islamic Finance

Unit 9.5 EARLY DISCUSSION ON IBRA’

SH5023 Shariah Issues in Islamic Finance

Unit 9.5.1 THE DIFFERENCES OF OPINION IN THE ISSUE

SH5023 Shariah Issues in Islamic Finance

Unit 9.6 CURRENT PRACTICE OF IBRA’ IN ISLAMIC BANKS

Unit 9.6.1 THE NEED OF IBRA’

Unit 9.6.2 IBRA’ CLAUSE

Unit 9.6.3 DIFFERENT RESOLUTIONS OF GOVERNING BODIES

SH5023 Shariah Issues in Islamic Finance

Unit 9.6.4 INTERNATIONAL ISLAMIC FIQH ACADEMY

Unit 9.6.5 THE RESOLUTION OF THE SHARI’AH ADVISORY

SH5023 Shariah Issues in Islamic Finance

Unit 9.6.6 DISCUSSION ON THE RESOLUTION

Unit 9.6.7 THE WAY IBRA’ IS GIVEN IN ISLAMIC BANKS

SH5023 Shariah Issues in Islamic Finance

Unit 9.6.8 ISLAMIC BANKS WILL BE MORE EXPENSIVE IF

Unit 9.6.9 DISCRETIONARY IBRA’ AND LEGAL DISPUTE

SH5023 Shariah Issues in Islamic Finance

Unit 9.7 REVIEW AND ANALYSIS OF THE OPINIONS OF

Unit 9.7.1 THE MASLAHAH AL-SHARI’AH

SH5023 Shariah Issues in Islamic Finance

Unit 9.7.2 PRICE FIXING: THE ISSUE OF GHARAR

SH5023 Shariah Issues in Islamic Finance

Unit 9.7.3 THE CORE OF THE ISSUE

SH5023 Shariah Issues in Islamic Finance

SH5023 Shariah Issues in Islamic Finance

Unit 9.8 SAC ’RESOLUTION ON IBRA’

There is a, SAC resolution on ibra’ and it reads as follows:

Unit 9.8.1 IBRA’ IN ISLAMIC FINANCING

Basis of the Ruling

SH5023 Shariah Issues in Islamic Finance

SH5023 Shariah Issues in Islamic Finance

Unit 9.8.2 TWO FORMS OF IBRA’ IN A FINANCING

Basis of the Ruling

SH5023 Shariah Issues in Islamic Finance