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Opalesque Islamic Finance Intelligence

Lex Islamicus: Ibra': Should it be Discretionary? By Marjan Muhammad and Hakimah Yaacob

Friday, July 30, 2010

Marjan Muhammad is currently a Researcher at the International Shari'ah Research Academy (ISRA) for Islamic Finance. Prior to joining ISRA she was a tutor at the Faculty of Law and Syari'ah, Islamic Science University of Malaysia (USIM). She holds a Bachelor of Islamic Revealed Knowledge and Heritage(Hons), Master and Ph.D of Islamic Revealed Knowledge and Heritage (Fiqh and Usul al-Fiqh) from International Islamic University Malaysia (IIUM). Her interests and areas of specialization are in intellectual reasoning (ijtihad), fiqh muamalat, and Islamic banking and finance.


Hakimah Yaacob is an Associate Researcher at the Islamic Banking Unit, International Shari'ah Research Academy (ISRA) for Islamic Finance.She holds a Bachelor of Laws (Hons), Bachelor of Syariah (Hons), a Master in Comparative Laws, from International Islamic University Malaysia and a diploma from Tokiwa International Institute, Japan. Previous positions held include Head of Law Reform & International Treaties, SUHAKAM, legal practitioner, as well as being the Drafter of International Standard Organisation 26000 on social responsibility. She has published many articles on alternative dispute resolution (ADR) in Islamic finance including arbitration, mediation and hybrid ADR


The concept of ibra' in Islamic laws has normally been discussed and applied in issues regarding debts (duyun) and rights (huquq). Literally, the word ibra' is derived from the Arabic root word of bara'a which means removal and acquittal from something. According to Ibn Al-A'rabi, bara'a connotes several meanings, i.e., to free, to purify, to avoid and to remind. Technically, ibra' is defined as either "considering one's debt as a gift to him", or "absolving the ownership that is in one's liability". In the context of Islamic banking and finance, ibra' generally refers to giving ownership or absolving one's right of the debts that are in the other's liability in partial or total.

In certain legal documentations in Islamic finance, it is a practice to include ibra' clause in the sale contracts involving the element of debt such as Bay' Bithaman Ajil (BBA), Murabahah, Bay' al-Inah and Bay' al-Tawarruq. In Malaysia for instance, almost 80% of Islamic banks apply ibra' clause whether it is expressly or impliedly stipulated in the contract. The bank at its absolute discretion, as a party who has rights on the debt, will grant ibra' for a prepayment (early settlement) or on a termination of the contract due to breach and default. Nevertheless, the application of ibra' has recently caused disputes in courts. Almost 90% of registered mu'amalah cases at the High Court of Kuala Lumpur from 2003-2009 are related to both retail and corporate products of BBA, in which the disputes revolve around the quantum of bank's claim when BBA contracts are terminated due to the defaulted customers.

Hence, this article will shed light on the status of ibra', whether to remain as a discretionary or to shift to an obligatory. Based on the analysis made on the above mentioned cases, the main argument is relating to the ibra' calculation1 as its formula is not transparently disclosed by the banks in the contract. From 2003-2004, the words ibra' or unearned profits is not mentioned in any of the files. It was only in 2005, the court started to order 'deduction of unearned profits' from the judgment sum. There was 1264 out of 2245 court orders in 2005-2009 contain the word 'deduction of unearned profits'. The court order reads: "judgment sum granted with unearned profits to be deducted upon full settlement on the settlement day". Starting from 2008, the court started to use the words ibra' and 'deduction of unearned profits' interchangeably.

Polemics on this issue arise when the bank considers granting ibra' as a discretionary (tabarru') in nature, whereas the customer assumes that ibra' will automatically be given when any prepayment is made or the contract is terminated. In the case where the bank refuses to grant ibra' in a default payment, therefore the customer needs to pay the full amount of total selling price less the paid amount.

In reaction to this, the Shariah Advisory Committee of Bank Negara Malaysia in several meetings resolved that the ibra' clause should be incorporated in the contract agreement. The justification for the incorporation is to uphold the fairness and justice between both contracting parties. As the clause is discretionary in nature, therefore, it is still not binding the bank to grant ibra' to the customers in both prepayment and contract termination cases. Exhibit 1 depicts an example of how ibra' is calculated based on the formula employed by Islamic banks. This formula is however not spelt out in the contract.

Exhibit 1: An Example of Ibra' Formula and Calculation


What is a Discretionary Clause?

It refers to the clause that gives discretion to the authority (banks) to determine the eligibility for benefits, to calculate the payment or to interpret the terms or provisions of the policy or contract. In the United States of America, the Texas Department of Insurance has filed a proposed rule that would prohibit the use of discretionary clauses in life, accident, and health insurance policy forms. The proposed rule was filed as a result of an October 2009 request from the Office of Public Insurance Counsel2. According to them, discretionary clauses are contractual provisions that reserve or purport to reserve for insurers the discretion to interpret the terms of an insurance contract. The main reason of introducing the new rule was to protect insurance consumers from the possibility of incorrect and unfair coverage determinations by insurers without a subsequent opportunity for a full and independent review under a non-deferential standard.

Therefore, ibra' clause can make those payments contingent on the unfettered discretion of the bankers. It will thereby nullify the promise to pay and render the contract to potentially illusory due to its "discretionary" in nature. This may also lead to riba and gharar which are the main prohibitions in Islamic finance.

Regardless of whether ibra' is regarded as hibah and unilateral in nature, based on maslahah and to avoid exploitation from the banks upon the calculation of ibra', the regulator should make it compulsory rather than discretionary. According to a hadith, the Prophet used to prohibit his companions from eating and keeping the meat of sacrificial animals (luhum al-adahi) at home for more than three days, and oblige them to give it as a charity to the group of nomad people who came to Medina at that time. When the reason de'tre (i.e. the presence of the nomad people) disappeared, the Prophet had allowed the companions to eat and keep the meat as they wished.

Although the act of giving charity is originally regarded as optional and praiseworthy, the Prophet had made it compulsory due to the circumstances appeared at that time. This is an illustration of a situation which is praiseworthy in nature can change to obligatory due to the need of the society. In conclusion, should we maintain the practice of giving ibra' as discretionary or should the discretionary clause be banned and make it compulsory? To maintain it as discretionary, and to apply it as our ¢â‚¬Ëœurf tijari, it will bring hazard and uncertainty to the practice since most of the cases disputed in the court are related to the ibra' calculation. On the other hand, to make it compulsory, the regulator must come out with its own calculation and applies to all banks, or alternatively the banks can come out with their own matrix which is approved by the regulator.

References:

1 Analysis of Muamalat cases at the High Court of Malaysia from February to April 2010.

2 http://www.insurancejournal.com/news/southcentral/2010/05/26/110211.htm#ixzz0pZugQzPU


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