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
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
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
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‚¬Ëśurf 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.
1 Analysis of Muamalat cases at the High Court of Malaysia from February to
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