CIC2002

FUNDAMENTALS OF SHARIAH
FOR ISLAMIC FINANCE

Sem. 1, 2020-21
BACHELOR OF FINANCE

INDIVIDUAL ASSIGNMENT

The differences between wa`ad and muwa`adah and their applications

Prepared by:

Group 2
Kenny Lim Yong Hui
Monday,
17206776
11am - 12 pm

Assessment Rubric
ORGANISATION IDEAS (CONTENT)
Introduction Problem Statement
Conclusion Evidence of Support
Logical Flow Provision of Examples
Layout Presentation of Argument
Sentencing
REFERENCES Total
Contents
Introduction ......................................................................................................................................... 1
Content and discussion ................................................................................................................... 2
A) Definition of Wa’ad and Muwa’adah.............................................................................. 2
B) Difference between Wa’ad and Muwa’adah ................................................................ 3
C) Application of Wa’ad and Muwa’adah in Islamic Finance Industry ..... 5
Conclusion ........................................................................................................................................... 7
Reference ............................................................................................................................................. 8
Introduction

Generally, a promise can be defined as a declaration or assurance that one will do something
or that a particular thing will happen in the future. Promise plays a vital role in our society
especially in the Islamic societies as there is a customary practice or moral obligation that
bound a person to his promise he made. Promise here is including the behavior or words
making others believe that he will fulfil his promise. From the verse in al-Quran, al-Maidah:1
which sound “O you who believe, fulfil your promise”, we can know that Islam gives an order
to Muslim to fulfil the promise. However, from the view of the majority of the classical jurist,
the promise was not enforceable and mandatory to meet its responsibility even though it is
morally and religiously binding according to the Shariah.

In the Arabic words, wa’ad is the notification of good and bad news. However, wa’d
normally will be used to deliver good news and the wa’id is to remind the negative news. On
the other hand, Muwa’adah means exchange of news between two parties. Based on the
Islamic laws, Al- Wa’d referred to the promise which expresses the voluntary commitment
given by someone to a counterparty to undertake certain actual or verbal actions in the coming
days. Muwa’adah is a word that derived from wa’d and it means bilateral promise from two
parties. Both of them are categorized as voluntary contracts as they involve promise which is
a voluntary action. However, there are some characteristics that distunguish between Wa’d
and muwa’adah from the aspect of the arrangement, legal principle and flexibility.

In the Islamic finance industry, we can observe the application of promise in the form of
wa’ad or muwa’adah in the Islamic commercial transactions, such as sale and purchase
contract, murabahah, musharakah and ijarah. Because of the unilateral nature of the promise,
the Wa’ad and Muwa’adah concept provide a space for the development of new Shariah-
compliant financial products. Under Shariah, the detail of the promise is not as restricted as
any other contract. Therefore, the Wa’ad becomes an alternative for the modern Islamic
finance industry to structure a lot of substitute products of conventional finance products.

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Content and discussion

A) Definition of Wa’ad and Muwa’adah

i) Wa’ad

According to the Shariah-based regulatory policy document of Bank Negara Malaysia (2016),
Wa’ad is a unilateral promise or undertaking which refers to an expression of commitment
given by one party to another to perform certain actions in the future. So, we can know that
Wa’ad is not a contract because of its unilateral nature. Therefore, it is permissible to execute
a future sale that is not allowed in other Islamic contracts but under Wa’ad concept.

For instance, Mr. A promises to sell his car to Mr. B in future. The example above is a
non-binding wa’ad. However, a wa’ad becomes binding wa’ad when it is attached to certain
causes and conditions such as time frame, consideration, action or event which shall be
enforceable and binding on the promisor. The promisor is bound by the wa’ad since the date
he makes the wa’ad and he is required to execute the subject matter of wa’ad. Using the same
example by adding the conditions, Mr. A promises to sell his car to Mr. B before the end of the
year for RM100,000. Thus, Mr. A is bound by the time frame and price in fulfilling his promise
(Wa’ad).

A promisor (wa’id) and a promisee (maw’ud lahu) are the parties involved in the wa’ad.
In addition, both parties must have legal capacity in the form of a natural person or legal entity
to execute the subject matter of Wa’ad. The subject matter of a wa’ad must be available and
deliverable at a specific time in future and also must not be used to conduct any Shariah non-
compliant activities. In addition, both parties have to agree that the promisor can extend the
time to fulfil the wa’ad according to any agreed conditions. Furthermore, there is no exchange
of a counter value permitted such as giving a fee to the promisor in a wa’ad if not it will be
deemed to be committed to riba.

For the revocation of wa’ad, the promisor is unable to unilaterally revoke his wa’ad if
he is bound to a binding wa’ad. In the contrast, the promisor can revoke his non-binding wa’ad
any time in the term of not incurring any loss from the revocation of wa’ad. In a binding wa’ad,
the promisor shall fulfil his wa’ad subject to the condition in the wa’ad agreement which
conforms to the Shariah law, otherwise, the promisor will be deemed as sinful (makruh). If the
promisor fails to fulfil his binding wa’ad, the promisee has a right to request compensation for
any actual loss suffered due to the promisor’s misbehaviour. The amount of compensation
can be determined by the authoritative body or a principle accepted by the customary practice
(‘urf)

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 ii) Muwa’adah

Muwa’adah is the word derived from wa’d which means mutual promise. Based on the
explanation of Bank Negara Malaysia, muwa’adah is a bilateral promise or undertaking which
refers to a promise which is issued by a counterparty against a promise issued by another in
the same transaction. Differ from wa’dan, two unilateral promises given by two different parties
which the subject matters are independent from each other, muwa’adah is a bilateral promise
to each other based on the same subject matter and conditions.

We use the same example to explain the concept of Muwa’adah. In a Muwa’adah, Mr.
A promises to sell his car to Mr. B before the end of the year if Mr B. pay him RM 100,00 and
Mr.B makes a promise at the same time that he will buy the car from Mr. A with the same
conditions. Thus, Mr. A (seller) and Mr. B (buyer) are the promisor and also the promisee to
each other in Muwa’adah. The muwa’adah is binding and enforceable on the promisor. They
are bound to the same subject matter which is the car and and the identical conditions which
is the time (end of the year) and consideration (RM100,000). If they fail to fulfil their promise,
they have to compensate for the actual loss incurred to the counterparty. In short, all
requirements of a wa’ad are also applicable to the muwa’adah such as the Shariah compliance
issue of the subject matter.

B) Difference between Wa’ad and Muwa’adah

Although Wa’ad and Muwa’adah are voluntary contracts and made up of promise(s), yet there
are some differences from arrangement, legal statues, rulings and other perspectives among
these two concepts. The most obvious difference between these two principles is the number
of promises in Wa’ad and Muwa’adah. Wa’ad is a unilateral promise which only one party,
promisor have to make good their promise while muwa’adah means bilateral undertaking or
agreement and there is a mutual action where two parties promise to each other.

In wa’ad, there is only a promisor (wa’id) who undertakes to perform a certain actual
or verbal to transfer the benefit of a subject matter to the counterparty, the promisee (maw’ud
lahu). On the other hand, in muwa’adah, both parties are the promisor which express a
commitment to fulfil a promise to each other on the same subject matter in the same
transaction. Therefore, wa’ad binds the maker only but the promisee is free to accept or reject
the offer from the promisor. For example, Ali promised to sell the house from his friend, Abu
amounting RM 600,000 and he is bound to its wa’ad. However, this wa’ad is the unilateral
promise and it is not necessary for Abu to accept the offer. In the contrast, if Abu also makes
a promise that he will purchase the house from Ali with the same amount, then there is a

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mutual promise between the two people, a muwa’adah is created. Hence, both parties are
required to bind to their promise.

For the revocation, the promisor shall not unilaterally revoke his wa’ad if he made a
binding wa’ad but he can revoke his wa’ad anytime if his wa’ad is not attached to any condition.
For the muwa’adah, both parties shall not revoke since it is a binding mutual promise.

There is also some deviation in the legal principles and rulings (hukum) of Wa’ad from
the view of Shariah. As we know, the promise is differ from the contract since it is not legally
binding upon the two parties and depends on the acceptance of the customary practice and
the opinion of Islamic jurists whether the promises made in Wa’ad and Mua’wadah is legally
binding or religiously binding or even it is just merely a morality issue. Hence, the Islamic jurists
from different schools have different views regarding the legal obligation of the parties who
make the promise.

There are four main schools having different opinions and judgement on Wa’ad
promises. The first school includes the Imam Abu Hanifah, Imam Al-Shafai' and some Maliki
scholars explained that the promise is honourable and recommended but not an obligation.
As the general principle, promise must be fulfilled for religious reasons or else the promisor
will be deemed to be sinful based on divine law. The second school consists of majority of
fiqhs of Maliki scholars such as Samurah b. Jundub and Ibn al-‘Arabi suggest that the promisor
is under a legal obligation to fulfil the promise and enforceable by the court. Some Maliki
scholars state that the fulfillment of promise is only enforceable and obligatory if it results in a
particular consequence such as incurring a loss or expense suffered by the promisee while
trying to meet the promise. The last and the generally accepted view is from the Islamic Fiqh
Academy in 1409H. Their ruling on Wa’ad suggested that fulfilling a promise is only judicially
binding when the promise is unilateral, the promisee will incur a loss or expense if the failure
of fulfilling the promise and the actual sale is completed.

For the Muwa’adah, it is using the similar rulings of wa’ad but it is less in favour of most
Islamic jurists since it involves two unilateral promises which can easily be linked to a forward
contract which is prohibited in Islamic law due to the uncertainty (major gharar). The
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Shariah
Advisory Council of Bank Negara Malaysia have issued a resolution that muwa’adah is only
permissible in future contract when it can be validly executed and does not ‘mulzimah’
(bilateral binding) in nature because it is similar to a sale contract (aqad). However, the Hanafi
jurists believe that forward contracts can be based on the Muwaada principle, as long as there
are no other prohibitions.

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C) Application of Wa’ad and Muwa’adah in Islamic Finance Industry

i) Wad

According to the Shariah law, it is very strict in structuring an Islamic commercial contract
(aqad) or Islamic financial product in order to ensure these transactions are archiving the
objective of Shariah. In Islamic contracts, Shariah requires some criteria in the subject matter
of the contract such as the knowledge of price, the possession, deliverability and availability
of the subject matter as the necessary prerequisites to legalize the contract. Thus, a lot of
conventional products such as futures contracts and interest rate swap are prohibited in
Shariah due to the uncertainty (gharar). However, the ‘forward-based’ structure contract is a
need for the customers in hedging the risk arising from their business activities.

Hence, the unilateral nature of wa’ad attracts the eyes of Islamic jurists and Islamic market
maker. This is because the wa’ad need not to strictly adhere to the formal prerequisites of an
Islamic contract under Shariah. Because of wa’ad’s flexibility, Wa’ad has gained a lot of
exposure over the last decade and becomes a key alternative method to develop several
Shariah-compliant financial products in order to substitute the conventional financial products.

The wa’ad is now generally used to structure a forward currency exchange. The flow
of forward currency exchange based on the wa’ad is shown as below:

1. The customer informs the bank of his intention to obtain USD 50k in 3 months.
2. The customer signs a wa’ad document and makes a unilateral promise to buy USD
50k from the bank at an agreed future date (3 months). Then, the exchange rate is
fixed by the bank and customer. So, the wa’ad of the customer is an agreement to buy
USD 50k from the bank using RM 200k ( RM 4 : USD 1) in 3 months time. The customer
is binding to these conditions in his wa’ad mulzim (unilateral binding promise)
3. On the exchange date, the exchange must be conducted at the spot. However, the
Shariah Advisory Council of Bank Negara Malaysia makes a ruling that the T+2
settlement practice of a spot foreign exchange transaction is permissible which is
accepted as customary of Urf.

In the case of default or non-fulfilment of promise, the Islamic financial institution (promisee)
has the right to claim the compensation from the promisor (customer) amount to the actual
loss suffered by the Islamic financial institution. This is because the promisee might have
procured the currency for the currency exchange transaction and any cancellation may incur
costs.

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ii) Muwa’adah

The muwa’adah is the two unilateral promises based on the same subject performed by the
two parties. In the modern Islamic finance industry, Muwa’adah is widely implemented to
conclude a contract in the future such as murabahah purchase order, musyarakah
mutanaqisah and al-Ijarah Thumma al-Bay‘ (AITAB). For example, I will explain the role of
muwa’adah in a bai' bi thaman ajil (BBA) home financing.

1. The customer will approach the house developer to purhcase the asset to be acquired.
They will sign a sale and purchase agreement after the customer pays the down
payment and the ownership of the property is transferred to the customer.
2. The customer will seek for the BBA home financing from the bank. After examining the
credit status of the customer, the bank and the customer will enter into a muwa’adah
where the customer promises that she will buy the asset at a marked-up price by
installment in future and the bank agrees to sell the asset based on the same condition.
A bilateral promise (muwa’adah) which includes the marked-up selling price, the
amount of monthly installment and the period of payment will be signed by both parties.
They are bound to the muwa’dah.
3. A cash sale formed when the bank purchases the property from the customer at the
spot by paying the remaining price of the property to the developer in cash.
4. After that, the bank fulfils its promise to sell the asset to the customer at a marked-up
price and the ownership is transferred back to the customer.
5. The customer also executes his promise by purchasing the assets and repaying the
deferred amount in the form of monthly installment.

Many Islamic jurists argued that the muwa’adah will turn into a contract if both of the promisors
agree that the binding muwa’adah is in intention to conclude a contract in the future. Therefore,
all the Shariah rulings regarding a contract will be effective on muwa’adah and the future
contract based on However, the Islamic Fiqh Academy revised its resolution of prohibition of
muwa’adah nto allow the execution of binding muwa’adah in the cases of necessity. The
Second Conference of Islamic Banking in Kuwait affirmed the legality of bilateral promise
(muwa’dah) in murabahah sale to purchase orderer which is similar to bai' bi thaman ajil if the
bank has the ownership and the possession of the goods (as shown in Step 3), the bank sells
the goods to the purchase orderer with an agreed marked-up price (as shown in Step 4). In
addition, the bank must bear the ownership risk until the goods are delivered and accept the
return of goods from the customer if there is any defective goods.

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Conclusion

We can conclude that wa’ad is the unilateral promise given by a promisor to commit some
actions that can benefits the promisee in the future while the muwa’adah is the bilateral
promise made by two involving parties to each other to perform something that will share a
mutual interest among them in future. So, we can find that there are some significant
differences between wa’ad and muwa’adah although both of them are categorized as
voluntary actions. However, many wa’ad and muwa’adah based Islamic financial products
have been innovated and introduced to the Islamic financial market because of their nature
that can provide flexibility to structure a lot of substitute products of a conventional bank that
are prohibited under the Shariah law such as the future contracts, interest swap and currency
swap. We could not deny that they will bring ease to market participants to escape from strictly
adhering to the restriction of the contract under the Shariah law. However, the regulator and
authority body should put more effort on ensuring the Shariah-compliance of these new
products in the market.

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Reference

Abdullah, M. F., & Ab Rahman, A. (2015). The Status of Muwa ‘adah and Wa ‘dan in the
Syari ‘ah. Jurnal Fiqh, 12, 113-138.

Bank Negara Malaysia. (2016). Concept Paper: Wa’d. Retrieved from

Bank Negara Malysia. (2010). Shariah Resolution in Islamic Finance (2nd ed.). Retrieved
from
https://www.bnm.gov.my/microsite/fs/sac/shariah_resolutions_2nd_edition_EN.pdf

Bello, S. I. (2012). The Scope and Application of wa'ad, muwa'adah and wa'dan in Islamic
Finance. Muwa'Adah and Wa'Dan in Islamic Finance (November 20, 2012).

Razali, S. S. (2008, July). The concept of Wa’ad in Islamic financial contract. In Islamic
Banking, Accounting and Finance Conference (iBAF 2008), Faculty of Economics and
Muamalat, Universiti Sains Islam Malaysia (pp. 28-29).

Zaini, S. M. (2011). The Application of Wa'd in Islamic Banking Contract. Management &
Accounting Review (MAR), 10(2), 27-45.