Accessory Contracts and Hibah

Islamic banks use many other accessory contracts including Wakalah, Jua’lah, Tawarruq, Kafalah, Rahn, Hawalah, Istijrar, Amanah, Wadiah, and Hibah.
Ju’alah is a reward or payment for an activity. Based on references from the Quran, (Surah Yousuf (12): Verse 72) Shari’ah scholars have allowed Ju’alah contracts. It is applicable in cases where a successful outcome is uncertain or cannot be exactly specified. Ju’alah can be offered for finding lost property, mineral or hydrocarbon exploration, debt collection, information gathering, or conveying a proposal whose outcome is unknown.
Ju’alah can be offered to a certain individual or to anyone who can complete the task in a specified or unspecified time. The reward is only paid for achieving success. If the Ju’alah is for a known person, he or she can further delegate this task to someone with the consent of the one who is offering the reward. Also, the service required and the reward should be clearly identified, permissible, and valuable. A full or partial reward could be paid in advance but it will be a loan until the service is completed. The parties are also allowed to terminate the contract unilaterally until commencement of the work. After which, fair remuneration should be paid for the work already completed or as may be specified in the contract. For fixed term contracts, the parties could agree to extend the time if the work is in an advanced stage. The worker is considered a trustee of the any property of the owner and is not liable for damages unless except if it is due to his own fault.
Many of the bank charges and commission based services provided by Islamic banks belong to ju’alah category. These include fees for successful recovery of debts or account receivables, charges for preparing paper work and raising capital for a customer, brokerage or underwriting fees for public offerings, and asset management fees. In the last case it could be in the form of expense ratio for managing a mutual fund charged to all fund owners or charges to a high net worth individual for placing and managing his investment in a basket of securities. The charges are usually a percentage based on the size of the portfolio.
The Islamic bank might take on a ju’alah contract but then further enter into another “parallel ju’alah” with another entity. In that case there should be two independent contracts in order to be Shari’ah compliant. For example, the bank may provide account receivables services for its clients for a fee yet pass that on to a collection agency to carry out the work. This is possible as long as the first ju’alah contract does not specifically forbid the bank from doing so.
Kafalah is a surety or guarantee provided by a third party to a creditor that a debt will be paid by the guarantor in case of default by the debtor. The guarantor promises to honor the financial obligation of a debtor should the debtor fail to fulfill his own obligation. If the debtor defaults and the guarantor does end up paying, then the debtor has to pay back the amount to the guarantor eventually.
In contrast, Rahn or pledge is a physical asset or security deposit held by a seller or creditor to assure payment for the items sold or the debt will be paid back. Rahn must be an item that someone can take possession of. The pledged goods can be in the possession of the seller/creditor or held in a trust. The pledge amount should be equivalent to the debt and in case the pledge has to be used, any excess should be returned back. The pledge has to be returned back once the debt or sale transaction has been completed and fulfilled. The pledged good cannot be used to generate profit for the creditor; however, if they are in the possession of debtor, he can continue to put them for profitable use. The pledger keeps ownership of the pledged assets unless until need to be sold. The assets may be kept either with the pledger or pledgee and whoever has the possession is liable for any damage.
Kafalah and Rahn are somewhat similar in case of a debt since they both provide security assurance to the lender; however, there are certain differences. In Kafala, a third party provides the security for the liability, while in Rahn, physical assets or financial securities are pledged to the creditor so he can sell those assets to cover his losses in case of non-compliance by the debtor. The items pledged must be of value and be acceptable to the creditor. Similar to all business contracts, both Kafalah and Rahn require agreement between contracting parties to make these valid in Shari’ah.
Kafalah is used by Islamic banks to guarantee repayment of loans where a third party may guarantee the payment in case of default by the debtor. It would be necessary in case the banks deems the debtor to be of higher risk or not credit-worthy. The bank may also play the role of a guarantor for a customer by issuing letters of credit for shipment of goods. The banks also use kafalah to secure the amounts due to them by asking for letters of guarantee, postdated checks, promissory notes, lien hold on cash deposits, third party guarantees, or earnest money deposits for fulfillment of a contract. No profit is allowed to be made on Kafalah, however, the bank can charge a fee for providing the service.
Rahn takes the form of securities used as collateral to assure fulfillment of financial obligations for customer of Islamic banks. The bank may ask the pledged asset to be held with the bank or let the borrower hold it in trust. The pledge could be in the form of tradable equity or debt securities, postdated checks, property ownership documents, or some physical asset.
Hawalah is a transfer of debt from one party to another. The debtor is released from the liability and another person or entity assumes the responsibility of paying the debt. Hawalah involves three parties: the debtor, the creditor, and the transferee who takes over the debt obligation of the debtor. The right of the creditor to collect his debt transfers from the original debtor to the transferee. The debt could be a title of property, interest in a property, or any other claim or right. Similar to other business transactions, Shari’ah rules require the consent and agreement of parties as well as an offer and an acceptance to make Hawalah a valid transaction. The validity of Hawalah is established through Prophetic (PBUH) traditions and it is considered a good deed to relieve someone’s debt burden. Islamic banks use the instrument of Hawalah to provide a range of services to their customers for a fee. This includes payment of checks, drafts, other payments, remittances, or bills of exchange paid by the bank on behalf of the customer.
Hawalah is not the sale of a debt as only the liability to retire the debt is transferred at face value. Shari’ah scholars do not allow the sale of debt for profit but permit its transfer at face value in the form of Hawalah. Any profit motive in transfer of debt would be tantamount to the forbidden riba. Also, in Hawalah, if the new debtor fails to pay back, the creditor cannot claim from the original debtor.
Hawalah requires that the parties should be competent and agree to the arrangement. The contract is binding once signed and takes effect immediately. Hawalah can only be used to transfer debt itself at face value and not a physical asset. Some scholars require that the transferee must owe a debt to the original debtor to take over the debt in Hawalah. In that case both the debts should be known. It also requires that one of the debts cannot be payable instantly while other is due in the future. Maliki school requires that both debts should also be equivalent in nature otherwise Hawalah will become the sale of debt involving profit for one of the parties. In case of default by the transferee or his death, the debt cannot be transferred back to the original debtor. Hawalah remains until the debt is paid, forgiven, gifted, given as charity, or ceases to exist in some other way.
Wadiah is a the safekeeping of deposits of the customer by the Islamic bank. This is an agreement between the customer who is the owner of the funds and the bank which is entrusted with the safekeeping. The bank agrees to fully or partially return the funds as demanded. The bank takes no responsibility for the losses to the funds unless it is proven negligent. The bank may be allowed to be reinvest the funds. The customer is not entitled to profits but the bank may provide returns to the customer as appreciation.
A similar term Amanah is used for holding a customer’s assets in trust by the Islamic bank. Demand deposit or current accounts are a prime example of Amanah. The bank takes responsibility of the funds and is only liable for losses in case of negligence. In some cases the bank is not allowed to use the funds for investment. A possible example of that transaction would be the safe deposit box.
Hibah is a voluntary gift that a bank may grant to its customers as a means of appreciation for use of their funds. It is given without any exchange or benefit in return. It may seem like riba but it is different because the payment is at the sole discretion of the bank and is not guaranteed. The effect of Hibah, however, may be similar to interest. Shari’ah scholars have allowed the use of Hibah because of its voluntary nature.
The Islamic banks have to devise innovative ways to compete with traditional banks yet keep their products and service in compliance with Shari’ah. The banks use Hibah to attract deposits and to retain customers for Wadiah deposits and also to reward customers who deposit funds as Qard Hasan with the bank on which the bank does not pay interest. The banks will pay gift to the customer based on their deposit amount and in proportion to the profit they had earned on customer’s deposits. Hibah is also used by banks to reward customers for making timely payments.