Hawalah vs. Wakalah vs. Kafalah
There are various legally recognised forms of financing contracts in Islam, and Hawalah, wakalah, and kafalah are three most commonly used concepts in modern Islamic banking. To a great extent, hawalah resembles kafalah and wakalah since these contracts involve transfer of risk and control. The main difference between hawalah and kafalah is that the principal debtor is released from the debt under hawalah contract whereas kafalah is not.
Below table gives a comparison of hawalah, wakalah and kafalah which is based on various resources, including academic publications and industry reports published by professional bodies. These three service based contracts compared and contrasted according to three main features: definition, legality and condition from each contract.
Comparison between Hawalah, Wakalah, and Kafalah
Hawalah means “change” or “transfer” and usually refers to the transfer of debt from original debtor to the legal personality.
Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI) Shariah Standard No. 7 define Hawalah as transfer of a debt liability from the transferor to the payer.
The effect of Hawalah is that the creditor can no longer claim debt from original debtor since the claim should be made against the new debtor named in Hawalah contract
Wakalah refers to a contract in which a party (muwakkil) authorizes another party as his agent (wakil) to perform a particular task, in matters that may be delegated, either voluntarily or with imposition of a fee
AAOIFI (2010) Shariah Standard No. 23 defines Wakalah as “the act of one party delegating the other to act on its behalf on what can be a subject matter of delegation.”
Kafalah is an Arabic word for responsibility, amenability or suretyship. It often refers to an act of someone adding himself to another person, and making himself liable to perform the responsibility, together with the person
According to AAOIFI Shariah Standard No. 5, kafalah are guarantees that are intended to secure obligations and protect amount of debts, either from being uncollectible or from being in default
Ibn Al-Qudamah defines kafalah as a conjoining of the guarantor’s liability to the liability of the guaranteed. Thus, the debt would be established on both of them
The hadith reported by Al-Bayhaqi, in which the Prophet صلى الله عليه وسلم have said: “Delinquency of rich debtors is a form of transgression, so if one of you has his debt transferred to a rich person, let him accept the transfer of debt” (Narrated by Ahmad and the author of six books of Hadith as well as Ibn Shaybah and Al-Tabarani in his ‘Awsat on the authority of Abu Hurayrah).
Al-Zuhayli (2003) recorded that majority of the jurist view this Hadith that it is preferred to accept the transfer of debt, since it is not an obligation.
The evidence of permissibility is derived from the text in Al-Quran hadith and ijma’. One of the text is “… so send one of you with this silver coin of yours to the city and let him look to which is the best of food and bring you provision from it ….” (Surah AlKahf, verse 19)
From the ijma’ the jurists agreed that wakalah is permissible and recommended based on ta’awun concept
Kafalah can be seen in the Sunnah of the Prophet Muhammad S.A.W., where Abu Qatadah asked the Prophet to pray for a man to whom he (Abu Qatadah) had been a guarantor for a debt
In more recent times, AAOIFI Shariah Standard No.5 has stated that guarantees are allowed with regards to contracts of exchange and also contracts of property.
According to Hanafis as reported by AlZuhayli (2003), there are five (5) conditions pertaining to the transfer of debt.
1. The language of the contract must be intended for offer and acceptance to transfer debt, and it can be in oral or in written form.
2. The principal debtor must be of eligible person to enter into contract and freely consent to the transfer of debt, meaning no coercion involved because coercion invalidate the transfer.
3. The creditor must have the same criteria of the principal debtor but with additional condition which is issuance of acceptance by creditor in order to signify recognition of the transfer.
4. The transferee must fulfil similar conditions like the creditor just now.
5. The debt must be fungible debt and should be binding. When such debt complied with the two conditions, the debt is eligible to be transferred.
There are other opinions with regard to the conditions of Hawalah contract, but the author mainly highlights the opinion from the Hanafis.
There are four (4) conditions pertaining to the basis of wakalah contract
1. The muwakkil shall authorize a specific wakil and notify him of his appointment.
2. The Wakil (Bank) agent (wakil) to perform a particular task, in matters that may be delegated, either voluntarily or with imposition of a fee
3. Subject matter in wakalah contract should be known to agent and it is not permissible to delegate someone to perform unknown thing.
4. Offer and acceptance may be expressed verbally or by appropriate documentation or by any other methods accepted by customary business practice which does not contravene the Shariah principles.
In Kafalah there are four (4) basic rules and conditions the parties must adhere to
1. Guarantor who is of sound mind, has legal capacity and willingly give his consent and agreement to the contract.
2. Debtor, he does not need to have legal capacity and can even be a minor, insane person or a bankrupt.
3. Creditor who must be known to all parties.
4. Guaranteed object or asset. This asset must be an actual asset that is possible to collect from the guarantor. It should be an asset that can be legally owned and sold should the debtor fail to fulfil his obligations.