Settlement of Debts by Set-Off : Scope & Shariah Ruling

Transcription

1. Shari ’ah Standard No. (4): Settlement of Debts by Set-Off Statement of the Standard 1. Scope of the Standard This standard covers the settlement of debt by way of set-off. The standard shall not apply to discharge of liability by way of transfer, waiving of obligation, composition, acquisition of a right payable or bilateral cancellation of a contract, as they are covered by their respective Standards. 2. Definition of Set-Off and Its Various Forms A set-off is to extinguish a debt receivable by a debt payable. It is divided into two main forms: mandatory set-off and contractual set-off. 2/1 Mandatory set-off A mandatory set-off is a set-off that occurs without the need for bilateral agreement or consent of both indebted parties and, in some cases of mandatory set-off, it is one party that is forced to comply with the request of the other party for set-off. It is divided into compulsory set-off (on both parties)(2) and set-off on demand (of the person with the superior debt whereby the other party is obliged to comply with the demand). 2/1/1 A compulsory set-off is the spontaneous discharge of two debts that is not contingent on the request or consent of both or either party. 2/1/2 The conditions of the permissibility of compulsory set-off are the following: a) Each party should be a creditor and debtor simultaneously. b) Both debts should be equal in kind, type, description and maturity. However, if the two debts are not equal in amount, a set-off will take place of an equivalent amount on both (2) Compulsorily set-off is a set-off that occurs without a need to bilateral agreements or consents of the parties. 108
2. Shari ’ah Standard No. (4): Settlement of Debts by Set-Off sides, and the party that is owed the larger debt will remain a creditor for the remaining balance. c) Neither of the two debts should be encumbered by an obligation to a third party, such as the right of a mortgagee to one of the debts. The intention of this is to protect rights associated with the amount of the debt and belonging to third parties. d) The set-off should not be arranged in a manner that results in violation of a rule of Shari’ah, such as Riba (usury) or Shubhat al-Riba (a transaction potentially involving Riba). 2/1/3 A set-off on demand is the discharge of two debts at the request of the creditor for the superior debt and his consent to forgo the excess of the amount or privilege he is owed over what he owes. This set-off will take place whether or not the creditor for the smaller debt consents. 2/1/4 The conditions of permissibility of a set-off on demand are the following: a) Each party should be a creditor and debtor simultaneously. b) The creditor for the superior debt, in terms of quality and duration, should consent to relinquish his additional right or privilege. An example of superiority in terms of quality is when the debt is secured by a mortgage, or when a third party has given a guarantee to pay the debt, and the owner of the secured debt consents to relinquish this guarantee. Superiority in terms of duration exists if the duration of one of the debts is shorter, or one debt is now due and the other is not yet due. In these cases, the debt which has the shorter duration or which is now due is superior. c) Both debts should be similar in kind and type, but not necessarily in quality and date of maturity. However, if the two debts are not equal in amount, a set-off will take place of an equivalent amount on both sides, and the party that is owed the larger debt will remain a creditor for the remaining balance. 109
3. Shari ’ah Standard No. (4): Settlement of Debts by Set-Off d) The set-off should not be arranged in a manner that results in violation of a rule of Shari’ah, such as Riba (usury) or a transaction potentially involving Riba. 2/2 Contractual set-off 2/2/1 A contractual set-off is the discharge of two debts by the consent of the two parties to extinguish their obligations towards each other. 2/2/2 The conditions of the permissibility of a contractual set-off are the following: a) Each party should be a creditor and debtor simultaneously. b) The two parties should mutually consent to the set-off. c) The set-off should not be arranged in a manner that results in violation of a rule of Shari’ah, such as Riba or a transaction potentially involving Riba. 2/2/3 A contractual set-off is permissible even without the need for two debts to be similar in kind, type, description or maturity. This is because the agreement on contractual set-off means that each party has agreed to relinquish any extra privilege associated with his debt. A contractual set-off is also permissible if the two debts are not equal in terms of amount, in which case a set-off will take place of an equivalent amount on both sides, and the party that is owed the larger debt is entitled to request payment of the remaining balance. [see item 2/10 (a) of the Shari’ah Standards on Trading in Currencies] 3. Bilateral Exchange of Promises to Conclude a Set-Off in the Future It is permissible for the Institution and its customers or other Institutions to exchange bilateral promises that debts that may be created between them in the future will be settled by way of set-off, in which case all the conditions mentioned in the items 2/1 and 2/2 will be applicable at the time of actual set-off. However, if the currencies of the two debts differ, a bilateral exchange of promise of set-off should be concluded on the basis 110
4. Shari ’ah Standard No. (4): Settlement of Debts by Set-Off that a set-off will take place based on the current currency exchange rate at the time of actual set-off; this ruling is to prevent the practices of Riba by roundabout methods or by implied agreement for practicing Riba. 4. Application of the Rules of Set-Off to Some Modern Transactions The followings are some rules of set-off to modern transactions: 4/1 Stipulating set-off between the customer and the Institution in respect of debts to the Institution arising out of sales on deferred payment. The agreement on contractual set-off of future debts, commonly known as set-off and consolidation, is a practice employed by a large number of financial Institutions. This form of set-off may take place either compulsorily or contractually depending on whether the situation that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off. Moreover, by pre-stipulating this type of set-off in the agreement, a fresh agreement may be avoided at the time of set-off when the two currencies are different or when one of the debts is superior to the other. 4/2 A set-off may take place between a financial Institution accepting a cheque and the drawer of the cheque, through the clearing-house. This form of set-off may also take place either compulsorily or contractually depending on whether the state that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off. 4/3 Set-off that is concluded among financial Institutions through international or national networking systems, such as credit card or debit card organisations. This form of set-off may be either compulsory or contractual depending on whether the state that gives rise to this set-off meets the conditions of compulsory set-off or the conditions of contractual set-off. 5. Currency Swaps The currency swaps that are concluded on the basis of Riba are not permissible. This is because in this process it is the interest-based securities that are set-off against interest-based securities. 111
5. Shari ’ah Standard No. (4): Settlement of Debts by Set-Off 6. Date of Issuance of the Standard This Standard was issued on 29 Safar 1422 A.H., corresponding to 23 May 2001 A.D. 112