‘WAAD’ OR
PROMISE: WHY IT IS INCONSISTENT WITH ISLAMIC CONTRACTUAL FRAMEWORK
In one of the previous posts, we raised up an issue
pertaining to the use “waad” or promise in Islamic finance and how it seems
that this concept has been widely employed to achieve some objectives aimed at
helping one party but denying justice to the other side in a transaction. For a
start, Islamic law right from the outset has recognized a distinction between a
promise and a contract (‘aqd) where a contract has been viewed more important
than a promise at least in the context of external binding effect. However even
in the case of contracts, Islamic law does look at the nature of the contracts
concerned when it comes to the question of their external binding effect that will define whether the court will
enforce the ensuing obligations or not.
In this connection there are at least three major categories
of contract to talk about in terms of the binding effect of a contract. Firstly
there are contracts held to be binding on both contracting parties upon their
formation where none of the parties are allowed to unilaterally terminate the
relevant contract, and among others this includes sale and purchase and leasing
or contract of/for service known as ijarah. The second type comprises contracts
that are held to be not binding on both of the parties such that at any time
any one of them can unilaterally put an end to the relationship without any
need to get approval from the other side like in the case of the contract of
wakalah (agency), mudarabah, sharikah (partnership) and the likes. And lastly
there are contracts that are viewed to be of special category when one of the
party is allowed to terminate while the other is to stick to them with no right
to terminate unless with the consent of the first party. One example is the
contract of surety or guaranty, where the creditor can always free the guarantor
from the contract at any time, but the guarantor has no such a right as he is
to stick to it as per the term agreed.
It is interesting to note, even in the case of the
contracts that are supposed to be binding on both of the parties like sale and
ijarah, both parties if they wish, can insert the right to terminate the
contract in their agreement based on a concept known as khiyar
al-shart as they may have provided
in the contract according to which the party who asks for it will have the
right to terminate such a contract within a specific time period. This concept is very similar to the modern
notion of right of cooling off (cooling off period) where the parties can
provide for it as part of the contractual terms, in which case they have right
to set aside the duly formed contract within specific period of time.
Coming back to the issue of binding promise as
previously discussed (refer to previous post), now it has become clear that if
the concept is relied upon, it (binding
promise) will take away the flexibility of the law of contracts itself by not allowing the relevant parties
to have equal bargaining power in their dealings. The binding effect of a
contract of exchange like sale and purchase derives its sanctity from the fact
that if one of the parties unilaterally backs off from his contractual duty
without agreement from the other side (who is ever willing to provide his part
of the bargain), then the one who is ready to continue can pursue the first
party in the court of law for enforcement (for specific performance). Therefore,
in the case of a contract that is binding on both of the parties, there is an
element of consideration where there are bargains on both sides which is not
the case in a one-sided promise. One basic question to ask here is how can a
party (promisee) who himself has not made any commitment to provide any
bargain/return/consideration to the other side is allowed to pursue the first
party (promisor) for an enforcement of a promise. Promise itself is said to be
not more than a statement by a person that he intends to carry out some good deeds
in future, such that it is up to the promisor to fulfill it or not even though
in a religious/moral term he is commanded to fulfill it unless there is any
justified reason not to fulfill it. Given that the promisee has not made similar
commitment, he cannot enforce the unilateral declaration of promise made by the
promisor, as there is no equal bargaining/fairness in the equation. Apart from
that, there is always a general Shariah prohibition on taking away anything
from an owner except based on the owner’s consent either premised on a sale or
gift contract. In short, if the notion of binding promise is to be widely
applied, it will defeat the purpose of the law of contract in accordance to
which people generally bargain their positions on a level playing field.
Although the approach that allows for a promise to be made binding seems to
address the issue of a customer not wanting to conclude a promised sale
contract like in Murabahah for instance, the danger of putting aside the
general theory/rule of Islamic contract is far more serious than the
anticipated benefit as it will defeat the very contractual framework that has
been laid down for the general benefit/protection of all, not to mention the flexibility of the
law of contract itself when it
recognizes the different categories of contracts from their binding effect
perspective.
It is interesting to note in this connection that in
May this year (2015), Islamic Fiqh Academy of Muslim World League (Rabitah
al-Aalam al-Islami) based in Mecca, issued a fatwa prohibiting the use of “waad”
in forward currency exchange as employed in Islamic finance. It emphasized that
Islamic rule prohibiting sale of currency not on cash/spot basis is far more
important to be observed as compared to the need to hedge against currency
exposure/risk based on doubtful method that clearly goes against Shariah
ruling. As known, Islamic finance practitioners have been using “waad” to
structure the so-called Islamic version of currency swap that has raised
serious concern among many Shariah scholars.
