An overview of AAOIFI Standard Number Seven is presented. It should be noted only a summary and overview of the standard is presented, the full standard is available from AAOIFI.

Scope of the Standard

An overview of AAOIFI Standard Number Seven is presented. It should be noted only a summary and overview of the standard is presented, the full standard is available from AAOIFI.

This standard is issued on Rabii 1 1423 H corresponding to 16 May 2002.

This standard deals with hawala transactions that involve a change of debtor, i.e. transfer of debt. The scope of this standard shall not include banking remittances except the remittances that take the form of hawala (transfer of debt).

1. Definition of Hawala

Hawala of debt is the transfer of debt from the transferor (Muheel) to the payer (Muhal Alaihi). The transfer of right, on the other hand, is a replacement of a creditor with another creditor. The transfer of debt differ from transfer of right in that in transfer of debt a debtor is replaced by another debtor, whereas in a transfer of right a creditor is replaced by another creditor.

2. Legitimacy of Hawala

Hawala is a legitimate and an independent contract made out of courtesy and is not a contract of sale. It is permitted in order to facilitate payments and recovery.

3. Form of a Hawala Contract

A contract of hawala can be concluded by an offer from the transferor and acceptance from the transferee (Muhaal) and the payer in a manner that clearly indicates the intention of the parties to conclude a hawala contract and the transfer of the liability or obligation in respect of a debt or right from one party to another party. It is not necessary that the word transfer be used.

4. Types of Hawala and the Applicable Rulings

Restricted hawala is permissible. It is a transaction where the payer is restricted to settling the amount of the transferred debt from the amount of a financial or tangible asset that belongs to the transferor and is in the possession of the payer.

5. Conditions of Hawala

The validity of hawala requires the consent of all parties, namely the transferor, the transferee and the payer.

6. The effect of Hawala on the Relationship between the Transferor and the Transferee

A valid hawala discharges the transferor from both the debt liability and any claims in respect of it. In other words, the transferee will have no right of recourse against the transferor for payment. However, if the acceptance of the transfer was based on the condition that the payer must be solvent, then the transferee will have a right of recourse if the payer is not solvent.

7. The effect of Hawala on the relationship between the Transferor and the Payer

After the conclusion of a restricted hawala, the transferor is no longer entitled to reclaim from the payer an amount transferred to the payer in respect of the debt to be settled, because the right to receive this amount has now passed to the transferee.

8. The effect of Hawala on the relationship between the Transferee and the Payer

The transferee is entitled to claim the amount of the debt assigned to him through hawala from the payer. The payer, on the other hand, is obliged to pay him and has no right to refuse payment.

9. The effect of death and bankruptcy on a Hawala transaction

A hawala shall not be annulled by the death of the transferor or liquidation of a transferor institution. The transferee is the sole owner of the amount of the debt payable by the payer and, after a hawala transaction, such a debt cannot be included in the assets of the transferor that are available to be distributed, after death or liquidation, among creditors on a pro rata basis.

10. Termination of a Hawala Liability

A hawala liability will come to an end by settlement of the debt or by a mutual agreement to terminate it or by the debt being written-off by the transferee.

11. The Modern Applications of Hawala Rules

a. Withdrawals from a current account

An issuance of a cheque against a current account is a form of hawala if the beneficiary is a creditor of the issuer or the account holder for the amount of the cheque, in which case the issuer, the bank and the beneficiary are the transferor, the payer and the transferee respectively. If the beneficiary is not a creditor to the issuer of the cheque, then this is not a hawala transaction because there can be no hawala transaction without an existing debt. In the absence of a debt, the transaction becomes an agency contract for recovery of the amount of the debt on behalf of the transferor, which is lawful in Shari’a.

b. Overdrawing from an account or overdraft

If the beneficiary of the amount of a cheque is a creditor to the issuer, then issuing a cheque against the account of the issuer without a balance is unrestricted transfer of debt if the bank accepts the overdraft. If the bank rejects the overdraft, then this is not considered a transfer of debt, in which case the potential beneficiary may have recourse to the issuer.

c. Travellers’ cheques

The holder of a travellers’ cheque, the value of which has been paid by him to the issuing institution, is a creditor to such an institution. If the holder of the travellers’ cheque endorses the cheque in favour of his creditor, it becomes a transfer of debt in favour of a third party against the issuing institution that is a debtor to the holder of the traveller’s cheque. This is a restricted transfer of debt and the amount of the debt is the value of the cheque for which the institution received payment.

d. Bills of exchange

A bill of exchange is a form of hawala if the beneficiary is a creditor to the drawer. The drawer is, in this case, the transferor who gives orders for the paying bank to pay a certain sum of money at a specified date to the defined beneficiary. The party executing payment of such amount of money is the payer whereas the beneficiary, i.e. the holder of the bill, is the transferee. If the beneficiary is not a creditor of the drawer, then the issuance of the bill of exchange becomes an agency contract to recover or collect the amount of the bill of exchange on behalf of the drawer.

e. Endorsement of a negotiable instrument

An endorsement of a negotiable instrument in a manner that transfers title to its value to the beneficiary is a form of hawala if the beneficiary is a creditor to the endorser. If the beneficiary is not a creditor to the endorser, the endorsement becomes one of agency contract for collection of the amount of the debt.

f. Transfer of money (remittances)

The request of a customer for the institution to transfer a certain amount of money in the same currency from his current account to a particular beneficiary is a transfer of debt if the applicant is a debtor to such a beneficiary. The fee that the institution gains from this transaction is consideration for the delivery of the money and it is not an additional amount gained by the institution over the amount transferred. However, if a remittance is to take place in a currency different from that presented by the applicant for the transfer, then the transaction consists of a combination of currency exchange and a transfer of money that is permissible.