Islamic Finance - Payment methods that adhere to sharia
A Shari'ah-compliant payment system has similar principles and objectives to the above-mentioned conventional system. However, a number of operational adjustments must be made to guarantee that Shari'ah principles are properly upheld. AAOIFI has addressed the traditional check-based clearance mechanism for debt settlement. Following the set-off or Muqasah concept, which is described in Shari'ah Standard (no 4) on the settlement of debt by set-off, has solved this (Muqasah). A set-off is the cancellation of a debt payable in comparison to a debt receivable. It comes in two different categories: A. Mandatory set-off occurs without the necessity for bilateral consent or the agreement of both parties to the debt; each party should be both a creditor and a debtor to the other at the same time. B. A contractual set-off is the extinguishment of two debts with the agreement of the two parties; each party must be both a creditor and a debtor to the other at the same time, and the two parties must agree to the set-off. A bilateral pledge exchange is intended to end a set-off in the future. It is acceptable for the institution to exchange bilateral commitments stipulating that any future debts incurred between them shall be paid off via set-off. If the two debts have different currencies, a bilateral exchange of a promise of set-off should be reached with the understanding that the actual set-off will be based on the exchange rate in effect at the time. These techniques are designed to prevent the accrued interest-based debt that results from a traditional payment system.
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