KembaraXtra – Islamic Banking – Example of Shari’ah-Compliant Payment System (Muqasah / Set-off)

KembaraXtra – Islamic Banking – Example of Shari’ah-Compliant Payment System (Muqasah / Set-off)

A Shari’ah-compliant payment system follows the same purpose as a conventional system, which is to settle payments between parties. However, instead of allowing interest-based outstanding balances to arise, Islamic finance uses a mechanism called Muqasah, or set-off, to settle obligations in a fair and Shari’ah-compliant manner.

Muqasah (set-off) means that when two parties owe money to each other at the same time, their debts are cancelled against one another, and only the remaining balance is paid. This method reduces unnecessary payments and completely avoids the charging or payment of interest.

Mandatory Set-off (Muqasah Qahriyyah)

Mandatory set-off occurs automatically and does not require the agreement or consent of either party. It applies when both parties are simultaneously debtors and creditors to one another.

Example:
If Bank A owes Bank B $10,000 and Bank B owes Bank A $7,000, the two debts are set off against each other. The $7,000 is cancelled, and Bank A pays only the remaining balance of $3,000. No interest is charged, and settlement is completed efficiently.

Contractual Set-off (Muqasah Ittifaqiyyah)

Contractual set-off takes place only when both parties mutually agree to cancel their debts against each other. This agreement is made in advance and applies to debts that may arise in the future.

Example:
Bank A and Bank B agree that any future debts between them will be settled through set-off. Later, Bank A owes Bank B $5,000, while Bank B owes Bank A $4,500. By applying the agreed set-off, only $500 is paid by Bank A, and both obligations are extinguished.

Set-off Involving Different Currencies

When debts are denominated in different currencies, Muqasah is still permissible, provided that the conversion is done using the prevailing exchange rate on the actual settlement date. No future or fixed exchange rate is allowed, as this could lead to speculation or unfair advantage.

Example:
If Bank A owes Bank B USD 10,000 and Bank B owes Bank A MYR 40,000, the amounts are converted using the exchange rate on the day of settlement, after which the set-off is applied fairly and transparently.

Why Muqasah Is Important in Shari’ah-Compliant Payment Systems

Muqasah plays a crucial role in Islamic payment systems because it:

eliminates interest-based settlement balances,
reduces the number of payment transactions,
speeds up the settlement process, and
ensures full compliance with Shari’ah principles.

Exam-Ready Summary

A Shari’ah-compliant payment system settles obligations through Muqasah (set-off), where mutual debts are cancelled against each other and only the net balance is paid, thereby avoiding interest and ensuring fairness and efficiency in payment settlements.

FINANCE