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KembaraXtra – Islamic Banking – Linking Dual Payment Systems with Muqasah (Islamic) and Non-Muqasah (Conventional) Settlement
In a dual-banking system, Islamic and conventional banks operate side by side and share the same national payment and settlement infrastructure. The key distinction does not lie in the payment system itself, but in how settlement obligations are handled internally by Islamic banks versus conventional banks.
1. One payment system, two settlement approaches
Both Islamic and conventional banks:
- use the same clearing house,
- participate in the same cheque-clearing and settlement system, and
- settle through the same central bank.
However, the settlement method differs:
- Conventional banks use non-Muqasah (gross or interest-based settlement)
- Islamic banks apply Muqasah (set-off) and Shari’ah-compliant liquidity tools
2. Conventional payment system (Non-Muqasah settlement)
In a conventional payment system:
- Cheques are cleared through the clearing house.
- Gross interbank obligations are calculated.
- Each bank settles its full obligation separately.
- If a bank has insufficient funds:
- it may borrow overnight,
- interest may be charged.
- Bank A owes Bank B: $10,000
- Bank B owes Bank A: $8,000
👉 Both amounts are paid separately.
👉 Temporary balances may attract interest.
This is non-Muqasah settlement.
3. Islamic payment system (Muqasah settlement)
In an Islamic payment system:
- Cheques are cleared through the same clearing house.
- Interbank obligations are identified.
- Muqasah (set-off) is applied:
- mutual debts are cancelled,
- only the net amount is settled.
- No interest arises at any stage.
- Bank A owes Bank B: $10,000
- Bank B owes Bank A: $8,000
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👉 $8,000 is set off.
👉 Bank A pays only $2,000.
This ensures Shari’ah-compliant settlement.
4. Linking Muqasah to Malaysia’s dual-banking system
In Malaysia:
- Islamic banks and Islamic windows maintain Wadiah current accounts with Bank Negara Malaysia.
- During cheque clearing, Muqasah is applied internally to settle interbank obligations.
- If a settlement deficit arises:
- BNM provides liquidity under Al-Wakalah using Islamic securities,
- through a Shari’ah-compliant repo-like mechanism
5. Why separate payment systems are NOT required
Shari’ah does not require:
- separate clearing houses, or
- separate settlement infrastructure.
What Shari’ah does require:
- internal segregation of Islamic funds,
- Shari’ah-compliant settlement methods (Muqasah),
- interest-free liquidity support
- Infrastructure is shared
- Settlement logic differs
In a dual-banking system, Islamic and conventional banks share the same payment system, but conventional banks settle using non-Muqasah methods that may involve interest, while Islamic banks apply Muqasah and Shari’ah-compliant liquidity mechanisms to ensure interest-free settlement.
Shari’ah does not require separate payment systems in a dual-banking environment. Islamic banks participate in the same clearing and settlement infrastructure as conventional banks but apply Muqasah (set-off) and Shari’ah-compliant liquidity arrangements, while conventional banks use non-Muqasah, interest-based settlement methods.
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