KembaraXtra-Islamic Banking – Linking the Cheque Payment System with Muqasah (Set-off)

The diagram shows the life cycle of a cheque payment in a payment system. In Islamic banking, this same process is used, but the final settlement stage is handled using Muqasah (set-off) to ensure Shari’ah compliance.


Below is how Muqasah fits directly into each part of the payment system.


1. Cheque issuance and deposit (same as conventional)

• The payer issues a cheque to the payee.
• The payee deposits the cheque with their bank (Bank B – collecting bank).

👉 At this stage, there is no difference between conventional and Islamic systems.

2. Clearing through the clearing house

• Bank B sends the cheque to the clearing house.
• The clearing house processes all cheques between banks.
• At the end of clearing, it calculates who owes whom and how much.

👉 This creates interbank debts, for example:

• Bank A owes Bank B
• Bank B owes Bank A

3. Where Muqasah applies (key Islamic difference)

Instead of settling gross amounts, the Islamic payment system applies Muqasah (set-off) at the settlement stage.

• Mutual debts between Bank A and Bank B are cancelled
• Only the net balance remains payable

Example from clearing results:

• Bank A owes Bank B: $10,000
• Bank B owes Bank A: $8,000

👉 Using Muqasah:

• $8,000 is set off
• Bank A pays only $2,000

This avoids:

• outstanding balances
• delayed settlements
• interest (Riba)

4. Settlement through the settlement institution

• The settlement institution (usually the central bank) executes settlement
• Only the net amount after Muqasah is transferred:
  • Bank A is debited
  • Bank B is credited

👉 Settlement is final, efficient, and interest-free

5. Debit and credit advice

• Bank A sends a debit advice to the payer
• Bank B sends a credit advice to the payee

This confirms the transaction is complete.

6. Return exchange (if cheque fails)

• If the cheque is dishonoured (e.g. insufficient funds),
• The item is returned through the payment system,
• Any settlement entry is reversed,
• Muqasah ensures no interest arises during reversal.

Why Muqasah is essential in the payment system

Muqasah ensures that the payment system:

• ✔ settles obligations fairly
• ✔ avoids interest-based balances
• ✔ reduces unnecessary fund transfers
• ✔ complies with AAOIFI Shari’ah standards

Very Simple Summary

In an Islamic payment system, cheque clearing works the same way as a conventional system, but during settlement, Muqasah (set-off) is applied so that mutual interbank debts are cancelled and only the net amount is transferred without interest.


Exam-Ready Answer

Muqasah is applied at the settlement stage of the payment system, where mutual obligations between banks arising from cheque clearing are set off, ensuring final settlement without interest and in compliance with Shari’ah principles.