KembaraXtra-Islamic Banking – Linking the Cheque Payment System with Normal (Non-Muqasah) Settlement

The diagram shows how a cheque payment moves through a conventional payment system. Below is how the same diagram works when Muqasah (set-off) is NOT used, i.e. normal conventional settlement.

1. Cheque issuance and deposit (same start)

• The payer writes 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 Islamic or conventional systems.

2. Clearing through the clearing house

• Bank B sends the cheque to the clearing house.
• The clearing house processes cheques from many banks.
• It determines gross obligations:
  • how much Bank A owes Bank B
  • how much Bank B owes Bank A

👉 Multiple separate obligations are created.

3. Settlement WITHOUT Muqasah (key difference)

In a normal non-Muqasah system:

• Each bank settles its full obligation
• Debts are not cancelled against each other
• Payments are made separately

Example after clearing:

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

What happens (non-Muqasah):

• Bank A pays $10,000
• Bank B pays $8,000

👉 Two payments instead of one net payment.

4. Role of the settlement institution

• The settlement institution (usually the central bank) debits and credits banks’ accounts:
  • Bank A account debited $10,000
  • Bank B account credited $10,000
  • Bank B account debited $8,000
  • Bank A account credited $8,000

If settlement is delayed:

• interest or penalty charges may arise
• temporary outstanding balances may exist

5. Debit and credit advice

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

Customers are informed that the transaction has been processed.

6. Return exchange (if cheque fails)

• If the cheque is dishonoured:
  • the item is returned through the system
  • settlement entries are reversed
  • delays may still create interest exposure
  
  

Why this is called “non-Muqasah”

Because:

• debts are not netted off
• gross settlement is used
• interest-based balances may occur
• efficiency is lower compared to set-off

Very Simple Comparison Line

• Non-Muqasah system: pay everything separately
• Muqasah system: cancel debts and pay only the difference

Exam-Ready Linked Answer

In a conventional non-Muqasah payment system, cheque clearing creates gross interbank obligations that are settled separately through the settlement institution, which may result in outstanding balances and interest exposure, unlike Muqasah where debts are netted and only the net amount is settled.