Kembaraxtra-Islamic Finance: Hiwalah (Debt Transfer in Islamic Finance)

Introduction

In Islamic commercial jurisprudence, Hiwalah (حوالة) is a contract that facilitates the transfer of debt obligations from one party to another in order to simplify settlements and reduce multiple chains of payment. It is derived from the Arabic root ḥ-w-l, meaning “to transfer” or “to shift.”


Hiwalah occurs when a debtor who owes money to a creditor transfers this obligation to a third party who, in turn, owes the debtor. In essence, the debt is reassigned, and the responsibility for repayment shifts. Once the creditor (transferee) accepts this transfer, the intermediary (transferor) is discharged from liability.


For example:

• A owes B RM5,000.
• B owes C RM5,000.
  Instead of A paying B, and then B paying C, under Hiwalah, B transfers his claim against A directly to C. C will now collect the RM5,000 directly from A, and B’s obligation to C is cleared.

This principle is rooted in Shari’ah as a means of easing transactions, preventing hardship, and ensuring justice in financial dealings.



Qur’an and Hadith Evidence

• Qur’an:
  “Allah intends for you ease and does not intend for you hardship.”
  (Surah Al-Baqarah 2:185)
  “O you who believe! Fulfil [all] contracts.”
  (Surah Al-Ma’idah 5:1)
• Hadith:
  The Prophet ﷺ said:
  “Delay in payment by a rich man is injustice, but if one of you is referred to a wealthy person for payment, let him accept the referral.”
  (Sahih al-Bukhari, Sahih Muslim)

This hadith forms the foundation of Hiwalah, showing that transferring debt to a solvent person is valid and encouraged.


10 Case Scenarios with Solutions


Case 1: Direct Debt Transfer

• Scenario: Ahmad owes Ali RM2,000. Ali owes Fatimah RM2,000. Instead of multiple payments, Ali transfers Ahmad’s debt to Fatimah.
• Solution: Permissible under Hiwalah. Fatimah can now collect RM2,000 directly from Ahmad, and Ali is released from liability.

Case 2: Transfer to Insolvent Debtor

• Scenario: Khalid transfers his debt to Zaid, but Zaid is financially insolvent.
• Solution: This is not valid unless the creditor agrees knowingly. Islam discourages unfair transfers that harm creditors.
• Hadith Reference: “Let him accept the referral” – but the implied condition is that the referred debtor is solvent.

Case 3: Partial Debt Transfer

• Scenario: Maryam owes Aisyah RM10,000. Maryam owes Zainab RM6,000. She transfers part of her debt (RM6,000) from Aisyah to Zainab.
• Solution: Valid if all parties consent. Hiwalah can be applied partially as long as terms are clear.

Case 4: Disputed Debt in Hiwalah

• Scenario: Yusuf transfers his debt to Hamzah, but the principal debtor denies the amount.
• Solution: Hiwalah requires a clear, undisputed debt. If disputed, it must be resolved first before transfer.

Case 5: Hiwalah Without Consent

• Scenario: Bilal owes Hassan but unilaterally transfers the debt obligation to Umar without Hassan’s approval.
• Solution: Invalid. The creditor’s acceptance is necessary for Hiwalah to take effect.

Case 6: Multi-Party Chain Settlement

• Scenario: A owes B, B owes C, C owes D. Instead of three transactions, B and C agree to transfer debts through Hiwalah directly to D.
• Solution: Valid. This streamlines settlements, reduces complexity, and aligns with Shari’ah’s objective of ease.

Case 7: Transfer of Non-Monetary Obligation

• Scenario: A farmer owes 50 sacks of rice but transfers the debt obligation to another farmer who owes him money.
• Solution: Permissible as long as the debt is measurable, transferable, and agreed upon.

Case 8: Guarantee vs. Hiwalah Confusion

• Scenario: Saad asks his brother to “cover” his debt in case he fails to pay, claiming it as Hiwalah.
• Solution: This is Kafalah (guarantee), not Hiwalah. In Hiwalah, the responsibility shifts entirely; in Kafalah, the guarantor is only liable if the debtor defaults.

Case 9: Creditor Refuses Hiwalah

• Scenario: A debtor offers to transfer his debt, but the creditor refuses.
• Solution: The creditor has the right to refuse, as consent is required. Hiwalah is not forced upon a party.

Case 10: Hiwalah with Extra Benefit

• Scenario: A debtor tells the creditor: “If you accept Hiwalah, I will give you an extra RM500.”
• Solution: Invalid. This resembles riba (interest). Hiwalah should not involve conditional extra benefit beyond the debt amount.

Critical Analysis


Hiwalah provides an efficient mechanism for resolving chains of debt, minimizing cash transactions, and reducing financial hardship. Its basis in Shari’ah reflects Islam’s broader objectives (Maqasid al-Shari’ah) of justice, ease, and removal of hardship.


Strengths of Hiwalah:

• Facilitates smooth financial transactions.
• Reduces disputes and overlapping debts.
• Protects creditors by ensuring payment from a solvent party.
• Eliminates unnecessary delays in business cycles.

Challenges in Practice:

• Risk of abuse if debt is transferred to insolvent or unwilling parties.
• Requires strict transparency and consent.
• May cause disputes if documentation is unclear.

Comparison with Modern Finance:
Hiwalah is similar to modern debt assignment but differs as it prohibits interest, unfair clauses, and transfers without consent. It aligns with Islamic finance’s ethical framework by emphasizing fairness, consent, and solvency.