wa'ad

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wa'ad, Also known as wa'd.

This is a unilateral promise unsupported by consideration. There is no ijima (scholarly consensus) on whether a wa'ad is enforceable. Scholars have argued that:

• Fulfilling a promise is recommended but not obligatory and should be performed for religious reasons as it is a matter of morality.

• Fulfilling a promise is obligatory for religious reasons and must be done and failure to perform it is a sin.

• Fulfilling the promise is obligatory for religious reasons and enforceable by the courts.

• If the promise is subject to certain conditions, fulfilling it is obligatory and enforceable. This promise becomes binding to avoid uncertainty.

• If the promise is subject to certain conditions, the promisor is obliged to perform it and it is enforceable by the court if the promisee has acted in reliance on that promise and non-performance will result in losses to the promisee.

The fifth position has been upheld by the Islamic Fiqh Academy (IFA) under certain circumstances. According to a fatwa issued by the IFA at its Fifth Conference held in Kuwait (1988-1989), a wa'ad, in the context of a classic murabaha is morally binding and its fulfilment is enforceable in a Sharia court if the:

• Promisor has caused the promisee to incur some liabilities.

• Promise is a unilateral promise binding one of the parties to the murabaha.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI ) has indicated that the use of wa'ads is also permissible for currency exchange transactions, but that view has not been accepted by all scholars.

A wa'ad is often used to mitigate risks associated with other Islamic finance techniques. For example, in a murabaha transaction, a lender buys an asset that has been identified by its client (the borrower) from a third party and then sells that asset to the borrower for the original purchase price plus a profit element (together, the loan amount). However, if the client decides not to purchase the asset after it been acquired by the lender, the lender is stuck with the asset. If, as part of the murabaha transaction, the borrower also enters into a wa'ad, it will be required to buy the asset from the lender.

For more information on Islamic finance, see Practice Note, Islamic Finance: Overview (www.practicallaw.com/9-500-3701).