Bilateral rebate (ibra’ mutabadal) in Islamic banking operation: a critical appraisal

Abstract

Purpose

This study aims to examine the scholars’ views on the legality of bilateral rebate in Islamic financial transactions. It also aims to evaluate the contemporary application of bilateral rebate in Islamic banking operation as an alternative to the conventional mechanism in handling the events of early settlement of debt, early termination of debt facility and early withdrawal of term deposit.

Design/methodology/approach

The study used deductive and inductive methods to analyze the juristic literature of all the major schools of law on the legality of both bilateral and unilateral rebate in a financial transaction.

Findings

The study found bilateral rebate (ibra’ mutabadal), instead of unilateral rebate, to be the best and fairest Islamic mechanism to overcome injustice in several events that may impact the bank’s liquidity such as that of early settlement of debt facility and early withdrawal of term deposit in the sense that the interest (maslahah) of both transacting parties is equally secured.

Research limitations/implications

This study has its limitation, as it only covers the applicability of bilateral rebate in Islamic banking operation. It does not include the applicability of bilateral rebate in other segments of Islamic finance such as Islamic capital markets and Islamic insurance (Takaful business).

Practical implications

This paper has practical implication for Islamic banking industry particularly with regard to its liquidity management in the event of early settlement of a debt facility, early termination of an Islamic facility and early withdrawal of Islamic term deposit. It may also assume policy implication in the event that the regulator adopts the legality of bilateral rebate in its Islamic banking policy and guidelines.

Originality/value

This paper offers an Islamic alternative to the conventional mechanism in handling the event of early settlement of a debt facility, early termination of an Islamic facility and early withdrawal of Islamic term deposit. Under conventional banking, there are certain fees and charges imposed on customers in the above events like early settlement charge and early withdrawal charge. Unlike its conventional counterpart, Islamic banks cannot opt for the conventional method that seems unjust to the customers as the charge is imposed without Sharīʿah basis. In this case, bilateral rebate serves as a fair mechanism to manage the bank’s liquidity in the aforementioned events.

Citation

Abdul Khir, M.F. (2016), "Bilateral rebate (ibra’ mutabadal) in Islamic banking operation: a critical appraisal", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 9 No. 3, pp. 435-452. https://doi.org/10.1108/IMEFM-07-2015-0085