This document defines and discusses the Islamic legal concept of Muqasah, or debt settlement by set-off. Muqasah refers to the discharge of debts when two parties are simultaneously creditors and debtors of each other. There is no explicit mention of Muqasah in the Quran, but some verses using similar terminology are cited to support its legitimacy. The document outlines different types of Muqasah (mandatory, on demand, contractual) and conditions for each. Examples are provided to illustrate how Muqasah can be applied, such as by Islamic financial institutions settling outstanding debts through asset purchase.

1. MUQASAH /

2. Definition
Legally: it’s the clearance of
an obligation and involves
setting-off debts of the
debtor and creditor who is
indebted to each other
Literally: Equality,
Set Off
Terminology: Debt
settlement by contract
transaction or set off. It also
means the discharge of
debt receivable againt a
debt payable
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3. • Imam Al-Dardir defines Muqasah as the setting-off of a debt that is due to the debtor by
creditor is at the same time indebted to the debtor with certain conditions.
(Al- Dardir, Al-Sharah Al-kabir,3/227)
• Imam Ibn Al-Qayyim define it as the clearance of the debt which is due, with a debt similar in
nature and character
(Ibn al-Qayyim, A’lam al-muwaaqqi’in 1/232)
Definition
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4. Legality of Muqasah
Basically, there is not explicit Qur’anic verse that indicates the legality of Muqasah. However there are a few verses that sued thee work Qisas that
is derived from the same root of Muqasah.
• Allah the Almighty says” O you who believe! The law of equality is prescribed for you in cases of murder (Qisas): free for free …….” (2:178)
• In other verse, Allah (S.W.T) says: “ In the law of equality (Qisas) there is saving of life for you (2:179).
Some Muslim scholars are of the view that the meaning of the word “Qisas” mentioned in the verses refer to the arrangement of setting-off by
way of payment of the compensation money (Diyyah) by the murderer. In this context the Diyyah is regarded as a kind of debt which is due on
the offender.
• From tradition of the prophet (P.B.U.H) narrated by Ibn Umar as follow: “ I came to the prophet (P.B.U.H) and said that I sell camels in Baqi’ for a
price name in gold coins, but I collected in silver, and vice versa. The prophet (P.B.U.H) said: there is no harm to do so if the exchange is carried
out according to the exchange rates of the day, and as long as you part without any debts between you.’ “(Sunan Al-Nisa’I 7/281).
So based in these evidence, it is logic to accept Muqasah in practice. Muqasah is acceptable by modern Muslim scholars as stated in AAOIFI’
Shariah Standard No 4, Clause 3 that spells out it is permissible for Islamic Financial Institutions and their customers to exchange bilateral promises
that debts which may be created between them in the future will be setteled by way of set-off/ Muqasah.
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5. Debts that
can be
available to
be sett off by
Muqasah
concept
Currency
Debts
Commodity
Debts
Usufruct
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6. Assamahah Consultation

7. MANDATORY SET-OFF
( )
A mandatory set off is the spontaneous discharge of two debts that is not contingent on the consent of both or either
party. The majority of muslim scholars are of the opinion that this type of Muqasah is permissible. On the other
hand, Maliki scholars opine that Muqasah shall only be allowed with demand with mutual agreement.
(AlMawahib Al-Jalil, 4/549)
The Mondatory Set-Off has four Condtion
1. Each party should be a creditor and debtor simultaneously.
2. Both debt should be equal in kind, types description and maturity.
3. Neither of the two debts should be encumbered by an obligation to third
party ( rights of pledgee to one of the debts . in other words the Muqasah shall
not bring any harm to the contracting parties or other related parties.
4. The Muqasah should not result in the violation of the Shariah (involves riba).
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8. MANDATORY SET-OFF ON DEMAND
( )
This type of Muqasah is affected by the demand of one of the parties to discharge the debts by away of
set-off. Usually it is effective upon the request of the superior creditor, who has a preference over the
other.
The Muqasah Set-off on Demand has four Condtion
1. Each party should be a creditor and debtor simultaneously.
2. The creditors for the superior debt in terms of quality and duration should
consent to relinquish his additional right or privilege.
3. Both debts should be equal in kind and types but not necessarily in quality and
date of maturity.
4. The Muqasah should not result in the violation of the Shariah such as involves in
riba
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9. CONTRACTUAL SET-OFF
)
This type of Muqasah is the discharge of tow debt by the consent of the tow parties to extinguish their
obligation toward each other. In contractual set off, there is no need for the debt to be similar in kind, type,
desperation or maturity.
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The Condtion of a Contractual Set-Off
1. Each party should be a creditor and debtor simultaneously.
2. Both parties must consent to the Muqasah /set –off.
3. The Muqasah should not result in the violation of the Shari’ah such as Riba and
so on.

10. EXAMPLE OF MUQASAH
Ali owns Abu RM2, 000 then Abu owes Ali the same amount 2,000. This mean Ali and Abu
are no longer in debt with each other. Because implicit settlement takes place between Ali
and Abu to discharge of a debt receivable against a debt payable.
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How IFI (Islamic Financial Institutions) apply the Muqasah as a supporting contract:
Under the Mudharabah financing
contract, when the customer default
The IFI may purchase the asset from the customer in default
on cash, based on a mutually agreed price. The proceeds
of which may be used to settle the outstanding debt on the
basis of set-off (Muqasah)

11. THANK YOU
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