Guidelines on Ibra’ (Rebate) for Sale-Based Financing

Ibra’ represents the ‘waiver on right of claim’ accorded by a person to another person that has an obligation (zimmah) which is due to him. Ibra’ or ‘rebate’ refers to an act by a person relinquishing his rights to collect payment due from another person. In the context of Islamic finance, an Islamic financial institution (IFI) may grant ibra’ to its customers of a sale-based financing (such as murabahah and bai’ bithaman ajil) who settled their debt prior to the agreed settlement period as stipulated in the agreement concluded by both parties.

In a sale-based financing contract, a customer is required to settle the selling price (comprising the principal sum and profit margin), regardless as to whether the contract is on deferred or spot basis. For deferred payment financing, principally an IFI has the right to claim from the customer the outstanding selling price that will also include the deferred profit portion even in early settlement. Under this circumstance, IFI is encouraged to grant ibra’ by forgoing the IFI’s right over the debt of the remaining deferred profit portion to its customer in early settlement cases.

Granting of ibra’ by IFIs is an important consideration for the IFIs to remain competitive with conventional financial institutions, as conventional financial institutions allow customers to pay the principal and accrued interests up to the date of early settlement only. Apart from the event where customers approach the IFIs for early settlement, other circumstances tantamount to settlement prior to maturity where ibra’ could also be granted include settlement arising from a restructuring exercise, default cases and termination of contracts.

Given that ibra’ is a discretionary consideration of the IFIs, the right to grant ibra’ remains with the IFIs. However, it has been observed that while a number of IFIs grant discretionary ibra’ and include such commitment in the offer letter and legal documents of the financing, there are also IFIs that are silent on the applicability of granting ibra’. The different practices among the IFIs need to be harmonised to avoid confusion to the public and provide greater transparency and clarity.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking