Wa'd
Wa'd is a unilateral promise by one party to do something in the future, such as buy or sell an asset. Islamic finance uses binding promises in hedging and financing where a bilateral forward contract would not be permitted.
Also called: wad · waad · unilateral promise · binding promise · muwa'adah
A sale must happen when it is concluded; Islamic law generally does not allow a binding agreement today to buy and sell at a future date, particularly for currencies. A one-sided promise is treated differently. Many scholars, and AAOIFI's standards, accept that a unilateral promise can be binding on the promisor where the other party has relied on it, while the sale itself is concluded separately when the time comes.
That is the basis of the purchase undertakings in sukuk, the customer's promise to buy in murabaha, and Islamic foreign-exchange hedging. In an Islamic FX "forward", one party promises to exchange currencies at a set rate on a future date and the exchange happens as a spot trade on that date.
Two matching binding promises, one from each side (muwa'adah), are widely viewed as amounting to a forward contract and are usually not accepted for currency exchange.
In practice
A wa'd is not identical to a bilateral sale contract. If both parties are bound to the same future exchange, many scholars treat it as a prohibited forward sale, whatever the documents call it.
Example
An importer must pay €1 million in three months. Its Islamic bank gives a unilateral promise to sell it €1 million at US$1.10 per euro on that date. In three months the two conclude a spot exchange at the promised rate; until then, only the bank is bound.
Commonly confused with
| Term | How it differs |
|---|---|
| Forward contract | A forward contract binds both parties to a future exchange. A wa'd binds only the promisor; the exchange itself is a new contract made on the day. |
See also
- QabdQabd is possession or control of an asset. Islamic law uses it to decide when a sale is complete, when an asset may be resold, and whether a currency or gold exchange has been settled on the spot as required.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
- Forward ContractA forward contract is an agreement to exchange one currency for another on a future date at a rate fixed today. It creates a binding obligation on both sides — which is what makes it useful for certainty and dangerous if the underlying payment never happens.
- GhararGharar is excessive uncertainty or ambiguity in the essential terms of a contract — the subject matter, the price, the delivery — of a kind that can make one party's gain depend on the other's ignorance.