Wa'd

Wa'd (Arabic وعد, "promise") is a unilateral promise by one party to perform an act in the future, such as buying or selling an asset at an agreed price. Only the promisor is committed; the other party, the promisee, is free to call on the promise or not. In modern Islamic finance, a wa'd that is treated as binding is used to create hedging and financing arrangements where a bilateral contract for future exchange, such as a conventional forward contract, would not be permitted.

The distinction between a one-sided promise and a two-sided agreement is central. A wa'd is not itself a sale; the sale, if it happens, is concluded later by a separate contract on the date the promise is exercised.

Classical jurists debated whether a promise is morally binding only or also enforceable in court. The majority view held promises to be morally but not legally binding, while the Maliki school accepted enforcement in certain cases, notably where the promisee had incurred costs in reliance on the promise. Contemporary bodies have built on that minority position. The International Islamic Fiqh Academy and AAOIFI accept that a unilateral promise in a commercial setting can be binding on the promisor, with any compensation limited to the actual loss suffered rather than the expected profit.

The same bodies generally prohibit a muwa'adah, a bilateral pair of binding promises on the same subject, because two mutual binding promises to exchange in the future are treated as equivalent to a forward sale. Such a sale is objected to because neither countervalue is delivered at the outset, raising concerns about gharar and, for currencies, about the rule that exchange must be hand-to-hand, or qabd.

Financing

In a purchase-order murabaha, the customer promises to buy an asset from the bank once the bank has acquired it. The promise protects the bank from being left with goods it does not want. In ijarah-based home finance and diminishing musharakah, the customer promises to buy the financier's share over time, while the financier may promise to sell. In sukuk, the originator's purchase undertaking to buy back the underlying assets at maturity or on default is a form of wa'd.

Hedging

Because a conventional forward exchange contract is generally impermissible, Islamic banks hedge currency risk with wa'd-based structures. One party promises to exchange a specified amount of one currency for another at an agreed rate on a future date. On that date the promisee may call on the promise, and a spot exchange is concluded at the agreed rate. Profit-rate swaps and other hedges are built in a similar way, often with commodity murabaha legs.

A "double wa'd" uses two separate unilateral promises, each exercisable under different conditions, for example one if the market rate is above the agreed rate and the other if it is below. Supporters say each promise is independent; critics argue the combination replicates a forward contract in substance. The ISDA/IIFM Tahawwut (Hedging) Master Agreement, published in 2010, provides standard documentation for Sharia-compliant hedging and accommodates wa'd-based structures.

A Malaysian importer must pay USD 1 million in three months and wants to fix the cost in ringgit. Its Islamic bank gives a wa'd to sell USD 1 million at an agreed rate on the payment date. In three months, the importer calls on the promise, and the bank and the importer conclude a spot currency exchange at the agreed rate. If the importer chose not to call on it, no exchange would take place. The economic outcome resembles a forward hedge, but the legal form is a one-sided promise followed by a spot sale.

Scholars and commentators debate how far wa'd structures differ in substance from conventional derivatives. Concerns include binding promises that leave the promisee no real choice, double wa'd arrangements that mirror forwards, and the use of wa'd to guarantee investors' capital in structures meant to share risk. Each institution's Sharia supervisory board decides which structures it accepts, and practice differs between jurisdictions, adding to Sharia non-compliance risk.