94 AN INTRODUCTION TO ISLAMIC FINANCE
asset in order to recover the debt. Where the borrower refuses to do so, the
court has the authority to sell the pledged asset to repay the debt.Kifala The contract of kifala (“suretyship”) refers to an obligation in addi-
tion to an existing obligation in respect of a demand for something. This
may relate to an individual, an act or a fi nancial obligation. A kifala for an
act or the performance of an act entails the timely delivery/fulfi llment of the
obligation or timely action in respect of the task contracted by the principal.
In the case of a fi nancial obligation, it refers to an obligation to be met in the
event of the principal debtor’s inability to honor the obligation. In fi nancial
transactions, under the contract of kifala, a third party becomes a surety for
the payment of a debt or obligation, if it is not paid or fulfi lled by the person
originally liable. It is similar to a pledge given to a creditor that the debtor
will pay the debt, fi ne or any other liability. In this respect, the kifala can
become the basis of a more sophisticated vehicle for a fi nancial intermediary
to undertake fi nancial and performance guarantees and for the underwrit-
ing of fi nancial claims, which are an integral part of modern banking and
capital markets.
The following are some of the features of kifala:
■ (^) It does not release the principal debtor from liability since it is an obli-
gation in addition to the existing obligation.
■ (^) More than one kifala for a single obligation is acceptable.
■ (^) Persons jointly indebted may provide surety for each other, in which
case both of them are jointly liable for the whole debt.
■ (^) If a delay is granted to the principal debtor for the payment of his debt,
it implies that a delay is also granted to the kifala.
■ (^) The discharge of the kifala does not necessarily discharge the liability of
the principal debtor.
Hawala Hawala entails transferring a debt or obligation from one debtor
to another, releasing the original debtor from that debt or obligation. This
is different from the kifala, where the principal debtor is not released from
the obligation.
The historical background to Islamic fi nancial instruments can be found
in Appendix B.