How muqassah or set-off is affected in the settlement of financial obligations in Islamic commercial transactions?

Muqassah is generally a clearance of obligation and involves setting off debts of the debtor and creditor who is indebted to each other. The debts set off must be identical in all aspects or when the debt is of different value, the smaller debt is reduced from the larger debt. The legality of muqassah can be divided into three opinions. First, one group of Muslim jurists opined the muqassah is a approved method for the settlement of debts. The subject matter doesn’t come under purview of sale of debt (bai’ al-dayn). 

Second, a group of jurists treated muqassah as an exception to the sale of debts, which will fall under certain conditions. Third group is who opined that muqassah is a sale of debts by nature, but its practice is legalised by the consensus of opinion of the scholars. The legal source for muqassah comes from the Holy Quran and Hadith (prophet says, actions and silences), but none is clear-cut on the subject. The subject matter of muqassah is mainly dayn (debts). 

The Muslim jurists have identified only three types of debts that can be available to be set-off by muqassah concept; 

1.     Currency debts (duyun al-naqd), 

2.     Commodity debts (duyun al-‘ard), and 

3.     Usufruct (manfaah). 

The rule of thumbs would be the debts to be set-off must be same in nature. Muqassah normally would not be applicable between two different debts. On the contrary, Hanafis ruled that muqassah between two different types of debts is permissible. 

A close analysis shows that debt clearance are only be made obligatory or voluntary for two similar debts. A mutual consent is required if both of not in similar nature.

Muqassah al-qanuniyyah is a mandatory set-off, which is valid even though without mutual consent of both parties. The set-off would be possible when the debts are equal and no adverse consequences for any party while exercising the set-off. The mutual obligation must actually exist between two persons in their own personal capacities. In other words, each one must be personally creditor or debtor for the other. The mandatory set-off can also comes from the judicial or legal enforcement set-off by the order of the court (when there is a dispute between creditors and/ or debtors as to the existence of debts). Another condition for the permissibility of mandatory set-off is when two cleared debts must be of equal nature (ejusdem generis). The debts must be in the same genus, type, characteristics and date of maturity. However, the set-off is not possible when there is variation in regards to the debts. On the contrary, the Muslim jurists have agreed that if the two debts are not equal in amount, a set-off will still take place as regard to the equivalent amount on both sides. The party that owes larger debts will remain as creditor after the set-off.

Muqassah al-talabiyyah or mandatory set-off on demand is the set-off by the request of the superior creditor. This kind of set-off needs only the consent of the privileged creditor. Muqassah al-talabiyyah normally takes place when there is no correspondence of the status of the debt or when one debt is preferred over the other. However, when there is cases where the set-off will bring injustice to the other party (happens because only consent of the superior creditor is required), both parties can bring the case to the court and the judge will decide the procedure to set-off the debts.

Voluntary set-off or muqassah al-ittifaqiyyah needs the consent from both parties because the debt to be set-off is different in nature. This is also known as contractual set-off. Voluntary set-off is applicable when the subject matter is not similar in genus or attribute. The parties still need to observe that the set-off should not result in violation of Shariah rulings.