Professional Documents
Culture Documents
Fiqh Muamalat
Semester January 2010
By:
Abd Aziz Bin Mohd Nor
Matric No: 0900334
2
Table of Contents
1. Abstract...................................................................................................4
2. Definitions of Tawarruq...........................................................................4
3. Differences and Similarities between Al-‘Inah and Tawarruq Contracts..5
4. Types of Tawarruq Contracts...................................................................7
5. Opinions and Issues of Tawarruq Contracts............................................8
6. Critical Observations.............................................................................17
3
1. Abstract
Islamic banking refers to a system of banking or banking activity that is
consistent with the principles of Islamic law (Shariah) and its practical
application through the development of Islamic economics. Shariah
prohibits the payment or acceptance of interest fees for the lending and
accepting of money respectively, Interest for specific terms, as well as
investing in businesses that provide goods or services considered contrary
to its principles. In addition, Shariah prohibits transaction which contain
the elements of gharar (uncertainties or ambiguities) and maisir
(gambling) but encourages risk taking (ghorm) and kasb (value added) so
that transactions could have iwad (equivalent counter value) in order to
earn legitimate ghonm (profit). Tawarruq is one of the Islamic banking
products and with the phenomenal growth of Islamic banking, the use of
tawarruq has grown from its original classical form to many other forms
and thus inviteing controversies. This paper will discuss the issues relating
to tawarruq contracts including types of tawarruq contracts as well as the
related juristic arguments that allows or prohibits tawarruq.
2. Definitions of Tawarruq
2.1 Literal Meaning
This term is derived from the word paper and dirham coined from silver or
money minted from dirham. Its plural is ‘awraaq’ i.e. ‘paper replacing
monies/paper money’. It was so called, because the buyers of a certain
commodity sell that commodity using paper, with the purpose of getting
the paper (liquidity) and not the commodity. The term ‘paper’ here means
different types of money.1
1
Prof. Dr. Ibrahim Fadhil Dabu, Tawarruq, Its Reality and Types, p1
4
Tawarruq is actually a sale contract whereby a buyer buys an asset from a
seller with deferred payment and subsequently sells the asset to the third
party on cash with a price lesser than the deferred price, for the purpose of
obtaining cash. This transaction is called tawarruq mainly because when the
buyer purchases the asset on deferred terms, it is not the buyer's interest to
utilize or benefit the purchased asset but rather to facilitate him to attain
liquidity (waraqah maliah).2
‘Inah consists of two parties; the seller is the party who buys the
commodity at a certain price, and the buyer is the second party who buys
the commodity at a higher price, and on deferred payment. But in
tawarruq, there are three parties, i.e. the seller, buyer and the third party.
The first party buys the commodity from the seller, and then sells it to the
third party who is not the first seller. ‘Inah is prohibited by majority of the
jurists, because it leads to riba. It falls within the prevention of things that
4
Taqi Usmani (2005)
6
causes prohibited actions (saddu zhara’i). For example, the path that
leads to haram is also haram. ‘Inah leads to riba, because there is a
difference in the price, i.e. between the cash and deferred price. The
prohibition of ‘inah is reported in a Hadith of Ibn Umar-radiyallahu
anhuma, who says that, “The Prophet pbuh says, ‘when you deal with
‘inah, and pursue the tails of cow and leave jihad in the way of Allah, Allah
will then send unto you a disgrace which will not be raised for you until
you return to your religion.’” (Reported by Abu Dawud).
There is also the Hadith of Aisha - may Allah have mercy upon her - from
‘Aliyah bint Aifa’, that she said, “I, a maid and wife of Zaid ibn Arqom went
to Aisha, the maid said, ‘I sold a child of Zaid ibn Arqom at three hundred
Dirham to the Ata. Then I bought it from him for six hundred Dirham. She
(Aisha) said to her, ‘shame to what you bought, tell Zaid ibn Arqom that
he had spoilt his jihad with the Prophet until he repents.’” (Reported by
Ahmad).5
5
Prof. Dr. Ibrahim Fadhil Dabu (2007), Tawaruq, Its Reality and Types, p2-4
6
Muhammad Taqi Uthmani (2009),Verdicts on At-Tawarruq and Its Banking Applications,
p2
7
Sa’id Bouheraoua (?), Tawarruq in the Banking System: A Critical Analytical Study of
Juristic Views on the Topic, p7
7
The Islamic Fiqh Academy defined it as: “the purchase of a
commodity possessed and owned by the seller for a delayed
payment, whereupon the buyer will resell the commodity for cash to
other than the original seller in order to acquire cash (al-wariq).”
8
Taqi Usmani (1998), Introduction to Islamic Finance p, p66
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iii. The subject of sale must be in the physical or constructive
possession of the seller when he sells it to another person.
iv. The sale must be instant and absolute.
v. The subject of sale must be a property of value.
vi. The subject of sale should not be a thing which is not used except
for a haram purpose, like pork, wine etc.
vii. The subject of sale must be specifically known and identified to the
buyer.
viii. The delivery of the sold commodity to the buyer must be certain
and should not depend on a contingency or chance.
ix. The certainty of price is a necessary condition for the validity of a
sale.
x. The sale must be unconditional.
9
Taqi Usmani (2008), Applications and Rules of Banking Tawarruq, p59
9
Furthermore, the quantity that is stated on the paper is not
distinguished from other quantities, which are available in the
warehouses. According to the same rules of sales above, before the
buyer can sell it again, the sold quantity should be owned by the
buyer. But the practice is not like that. The prevailing practice is
that the buyer sells the quantity before he possesses it, and even
before his quantity can be distinguished from other quantities.
Therefore, this process is not Shari’ah-compliant, due to guarantee
of profit for something that is not possessed. Sheikh Taqi Usmani
added that there should be fiqh scholars supervising the
transactions of these markets, so that legal sales are concluded.
However, that can be done by setting up a special way and
formulating new contracts by Shari’ah committees. Furthermore,
the parties involved should negotiate with the brokers and trader in
these markets, i.e. for adherence to the Shari’ah principles, as far as
possible. If that cannot be achieved, dealing with these markets is
not permissible, either for tawarruq or for anything else.
c. Suppose that the broker is the agent for the buyer (mustawriq) and
the broker possesses the commodity from the bank before he sells
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it to the third party. This is fine, but the problem is that the broker
himself is the bank’s agent as well. The broker purchases the
commodity and he possesses it from first seller on behalf of the
bank. Then, he sells it to the mustawriq. Legally, the broker
assumes the position of the bank. Therefore, the broker cannot be
the agent for the mustawriq to possess the commodity. There are
two legal ways to make this sale Shari’ah-compliant. The first way is
initially, the bank has to hand over the commodity to the
mustawriq. The moment the bank is no longer liable for the
commodity, the mustawriq can assign the bank or the broker to sell
the commodity to a third party. However, if there is an upfront
agreement that states that the mustawriq has to appoint the bank
as his agent, then the sale is void.
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such contracts, there should be an independent study for contracts
that happens through computers, in light of the laws and rules.
10
Nikan Firoozye (2009), Tawarruq : Shariah Risk or Banking Conundrum, p?
12
In its first ruling on tawarruq, The Islamic Fiqh Academy has approved the
use of tawarruq as one of the Islamic banking products. Specifically, it has
approved the use of Al-Tawarruq al-Fardi (Tawarruq on an Individual Basis) in
the Islamic banks. The Islamic Fiqh Academy, in its 15th session, which was
held in Makkah al-Mukarramah on Saturday, November 1998, discussed the
issue on tawarruq for the first time. The academy has decided, as follows:
However, the years following the first ruling on tawarruq has seen the
proliferation on the use of tawarruq and the birth of new forms of tawarruq
contracts. The new form of tawarruq contracts are Al-Tawarruq al-Munazzam
(Organized Tawarruq) and Al-Tawarruq al-Masrafi (Banking Tawarruq)
products. Subsequently, this has forced the need for the Islamic Fiqh
Academy to issue another fatwa on tawarruq.
11
http://www.isra.my/fatwas/commercial-banking/financing/tawarruq/426-rules-of-
tawarruq.html
13
The International Council of Fiqh Academy, in its 19th session which was held
in Sharjah, United Arab Emirates, on 26 – 30 April 2009, decided that after
having reviewed the research papers that were presented to the Council
regarding the topic of tawarruq, its meaning and its type (classical
applications and organized tawarruq), a resolution were passed. Furthermore,
after listening to the discussions that revolved about the applications of
tawarruq, the resolutions were presented.
The same council in its 8th meeting held on 12th December 1998 resolved
that that Bai` `Inah transaction in the Islamic Inter-Bank Money Market is
permissible.14 The same council went further in revisiting its ruling on Bai’
Inah at their Regional Shariah Dialogue which was held on 28th and 29th
June 2006. In this meeting, the council members decided that tawarruq
and bai’ ‘nah shall be ruled similarly since the basis relied upon to justify
the permissibility of tawarruq is similar with the basis to justify the
permissibility of bai` `inah.15
13
http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/
07_shariah_resolution.pdf, p12
14
Ibid, p15
15
Ibid, p16-17
15
In this meeting too, the council acknowledges that the permissibility of
bai` `inah and tawarruq is still a matter of juristic disagreement among
the Shariah scholars backed by their own basis of justifications.
6. Critical Observations
The recent ruling on Tawarruq is perhaps the most significant Shariah risk
event thus far. Tawarruq is firmly embedded in the Islamic Banking system in
a great many countries and an undiversified revenue stream for many Islamic
banks. Commodity Murabaha (a form of tawarruq) is one of the most
commonly used financing contract in Islamic Banking (73.9% of the total
Islamic modes of financing) and it is estimated that global tawarruq market is
more than $100 billion18.
17
http://www.arabianbusiness.com/557758-islam-allows-organised-tawarruq-asset-
sales---scholar
18
http://www.dawn.com.pk/wps/wcm/connect/dawn-content-
library/dawn/news/business/11-scholars-raise-questions-over-islamic-finance--il--07
19
Saiful Azhar Rosly (2005), Critical Issues on Islamic Banking and Financial Markets,
p340
17
Since debt is the end result of an organized and banking tawarruq, therefore
Islamic banks should look into the purpose of debt creation itself. If the
purpose of debt creation is to create a venture capital or for the purpose of
equity financing, for example, then Islamic banks should encourage the use
of mudarabah and musharakah contracts instead. These contracts would
lessen the impact of market risks of another financial crisis. If the purpose is
to create extra cash in itself, this should be discouraged since Allah says in
the Quran that, “wealth must not circulate only among the rich ones among
you.”
The difficulty arises since the main objectives of the majority of Islamic
banks’ formation are to maximize profit and maximize shareholders’ value
but not the proliferation of conformance to the Shariah and the
betterment of the Islamic ummah for Allah’s sake. This is because most
Islamic banks are publically owned. As long as it remains as such, Islamic
banks, whether consciously or unconsciously, will tend to use hillah
(strategems) to justify the continued use of organized and banking
tawarruq.
20
Dr Salman Khan (2009), Why Tawarruq Needs to Go?, Islamic Finance News Volume 6,
Issue 35, p19-20
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