FINAL PROJECT OF ISLAMIC

FINANCE
TOPIC: AL-TAWARRUQ
SUBMITTED TO: SIR SHAKEEL IQBAL AWAN

SUBMITTED BY: GROUP MEMBERS

NAWAZ AMIN

20160

ZUHAIB ALAM

20256

ALI NASIR

20244

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TABLE OF CONTENTS

ABSTRACT
CHAPTER # 1 INTRODUCTION OF TAWARRUQ
1.
INTRODUCTION.............................................................................................................
.................... 4
2. DEFINITION AND TYPES OF
TAWARRUQ........................................................................................... 5
2.1 DEFINITION AND TYPES OF
TAWARRUQ................................................................................... 5
2.1.1 LITERAL MEANING OF
TAWARRUQ...................................................................................... 5
2.1.2 TECHNICAL MEANING OF
TAWARRUQ.................................................................................. 6
2.1.3 TYPES OF
TAWARRUQ
8
CHAPTER # 2 FORMS AND AGUREMENTS OF TAWARRUQ
3. FORMS OF
TAWARRUQ...................................................................................................................
... 9
4. THE PROPONENTS AGUREMENTS ON
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TAWARRUQ.13
CHAPTER # 3 CONTROLS,RISK MANAGEMENT AND CONCLUSION
5. CONTROLS OF VALID
TAWARRUQ....................................................................................................... 15
7. TAWARRUQ FOR LIQUITY RISK
MANAGEMENT.................................................................................. 17

8.
Conclusion
18
References

ABSTRACT

Islamic banking product has gained popularity since the last two decades
and stole the attention all banking and finance sector industry around the
world due to its uniqueness compare to conventional bank and trusted as a
solution

for

the

current

crisis.

However

the

issue

of

liquidity

risk

management is very sensitive in the banking system to satisfy the need of

asset and liability. Since Islamic bank is free interest-based system which
cannot use conventional product as their liquidity risk management where
Islamic bank trusted as one of institutions that become solution for crisis, we
need Islamic product that can overcome this issue. One of aqd that we can
offer is tawarruq concept where by the Islamic bank A for instance needs
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liquidity to satisfy the demand of depositors; he can borrow from Islamic

bank B who has surplus in liquidity by using tawarruq concept. The main
objective of this paper is to introduce the real tawarruq concept for Islamic
bank to manage its liquidity which also can be used for conventional banks if
they want to offer Islamic windows. In this paper we provide the structure
how the tawarruq can be work in banking system and forms of Tawarruq that
are actually practiced by Islamic banks.

INTRODUCTION
Tawarruq is the most popular product in Islamic banking and finance sector
especially in GCC countries which is disputed among the Muslims scholars.
The idea of tawarruq came from the classical view of jurists that want to
assist the development of Islamic economic, banking and finance and
replacing the old concept which is clearly prohibited in Islam. Islam has
always coming up with an alternative product and contract to replace the
position of the Haram transactions that will lead into the serious economic
problem to the society. Such as, Allah has prohibited Riba and at the other
hand, Allah allowed sale as long as the terms and conditions of sale are
followed by counterparty.
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However, the ideal concept brought my classical scholars about the contracts
has already contaminated by the current banking and finance sector who try
to get advantages from the classical concept without following the original
structure that mentioned by the classical jurists. At the other hand, we face
many issues to implemented the real Islamic finance in banking sector which
loaded by non-Muslims players whose their mind-set is originated by
capitalism point of view. In this coming discussion will discuss how Islamic
banking product play its role in the real economic whereby there is real
transfer of ownership between counterparty compare to conventional
product that only play money with money and consider money as
commodity. Where in Islam it is not allowed, Islam considers money as a
medium of exchange and money cannot be exchanged with money unless
has same value. However, to raise value of money we have to change money
with commodity and sell it to another party so that we can take advantage
differentiation of price between purchase and sale. Since the concept of
tawarruq is widely used and accepted by middle east country (GCC), Bank
Negara Malaysia (BNM) has revised the concept of tawarruq by introducing
new concept of using tawarruq, the concept introduce by them is Bursa Suq
Al-Sila . This concept organizes between the counterparty how to manage
liquidity between the banks and will further discuss in this paper. Therefore,
the objectives of this paper are; first, to provide the definition and forms of
tawarruq, second, to discuss the differences between tawarruq and bay
al-inah, third, to provide the real Tawarruq concept for Liquidity risk
management, fourth, to provide liquidity risk management structure for
Islamic bank and discuss the scheme of Bursa Suq Al-Sila that basically
implementation of real tawarruq concept has been implemented by Bursa
Malaysia.

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DEFINITION AND FORMS OF TAWARRUQ

Definition of Tawarruq
A tawarruq is an Islamic financial product which allows clients to raise money quickly and easily,
in theory without breaking Muslim bans on interest. A customer buys an easily saleable asset
from an Islamic bank at a marked up price, to be paid at a later date, and quickly sells the asset
to raise cash.

Literal Meaning of Tawarruq

The term Tawarruq is derived from the word al-warq or al-waraqa, which
means minted dirham or any silver that issued to serve as a medium of
exchange, in this concept; it is designated to someone who has an
abundance

of

silver

coins.

In

another

term

tawarruq

comes

from

masdarthe verb tawarruqa is said Tawarruq al-hywan which it means the

animal at the leaves (Bouheraoua, 2009). The term of basically tawarruq
comes from the word wariq(Khayat, 2006) as it mentions in surah Al-Kahfi: 9
So send one of you with this silvery coin of yours to the town.
Which it means Dirhams made of silver. However, there are two different
accents in the Arabic language (wariq-warq).Furthermore, Tawarruq and the
verb derived from al-warraq are not directly traceable in the Arabic
language; linguists mention only variable nouns, as an al-Iraq (which applied
to become rich) and al-istiraq (which applied to a man who is seeking Dirham
or money). So the scholars invent the term of tawarruq for the one who may
be pressure himself on how to obtain al-wariq or cash money.

Technical Meaning of Tawarruq

Tawarruq technically is the purchasing of a commodity on credit by the
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mutawarriq (seeker of cash) and selling it to a person other than the initial
seller (3rd party) for a lower price on cash (Dusuki, 2008). Actually, tawarruq
is a sale contract, whereby a buyer buys an asset from a seller on deferred
payment and subsequently sells the assets to the third party for cash, with a
price lesser than the deferred price. This transaction is called tawarruq,
mainly because when the buyer purchases the asset on deferred terms, it is
not the buyers intention to utilize the benefit from the purchased asset,
rather to facilitate him to attain liquidity (waraqh maliah).
Parties to a tawarruq transaction
1. Seller (mutwarriq) or creditor;
2. Buyer (mustawriq or mutawarriq), i.e. the one who is looking for liquidity;
and
3. Subject matter:Commodity.
Figure 2.1

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According to Malikis tawarruq means selling something on deferred basis and

then buying it back in cash, at a lower price than the deferred price. For
example, someone sells his commodity at a price that is already known to be
paid by the deferred payment. He then buys it at a lesser price than the
deferred price. It is known because of obtaining the money for sahib alinah.This is because al-ain is the present property from the money. This is
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one of the practices of the Hanafis (Khayat, 2006). According to the Shafiis,
tawarruq means selling something on deferred payment, and then buy it
back in cash, albeit at a lower price than the deferred price. Furthermore, the
Hanbalis said in kitab Syarh Muntaha Al-Iradat,known as Daqaiq Awla AnNahyu Li syarhi Al-Muntaha that bai al-inah by the name of tawarruq is the
need for cash, buying the equivalent of thousands and more to expand its
price and there is nothing wrong with that and it is known as tawarruq.In
Muntaha Al-Iradat Fi Jami Al-Muqni Maa At-Tanqih Wa ziadat,If someone
bought something on credit or he did not pay the price, it then becomes
forbidden and the sale is invalid to its buyer by cash purchase less than the
first price, and it is a tool to the second, except change its feature and it is
known as the problem of inah, because the commodity of the buyer in
deferred is taken instead of it.

The difference between tawarruq and tawriiq

Many researchers have mixed up the term tawarruq and tawriiq. The
definition of tawarruq has been mentioned above. However, tawriiq means
documentation (taskiik).This means transferring existing commodities into
sukuk, which are subject to circulation.This type of arrangement needs to be
guarded by certain restrictions and procedures, in order to attain the
Shariah criteria that are based on investors ownership on the assets that
yield income. The acceptable deeds (sukuk) are the likes of sukuk of ijarah
(leasing), sukuk of salam (advance payment) and sukuk of mudharabah
(profit sharing). The rulings for all these sukuk are based on certain Shariah
criteria. The process of issuing sukuk can be divided into different parts, with
the view of protecting the sukuk bearers and the integrity of their circulation,
with the reference to that sukuk ijarah can be of long-term application, via
the different amounts that is in agreement with the Shariah criteria, which
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can create different returns for the sukuk bearer.

The difference between inah and tawarruq

According to the Hanafi School of Thought, inah is when someone buys
something at a known price (on deferred basis), and then resells it to the
original seller for cash, in which the second sale price is less than the
deferred sale price.
According to the Maliki School of Thought, inah happens when someone sells
a commodity of ten Dinar in cash to another person. He then buys it from
him (the same person) at twenty Dinars, i.e. on deferred basis or vice versa.

Types of Tawarruq
Generally, there are two types of Tawarruq namely individual Tawarruq
(Tawarruq al-Fardi) and organized Tawarruq (Tawarruq al-Munazzam).

Individual Tawarruq (Tawarruq al-Fardi)

Individual Tawarruq is a pure Tawarruq whereby a buyer buys a commodity
from a seller on deferred term and later sells it to other person for immediate
cash. When the buyer sells it, the commodity is in his hand and he has the
choice in either to keep it or to sell it in the future. If the buyer has the
intention to sell it, the sale contract is considered valid by the majority of
jurists even the buyer sells the commodity to other person (independent
from original seller) since the intention of all parties is not to engage in riba
(Haneef,

2009).

Therefore,

Tawarruq

is

allowed

though

some

jurist

considered it is reprehensible provided that third party is present as an

intermediary (El-Gamal, 2006; Kuwait Finance House, 2011a).

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Organized Tawarruq (Tawarruq al- Munazzam)

Tawarruq al-Munazzam is organized in a way that the buyer has the options
in either keeps the commodity or appoint the seller to be an agent to sell it
or appoint a third party which is related to the bank to sell the commodity.
This type of Tawarruq is common in banking practice for the purpose of
consumer financing (Adel, 2010). The buyer practically has no options as the
purchased commodity is not intended to be purchased (Dabu, 2007). Rather,
it is a facility to allow the buyer to get cash. Hence, he appoints the bank as
his agent to sell the purchased commodity to any third party and the
proceed will then be delivered to him.

Forms of Tawarruq
We can detect six forms of Tawarruq that are actually practiced by Islamic
banks that deal in it. These are as follows:
1. Buy deferred and sells cash with the intermediation of the Islamic bank
2. Buy cash by the Islamic bank with lease/sale to the same seller
3. Buy commodities cash and selling them for a deferred price in the
international market for the bank itself
4. Sell commodities cash and buying exact equivalent deferred in the
commodity market with the intermediation of the bank
5. Sukuk of leased assets
6. Sukuk of services (service bonds).
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It is worth noticing that in the forms 1, 2 and 4, the bank provides cash to its
customers while in the form 3 the bank provides cash to international
companies and traders in the international market. In the form 5 the Islamic
banks gets the cash or it the Sukuk are issued by a government it also gets
the cash. The form 6 is not practiced by Islamic banks but certain companies
practice it and the most common form of it is the phone and gift cards that
are issued for a future service or purchased that will be made by the card
purchasers.

Buy deferred and sells cash with the intermediation of the

Islamic bank
There are Islamic banks that announce and advertise its service of Tawarruq
financing. Very often, and for obvious reasons new cars are used as a
commodity-medium in consumer Tawarruq. The car does not leave its lot in
the dealership and all transactions are made on the keys! Several cars may
be contracted if the amount of financing happens to be larger.
The corporate version of it is normally done on large inventory at an
associate company to either the Islamic bank or customer crop.
From a financial and economic point of view, the direct cost to the customer
and the social cost of this transaction is certainly much higher than the cost
of interest-based lending. The reason is the complexity of the transaction
and its several steps and contracts in addition to the potentiality or legal or
economic changes during its period. It takes much more than Murabahah
that is already more costly than interest-based lending. Besides, since the
only way to reduce its cost is to apply it in a formal not real way so that it
becomes exactly like a Riba-based loan but with more paper work, it gives
the attraction to fake the transaction instead of implementing its details
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required by its Fiqhi description. Finally it has all the drawbacks that are
associated with interest-based lending while it does not bring any social,
economic or equity advantage.

Buy cash by the Islamic bank with lease/sale to the same

seller.
In this form of Tawarruq, the Islamic bank buys from its customer a real longlasting asset, often real estates, for a cash payment, then it sells/lease the
same back to the customer on installment basis for either fixed or variable
installments. The Price is normally the same original price of the purchase
from the customer and the Islamic bank earns the rent of the part that is not
sold. Once the customer fulfills all its obligations the ownership of the
property is returned to it. Some Islamic banks restrict the use of this type of
financing for cased or replacing interest-based loan the customer had with
another party.

Buy commodities cash and sell them for a deferred price

in the international market for the bank itself.
Almost all Islamic banks practice this kind of Tawarruq, or rather Tawriq,
under the name of international Murabahah as a means for using their
excess liquidity. This transaction consists of parallel contracts each pair of
them consists of cash purchase and deferred sale.

Sell commodities cash and buy exact equivalent deferred

in the commodity market with the intermediation of the
bank
This is used by Islamic banks as a vehicle to provide cash to their customers.
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The transaction consists of a series of agency contracts between the bank,

its international correspondent, international broker, and the customer. The
customer normally only sign a bunch of papers that it does not know their
content and get cash from the bank and pays for it a higher amount in the
future. The only basic difference from interest lending is that the amount of
of increment above the advanced cash is not determined by a general rule
announced to everybody but rather by the price differential of the
commodity at the time of the transaction in addition to the commissions of
all intermediaries.

Sukuk of leased assets

The creation and sale of the Sukuk of leased assets is essentially a real life
investment transaction although some of its versions may be used as a tool
of tawarruq.
If a government wants to build a new airport or connecting two cities with a
railroad for a construction cost of 200 million Dinar, and the government
desires to keep the management in its hands while finance the project from
the public, it can issue, say, 2 million title deeds, each one of them
represents the ownership of only 1/2,000,000 of the project and sell these
Sukuk for 100 Dinar for each Sukuk (in fact for each share of the project),
and the government pledges to rent these assets for a given known rent and
a given long term period. The proceeds of sale will be used to construct the
project and put it on its feet ready for delivery to the lessee.
It is obvious that these Sukuk are negotiable for a market price because they
represent a part of a real estate. And it is obvious too that they provide the
owners with a pre-determined earning fixed and known in advance. It is
obvious too that the same can be done by an Islamic bank instead of a
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government.
The same also can be applied to already existing projects or real estates
owned by the government or the Islamic bank if the government or the bank
decides to sell them and lease them from the new owner. The proceeds of
the sale may be needed to establish another developmental project.
These Sukuk can be used as a vehicle for Tawarruq when the government or
the Islamic bank offers already existing long-lasting assets, represented by
Sukuk, for sale with the condition of not only leasing them from the new
owners but also to buy them back too through installment payments along
with the lease payments so that by the end of the lease period ownership
goes back to the government or the Islamic bank. Under this, added
condition, the apparent objective of the government is to acquire the cash
now and return it with a surplus or increment over a period of time.

Sukuk of services (service bonds)

Some universities in the West actually started offering for sale future credit
hours that parents can buy for their childrens education. With all prices
going up over time, the cost of future education can be guaranteed at
affordable

prices

developmental

today.

projects.

The

university

These

can

well-defined

use

the

service

funds

bonds

for

are

its
also

negotiable and can be issued by an Islamic bank that can buy these services
in bulk from the service provider, thus financing its projects, and sell the
service Sukuk to the public.

The Proponents Arguments on Tawarruq

Tawarruq is a type of sales
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Tawarruq defined as buying commodity with deferred payment and selling it

to other than the seller in order to obtain cash. It is generally acceptable by
referring to verses in Al Quran when Allah says;
Allah Has allowed trade and has prohibited Riba (Al Baqarah 2:275 ).
In addition, Islam Does not prohibit any trade except those which involve
injustice, cheating, making exorbitant profits, or the promotion of something
which is Haram (AlQaradawi,No year) .It Denotes that the word trade is the
generality of all types of trade and permits every sale, where Tawarruq is like
any other sale.

Mutual Consent between the parties

Every agreement made between the parties is legally permissible in Islam.
When if both parties agreed and have mutual consent toward their
agreement or transaction. This Principle was laid down in Al Quran:
O You who believes! Do Not squander your wealth among your selves in
vanity, except it be a trade by mutual consent
(AnNisa4:29). Thus, The free agreement is one of the conditions which
render the transaction valid in Islamic Point of view especially in debt
transaction. Tawarruq Is based on mutual consent between the customer and
Islamic banks.

No Harmful effect
It was narrated that Ibn Mas udruled that there was no harm in declared
lump sum or percentage profit margins. In this regard, the cost in Tawarruq Is
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determined and thus permitted.

No Element of Riba
Allah said, O Ye who believe! Squander Not your wealth among yourselves
in vanity, except it be a trade by mutual consent (An Nisa4:29). This Verse
shows that it is prohibited to eat the property of others by using the incorrect
ways, which are not in line with the Shariah , Such as Riba, Qimar, Ghisyh
.Murabahah Transaction is not based on Riba Because the profit margin
agreed by both parties
And ther is no other hidden payment charged by the seller to the purchaser.
Nevertheless, some argues that what are the differences between profit
margin in Murabahah And interest charged by conventional bank through the
loan given. The Argument is that the profit margin offered in Murabahah
Transaction determined by negotiation by both parties i.e. between the bank
and the customer until they mutually agreed into the transaction. While In
conventional bank, the interest determined by keeping up with interest rate
developed in financial market (Khalid, No year) . In Case of default payment
occurred, the client of credit loan will be penalties, in contrary the client of
Murabahah Financing disallowed to be penalties. The Price in the beginning
of Murabahah Contract is the final price fixed until the end of installment
payment finished. Thus, There is no other penalty in the case of default of
payment It Same goes to Tawarruq Where the trade is like selling the
commodity to the purchaser at a high price through debt, and the buyer sell
the commodity at a lower price to the third party at the same price, in order
to make the profit differ from the other price. This Type of sale is permissible
i.e. Tawarruq, because there is no Riba.

Tawarruq as to avoid usury without Hilah

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The Scholars who permit Tawarruq Based on the Hadith Of Bukhari Muslim
27 , Who has been proven to support the Tawarruq transaction, on
theoccasion when a farmer from Khaybar Came to the Prophet Muhammad,
Bearing dates of the highest quality. The Prophet Asked him,Are allthe dates
from Khaybar of good quality And the farmer answered, No, I Have
exchanged two kilograms of low quality dates for one kilograms of superior
quality. On Hearing the farmer S answer, the Prophet Muhammad Forbid
this, and recommended he sell all his low quality dates for cash, to obtain
money, then to buy dates of a superior quality (Hosen And Narawi, 2009) .
This Hadith Indicates the legal trading method to avoid usury, without the
existence of Hilah or anything of that nature, because trading conditions had
been fulfilled and there was no usury in this trade transaction. Ibn Baaz said
with regard to the issue of Tawarruq, it is not Riba And the correct view is
that it is permissible, because of the general meaning of the evidence and
because it facilitates relief and enables people to meet their current needs.
As for the one who sells it to the one from whom he bought it, this is not
permissible rather this is a Riba based transaction, which is called Innah .
This Is Haram Because it is a trick aimed at getting around the prohibition on
Riba (Yusri And Abdurrahman, no year). Thus This matter indicates the
legality of trading transactions, wherein the intent and differing goals using a
medium is acceptable and may be carried out, or put into practice, As well
as being free from usury explicitly or implicitly. In Other words, the Tawarruq
Transaction is permitted and is made legal when it is indeed required.

Controls of valid tawarruq

1.The contract of deferred sale should be Shariah-compliant, either by
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negotiation or
,which
make

murabahahtaking into

account

the

eighth standard

concerns murabahah and murabahah to the purchase orderer-and

sure

that

the commodity exists

and possessed

by

the

seller

before he sells it. In case of a binding promise, the promise should only be
from one party. Moreover, the subject matter should not be gold, silver or
currencies;
2.The commodity must be precisely determined, either by possessing or
by serial number of its documentation, such as the serials

numbers

of

warehouse certificates.
3.If at the time of concluding the contract, the commodity does not
exist, then the seller

must

provide

full

information

regarding

the

description, quantity and the place the commodity is stored to the client,
in order to ensure that the sale is genuine not nominal. Preferably, the
transaction should use local commodities.
4.There should be real possession of the commodity, and there should
not be any obstacle that prevents the client to hold the commodity;
5. The commodity should be sold to a third party, and not to the first seller,
so that sale of inah is avoided. Additionally, the first seller should not get
back the commodity by any condition, collusion or through customary
practices;
6.There should not be any link between the contract of purchase at
deferred price and the contract of sale at cash price, by a way that forbids
the client to hold the commodity, either the link is stated in the contact or
due to customary practices or by the nature of the procedures;
7.The client should not appoint the company (which deals with the
international markets

of

commodities)

or

its

agent

to

sell

the

commodity that the client has bought. Moreover, the company should not
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appoint itself as the agent for the client. However, if the system in the
market does not allow the client to sell the commodity by himself, the
client can assign the

company

as his agent to sell the commodity, on

condition that the sale should be done after the client has held the
commodity;
8. The company should not appoint another agent to sell the commodity
(which was sold by the company -first seller) on behalf of the client;
9.By taking other provisions into account, the client should sell the
commodity himself or through another agent (not the company); and
10. The company should provide full information, in order to enable the
client to sell the commodity, either by himself or through his agent. .

TAWARRUQ FOR LIQUIDITY RISK MANAGEMENT

Liquidity risk is the potential loss to banks arising from their inability either to
meet their Obligation or to fund increases in asset as the fall due without
incurring unacceptable costs or Losses (Dusuki, 2010). Where the bank will
incur systemic risk at this moment either bank runs or financial instability.
Liquidity risk management is play important role in banking sector. Since the
bank play with other peoples money, managing the liquidity to satisfy the
demand of asset and liability is the key of survive of the bank and ensure
that the bank always has liquidity to pay the depositors money. Otherwise,
the depositors will rush to the bank to take their money back namely bank
run. If let say one bank collapse it will lead other banks will collapse
(systemic risk) as happened in Asian crisis 1997-1998. Therefore, the role of
treasury department in the banking like heart, if they cannot manage in
appropriate way, automatically the bank will collapse.
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Conclusion
It is concluded that Tawarruq Transaction practice by Islamic Banks is
according to Shariah guidelines. Even Though there are different views and
stands towards the legality of Murabahah and Tawarruq But the Fatwas from
AAOIFI

(Accounting

and

Auditing

Organization

for

Islamic

Financial

Institutions) conformed that the products are permited to be used in current

practice. However, The requirement outlined by AAOIFI shall be fulfilled by
Islamic Banks to ensure that product is permissible to be used i.e. no
elements of Riba, GharaR and Maysir.

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References
1-http://www.islamic-banking.com/glossary_t.aspx
2-http://www.dummies.com/how-to/content/reverse-murabaha-tawarruq-inislamic-finance.html
3-http://cif.ciitlahore.edu.pk/Documents/Tawarruq-Concept.pdf
4-http://www.iefpedia.com/english/wp-content/uploads/2011/11/Tawarruq-inIslamic.pdf
5-http://lexicon.ft.com/Term? Term=tawarruq
6-http://islamicbankers.me/islamic-banking-islamic-contracts/financingcommodity-murabaha-tawarruq/
7http://www.sciencedirect.com/science/article/pii/S187704281401146X#bbib0
00
8-http://www.slideshare.net/saupee/presentation-tawarruq
9-http://www.emeraldinsight.com/doi/abs/10.1108/IMEFM-10-2013-0106
10-http://wiki.islamicfinance.de/index.php/Tawarruq
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11-http://www.slideshare.net/saupee/presentation-tawarruq
12-http://www.inceif.org/blog/islamic-finance-2/tawarruq-and-islamic-finance/
13-http://dirasat.io/elmp/files/a-61-.pdf.

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