TAWARRUQ

ESSENTIALS OF ISLAMIC FINANCE

SYED MOHIB HUSSAIN

5527
 TAWARRUQ

Tawarruq is an arrangement whereby a person, in need of liquidity, purchases a commodity

from a seller on credit at a higher price. The person who acquires commodity in this way is
called 'Mutawarriq'.
It is basically an instrument in which a buyer purchases a commodity from a seller on Deferred
Payment Basis and sells the same commodity to another buyer on Spot Payment Basis. The
buyer basically borrows the cash needed to make the initial purchase. Later, when he secures
the cash from the second buyer, he pays the initial installment to the seller from whom he has
purchased the commodity which is Cost plus Profit or Murabaha.
Because the buyer has a contract for a Murabaha transaction, and later the same transaction is
reversed, this scenario is called a Reverse Murabaha. Both transactions involved must be
Shariah-Compliant.

HOW TAWARRUQ WORKS IN ISLAMIC BANKING?

Tawarruq is the mode through which some Islamic banks provide personal financing to facilitate
the supply of cash to their customers. As used in personal financing, a customer purchases a
commodity from the bank on deferred payment basis; the customer then sells the commodity
in the market to a third party for cash. Islamic banks also use Tawarruq to guarantee a
predetermined percentage rate of return to on investment deposits, buying a commodity from
the customer on deferred payment basis then immediately selling the commodity for cash, the
deferred payment price paid to the customer being higher than the cash price received by the
bank – this is referred to as Organized Tawarruq as the purchase and sale transactions are
carried out simultaneously and there is no risk for the bank. Reverse Tawarruq is also practiced
by some Islamic banks to manage their liquidity, it is similar to Organized Tawarruq, but in this
case, the banks act as the customer.
First, the customer purchases a commodity (other than a medium of exchange) from the bank
on a cost plus profit basis. Then the customer sells that commodity to a third party. In reality,
the customer simply authorizes the bank to sell the commodity to the third party on his behalf.
The proceeds from the sale are credited to the customer’s account, and the customer pays back
the bank (the cost plus profit).
 SHARIAH STATUS OF TAWARRUQ

Classical Muslim jurists are divided on the issue of Shariah permissibility of Tawarruq. There is a
view from Imam Ahmad Ibn Hanbal that Tawarruq is prohibited (Haram). Another view from
Imam Muhammad Hasan al-Shaibani, Imam Malik and of the two opinions narrated on behalf
of Imam Ahmad Ibn Hanbal held that Tawarruq is discouraged (Makrooh). Imam Ibn
Taimiyyah has considered Tawarruq as an exceptional dealing which is permitted in the case of
necessity (Darura), where the person is really in need of cash. Contemporary Muslim jurists are
also divided on the issue of Shari'ah permissibility of Tawarruq.
The OIC Islamic Fiqh Academy ruled in its 19th session in April 2009 (Resolution 179 (19/5) in
relation to Tawarruq (Classical applications and Organised Tawarruq) that; it is not permissible
to execute both Tawarruq (organized and reversed) because simultaneous transactions occurs
between the bank and the client, whether it is done explicitly or implicitly or based on common
practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to
get the additional quick cash from the contract. Hence, the transaction is considered as
containing the element of Riba. To ensure that Islamic banking and financial institutions adopt
investment and financing techniques that are Shariah-Compliant in all its activities, they should
avoid all dubious and prohibited financial techniques, in order to conform to Shariah rules and
so that the techniques will ensure the actualization of the Shariah objectives ( Maqasid-e-
Shariah ). Furthermore, it will also ensure the progress and actualization of the socio-economic
objectives of the Muslim world.
This is the position with regard to the original concept of Tawarruq, but the ruling may change if
the transaction is infiltrated by some other elements. If the bank appoints the Mutawarriq
himself as its agent to purchase the commodity on behalf of the bank, then to sell it to himself,
this transaction is invalid. However, if the bank appoints him as an agent only for the purchase
of a commodity on behalf of the bank, then once it is purchased, the bank itself sells it to
Mutawarriq through a proper contract with offer and acceptance, the transaction is valid, but
not advisable.
If the Mutawarriq after purchasing the commodity from the bank, appoints the bank his agent
to sell it in the market and this agency is stipulated in the contract of sale as a condition, the
translation is not valid. However, if the agency was not a condition in the sale contract, and it
has been affected after unconditioned sale, the transaction is valid, but not advisable.
If Tawarruq is carried out through the international commodity exchange, it is vulnerable to
many violations of Shariah, because many conditions of a valid Islamic sale may be lacking.
However, if all the condition of a valid sale are properly observed, the transaction may be valid,
but its extensive use is not advised.