1.
Introduction
One of the main
difficulties that faces Islamic finance currently is to find a contracts or
products for the purpose of liquidity to both customers and banks. All Islamic
law school (Madhahib) –except Shafi’ Madhhab- consider the contract of ‘Inah is
Haram (prohibited), but at the same time they accept the use of Tawarruq
contract-except Malki Madhhab-. These differences of opinions are not new
regarding Tawarruq, but it started from the generation of the companions. The
application of Tawarruq in the banking system leads to another debate specially
the agency practice by the buyers to the sellers. In this paper will try to cover the meaning of
Tawarruq, types of Tawarruq, arguments and disputes, reasons for these disputes and we conclude by our
opinion regarding the use of Tawarruq.
2.
Tawarruq: An Overview
This part examines the literal and conceptual
meaning of tawarrruq, its esseential elements, and its common types. This is to facilitate a correct understanding of the concept
and its underlying aspects.
2.1 Definition of Tawarruq
Tawarruq, linguistically, is derived from the term Warq
which means leaves of the the trees then it has been used to denotes minted
silver (coin).Tawarruq was used by early generations to mean a request
for silver coin (dirham).
Technically is defined as:
OIC
Fiqh Academy
definition: “a person (Mustawriq) who buys a merchandise at a deferred
price, in order to sell it in cash at a lower price. Usually, he sells the
merchandise to a third party, with the aim to obtain cash.”
AAOIFI
Definition of Tawarruq “Monetization”: “refers to the process of purchasing a commodity for a
deferred price determined through Musawama (Bargaining) or Murabaha (Mark-up
Sale), and selling it to a third party for a spot price so as to obtain cash.”
According
to Bank Negara Malaysia Shari’a Resolutions in Islamic Finance Tawarruq refers “to a Mu`amalah with two stages of transactions. At the first
stage, the buyer will purchase an asset on credit from the original seller, and
at the second stage, the buyer will then sell the asset on cash basis to a
third party.91 It is named as Tawarruq because the buyer purchased the asset on
credit with no intention of utilising or benefiting from it, rather to sell it
to obtain cash.”
The
Fiqh Encyclopaedia of Kuwait definition of Tawarruq is: “buying a commodity with deferred payment and selling it to a
person other than the buyer for a lower price with immediate payment.”
2.2 Parties and elements to a Tawarruq transaction:
1.
Buyer (Mustawriq or Mutawarriq).
2.
Seller (Muwarriq) or creditor;
3.
Subject matter (Commodity).
4.
Consideration (price).
5.
Offer and acceptance; and
6.
The third party (Ultimate purchaser).
2.3 Types of
Tawarruq
1. Classical Tawarruq (Al-Tawarruq al-Fardi)
The OIC Fiqh Academy defined Classical Tawarruq (Al-Tawarruq
al-Fardi) as: “the purchase of a commodity possessed and owned by a seller
on a deferred payment basis, whereupon the buyer then resell the commodity for
cash to other than the original seller in order to acquire cash (al-Wariq).”
2. Al-Tawarruq al-Munazzam (Organized Tawarruq)
The OIC Fiqh Academy defined it as:“when a person (Mustawriq)/
[Mutawarriq] buys a merchandise from a local or international market on
deferred price basis. The financier arranges the sale agreement either himself
or through his agent. Simultaneously, the Mutawarriq and the financier execute
the transactions, usually at a lower spot price.”
The main
differences between classical and organized Tawarruq:
·
In organized Tawarruq the purchaser (Mutawarriq) will appoint the
seller (Muwarriq) as an agent to sell back the commodity to a third party, but
in classical Tawarruq the Mutawarriq
will possess the commodity and go to the market and sell it there
without any help from the Muwarriq.
·
The Mutawarriq will receive the cash from the ultimate buyer in the
case of classical Tawarruq, but in organized Tawarruq usually the Mutawarriq
will receive the money from the Muwarriq directly.
3. Modern Application of Tawarruq
There are many types of modern tawarruq, but
the basic purpose is the same for all, which is to
provide a liquidity management purpose. The following is a brief figure of the most used controversial form.
3.1 Term Deposit Based on Tawarruq
Source: RHB Investment Bank (IRTI, 2014)
From the above illustration, it is learnt that
it is clearly appeared that the principle of wakalah is embodied in this
application of tawarruq. The embodiment of wakalah can be viewed in the
steps(a), (c), (e) and (g). the bank who is acting as the parties to both sides
of a contract.
3.2 Tawarruq Financing (Commodity Murabahah
Financing)
Source: Maybank Islamic (Al-Ghazali, 2014)
From the above ilustration,
Commodity Murabahah Financing was introduced for
the purpose of working capital or asset expansion. In other words, it provides
cash to operate the business.
The principle of wakalah is also embodied here.
Since the focus of this paper is
to analyses the sharia issues of tawarruq, the next section
will examine the scholar opinion with regard to tawarruq.
4.
Juristic Discussion of Tawarruq
Sharia’
scholars’ differ regarding the Shariah view of both tawarruq.
4.1 First View: All Tawarruq types
(classical and organized) are prohibited
All Tawarruq types (classical and
organized are Haram and prohibited) this is the opinion on the majority of
Maliki madhahab scholars and some Hanbali scholars like Ibn Taymia and Ibn
al-Qayim, this opinion is practiced in Sudan. Their arguments are as follow:
1.
It is against the clear text of the prophet PBUH regarding
prohibiting ‘Inah.
2.
Tawarruq is a type of deception or trickery for Riba, in both Riba
and Tawarruq the end result is to exchange immediate cash for greater differed
cash. It causes the same effect of Riba on the needy party, by increase his/her
indebtedness in the future
3.
Using of Tawarruq is contradicts the legal maxim of Sadu Aldhrai’
(blocking of means to evil).
4.
Negative impact on the market by creating artificial demand and
instability of prices.
5.
It is encourages individual to ask for debt for non-necessary
purposes which against the spirit of Shari’ah which discourage debt except for
necessities.
4.2 Second View: Only classical Tawarruq is permissible
Only classical Tawarruq is
permissible (Halal), but organized Tawarruq is not, this opinion is adopted by
the majority of other Madhahib- except Malki Madhab- and recognized by AAOIFI
and the OIC Fiqh Academy. Those who state this opinion cited the following
evidence:
1.
Tawarruq is not a deception to Riba, but it is a Makhraj (permissible way to avoid hardship) from falling in
Riba
2.
The permissibility of trading and sale and applying the legal maxim
of the presumption of permissibility (al –Asl fi al-Mu’amalat al-Ibaha).
3.
The contracts of buying and selling back the commodity are totally
separated and there is no condition that the buyer will sell back the
commodity, also the seller can’t be an agent for the buyer for selling the
commodity.
Those above opinions are to rebuttal
the first view.
In addition, to argue the third
view, they use justification that tawarruq (organised and
reversed) [I1] are simultaneous transactions occurs between the financier and the
mustawriq, 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 (Fiqh stated explicitly in its resolution number 179 (19/5)
To avoid organized Tawarruq AAOIFI
stated many conditions for Tawarruq in its standard, namely:
4/7The client should not delegate
the institution or its agent to sell, on his behalf, a commodity that he
purchased from the same institution and, similarly, the institution should not
accept such delegation. lf, however, the regulations do not permit the client
to sell the commodity except through the same institution, he may delegate the
institution to do so after he, actually or impliedly, receives the commodity.
4/8 The institution should not arrange proxy of a third party to
sell, on behalf of the client, the commodity that the client purchased from
the institution.
4/9The client should not sell the commodity except by himself
or through an agent other than the institution, and should duly observe the
other stipulations.
5/1 Monetization[1]
is not a mode of investment or financing. It has been permitted when there
is a need for it, subject to specific terms and conditions. Therefore, the
institutions should not use Monetization as a means of mobilizing liquidity for
their operations, and exert no effort for fund mobilization through other modes
such as Mudaraba, investment proxy, Sukuk, investments funds, and the like. The
institution should resort to monetization only when it faces the danger of a
liquidity shortage that could interrupt the flow of its operations and cause
losses for its clients.
4.3 Third View: Both classical and organized Tawarruq are permissible
Both classical and organized
Tawarruq are permissible, this is practiced in Malaysia, many middles east
Islamic banks and some Islamic banks in UK.
1.
Tawarruq is not a deception to Riba, but it is a Makhraj (permissible way to avoid hardship) from falling in
Riba
2.
The permissibility of trading and sale and applying the legal maxim
of the presumption of permissibility (al –Asl fi al-Mu’amalat al-Ibaha).
3.
Essentially similar to the simple tawarruq recognised by the
jurists; only that the latter happens to be organised and the procedure
smoothened, so that the whole process could be concluded in a short period of
time
4.
Form over substance, and there is no disclosure for the intention
from both parties.
4.4 The rebuttal of first group’s argument
1.
The text is related to ‘Inah, not Tawarruq.; although the only
Madhab that differentiate between ‘Inah and Tawarruq is Hanbli Madhab.
2.
The process to get immediate cash is through real sale and purchase
transaction. Hadith Bukhari Muslim[2]
indicates the permissibility of employing the described method for avoiding involvement
in riba overtly or covertly
3.
Shaf’I, Hanfi and Dhahri Madhhab don’t consider “Blocking the means
to evil” as a source of Shari’a,
4.5
The rebuttal of second and third group’s argument
for permitting tawaruq
1.
There are criteria that used to differentiate between Heela
(deception) and Makhraj (permissible way to avoid hardship)
2.
The permissibility of trading and selling is a “very general rule”
and there are many exceptions for this rule among them the sale of ‘Inah
4.6
The rebuttal of second and third group’s
argument for permitting tawaruq
4.7
The rebuttal of third group’s argument for
permitting organized tawaruq
1.
To tackle sharia non-compliance issue, the contract is separated.
Moreover, the condition is made to help the customer to easily sell back the
commodity to other because the objective
of buyer is to get money for liquidation purpose. To achieve that, customer
will sell his own commodity to other. Wakalah
principle also is used, and buyer already agrees to appoint seller as his
agent.
2.
One of the reasons of difference opinions is what Fiqhi rule that
they should use “Form over substance” or “Substance over form”, for those who
apply “Form over substance” they argue that Tawarruq is permissible because all
the forms “contracts” are permissible, but for those who use the maxim of
“Substance over form” they said the forms are correct but the end purpose and
the end is not.
4.
The Preferred Opinion
It is apparent that those three groups of scholars have, in
general, articulated their opinion well by using a variety of evidence.
However, we believe-and Allah knows the best- that two aspects have to be
addressed to come up with a correct and precise opinion. The two aspects are:
First: The usuli issue with regard to essential objective of
tawaruq.
Usuli principle (Qur’an, Sunnah, Qiyas, and Urf) have to be
considered. For this case, there is evidence from Qur’an and Sunnah or from
general principle derived from them, permitting sale transaction. Therefore,
tawaruq is an exit for avoiding riba rather than trick for performing it.
However, the essential objective of permitting
tawaruq is an urgent need of liquidation.
Second: The practical approach to
scenario of tawarruq, each of them having its own situation and consequences.
1.
The first scenario is when there is an urgent need of liquidation
and there are many alternatives that lead to more manfa’ah. In this situation,
there is no reason to use tawarruq. For example Sudan.
2.
The second scenario is when there is an urgent need of liquidation
(daruriyyat level), no other alternatives except tawarruq In this
situation, it is allowed. The proposed model for this scenario is:
·
It is confined to facilitating liquidity, not
designed for commercial aims e.g, attracting deposits, financing, and
structuring government and corporate structure. e.g Indonesian Jakarta
Future Exchange Model
·
The client should not delegate the institution or its agent to sell,
on his behalf, a commodity that he purchased from the same institution.
·
The institution should not arrange third party to sell, on
behalf of the client, the commodity that the client purchased from the
institution. Third party randomly involved.
·
The client should not sell the commodity except by himself or
through an agent other than the institution.
·
Sharia Supervisory Board (SSB) assure the series of sale
transaction on platform is genuine and real and assure the availability
of the asset to be transacted and the same commodities are not transacted
with multiple deals (for supporting real economy transaction only). e.g
in commodity exchange market, it should be purely financial transactions
increasingly outnumbering physical trades in which goods are delivered.
This model is applied in dual banking system country like Indonesia
(Indonesian Jakarta Future Exchange Sharia Model; it is used to fulfil the regulatory
liquidation requirement from central bank).
3.
The third scenario is when there is no liquidation purpose, using
for commercialisation purpose. In this situation, tawaruq should be avoided
because Allah already provides many main model (e.g mudharabah, musyarakah,
murabahah, ijarah, salam, istishna, wadiah, etc) to support commercialisation/trading
activities. In this scenario, reasons such as daruriyyat level to fulfil the
needs of the Muslim society and necessity to uplift the Islamic financing and
overtake the conventional lending could not be rationalized.
Although basicly tawaruq is not riba-based activities, but the
continuous actvitiy with commercialisation intention will lead the way to riba-
which brings mafsadah to the society. For this scenario, the meaning of riba
itself and the reason behind of illigimate should be deeply understood and
analysed from various perspective (sharia, economy, and social impact).
This scenario is used in for Islamic term deposit; commodity
murabaha financing, money market, etc.
2.
Conclusion:
The majority of Shari’ah scholars –except Maliki and some scholars
from Hanbali Madhhab- considering the sale of Tawarruq is permissible. This
difference of opinions regarding Tawarruq started from the era of companions of
the prophet PBUH (Shahaba). The majority of international standards setting
bodies currently including Fiqh Academy and AAOIFI consider classical Tawarruq
is permissible. The practice of majority of Islamic banks for Tawarruq was
wrong and leads these standards setting bodies to differentiate between
classical Tawarruq and organized Tawarruq. The main issue was that the
buyer (Mustwariq) appoints the seller (Muriq) to work on his behalf as an agent
and sell the commodity to the third party. To make current Tawarruq be
permissible the banks and regulators must introduce a mechanism through which
the buyer sells the commodity without recourse to the seller.
References
AAOFI Sharia Standard
Abdul Ghafar Ismail- Nik Abdul Rahim Nik
Abdul Ghani – Mat Nor Mat Zain. Tawarruq Time Deposit With
Wakalah Principle: An opinion That Triggers New Issues. IRTI Working Paper Series WP#
1435-02. November 10, 2013
Nasrun Bin Mohamad Alghazali. 2014.
Tawarruq in Malaysian Financing System: A case Study on Commodity Murabahah.
Department of Shariah and Economics Academy of Islamic Studies. University of
Malaya.
INCEIF. Sharia Rule in Islamic Finance.
[1] AAOIFI use the terminology “monetization’’ for Tawarruq.
of Khaybar who
had been contracted the upkeep of a plantation came to the Holy Prophet with
some dates of good quality. When the Prophet asked him whether all dates of
Khaybar were of similar quality, the man replied in the negative, and added
that they used to obtain a measure of better dates against two measures of
ordinary dates, and two measures against three measures. The Prophet forbade
him from doing that, and directed him to sell the low quality dates against
silver coins, and then purchase better dates against silver.
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