Tawarruq from Theory to Practice

OUTLINES

The Concept of Commodity Murabahah (Tawarruq)

Tawarruq Vs Bai al- Inah

The Applications of Tawarruq: 1. Islamic money market

2. Personal financing

3. Swap

Costs and Benefits Analysis of Tawarruq

LINGUISTIC MEANING

Taqarruqa

Wariq

Awraqa

tawarruq comes from masdar the verb taqarruqa is said Tawarruqa al-hayawan: the animal has eaten the leaves of trees

(Al-Kahfi: 9)

So send one of you with this silvery coin of yours to the town

Dirham that is manufactured from silver

Plural of waraqah: paper , trade for money. Means have much dirham

Al-Tawarruq is taken from this which means lots of Money

SCHOLARS DEFINITIONS

tawarruq means selling something on deferred basis and then buying it back in cash, albeit at a lower price than the deferred price

Malikis

tawarruq means selling something on postponed payment and purchase it back in spot payment at a lesser price

Shafiis

tawarruq is bai al- Inah using a third party Hanafis

tawarruq is the need for cash, buying the equivalent of thousands and more to expand its price Hanbalis

CLASSICAL TAWARRUQ

Buy commodity from Trader on cash at (x) & sells it on deffered basis at (x+y)

BANK

Sells the commodity to Trader on cash payment at (x)

CUSTOMER Sells the

commodity from customer to Bank at (x) by cash

TRADER

ORGANIZED TAWARRUQ

Trader A BANK Trader B

CUSTOMER

1. Purchase commodity on cash @ x

2. Transfer commodity ownership

3. Sell commodity on deferred price @ (x+y)

4. Transfer commodity ownership

6. Transfer ownership

5. Sell commodity* on cash @ x

*In practice, the customer will appoint the bank as his agent to sell the commodity to Trader B on cash basis in the commodity market, so it call organized TAWARRUQ

Source: Fahmy et.all (2008)

Diagram 1

CLASSICAL VS ORGANIZED

ORGANIZED TAWARRUQ CLASSICAL TAWARRUQ

Four-parties arrangement

(may also be three parties) Three-parties arrangement

Involves unilateral promise to purchase by the

client (mutawarriq) Involves no promise to purchase

Involves additional purchase prior to the two

basic sales Involves only two basic sales

Involves signing of an overall agreement /

memorandum of understanding delineating the

procedure to be followed

No signing of such an agreement

Involves the client appointing the bank as his

agent to carry out the second basic tawarruq

sale

The client will sell the commodity on his

own

Transfer of possession is only limited to signing

of the contracts of sale that includes clauses on

transfer of rights and liabilities pertaining

to the items. Thus, transfer of possession

throughout the procedure is only held to

materialise constructively

Seems to have envisaged the two basic

sales giving rise to complete transfer of

possession physically after each contract

TAWARRUQ IN BANK ISLAM

Source: Bank

Islam (2009)

Diagram 2

TAWARRUQ Vs INAH

RM100,000

RM 150,000

How can I borrow RM100,000

to get married?

Source: Dusuki (2008)

CONT

NO. ITEMS AL-INAH AL-TAWARRUQ

1. Concept A sale contract with immediate buy back by the seller

Buying a commodity at deferred, then sell it to third party other than seller for cash but at

lower price from initial price

2. Purpose To facilitate cash and

liquidity shortage. To facilitate cash and

liquidity shortage.

3. Parties Two parties involve for

two transactions

Three parties (at least) involve for three

transactions

4. Subject Matter Return back to the

original seller. Transferred and

possessed by third party.

10

The PROPONENTS VIEW

The majority of scholars allowed tawarruq because:

1. tawarruq is form of trade or sale which is permissible by Shariah.

1. Basic ruling of Muamalah is al Ibahah

2. Allah has allowed trade and has prohibited riba (Surah: Al-Baqarah: 257).

2. tawarruq is different from inah, which leads to riba. Inah is prohibited because the commodity is sold back to the person from whom it was purchased

The OPPONENTS VIEW

Some Jurists such as Umar bin Abdul Aziz, Ibn Taimiyah, Ibn al-Qoyim and al- Shaibani disallowed tawarruq because:

1. Tawarruq is a trick of riba. the riba is actualized in tawarruq with additional cheating, deceiving, pain and so on.

2. The similarity with Inah, because the intention is not the sale itself, but the intention is to sell money with money

3. Tawarruq is sale of a forced person (bai taljiah) which is something is enforced on a person to do it, and he does not have any choice

TAWARRUQ IN FINANCING

Dusuki(2010)

Dusuki(2010)

TAWARRUQ IN DEPOSIT

ISSUES IN TAWARRUQ

When broker A and broker B is the same company, the organized murabahah is there, as similar with tri-partite al Inah which is unacceptable, according to Organization of Islamic Conference (OIC) Islamic Fiqh Academy conference.

To solve that problem, Bursa Malaysias Suq al-Sila developed mechanism which is a random selling and buying as following:

COMMODITY MURABAHAH IN PERSONAL FINANCING

Special Account

4

Commodity Murabahah Employed in Tawarruq-based Credit card

Merchant

Broker

A

1

4 Broker B

3

5 Custome

r

2

RM20,000

RM20,000

RM35,000

deferred

Commodity Murabahah (Tawarruq) Employed in Model of Home Financing

RM200,000

RM350,000

Deferred

RM200,000

RM200,000

Property

Electrical Appliance

Worth RM200,000

Electrical

Appliance

4

2 3

1

Broker

A

1

5

Broker B

3 Customer

$10 million 2

4

$10 million

$10

million+

profit on

deferred

Commodity Murabahah Deposit-i

Analysis of The Costs and Benefits to Each Party In Commodity Murabahah

PARTIES BENEFITS COSTS

1. Financier/ Investing Bank (Muwarriq)

Earn price of cost plus profit Earn fixed return

Transaction costs

2. Client/ Investee Bank (Mutawarriq)

Get liquidity Higher deferred payment Transaction costs

3. Commodity Supplier/ Broker A

Fees around $40 per $1 million of transaction value (www.proxcelglobal.com, 2011)

The opportunity cost of the commodity being used for productive purposes

4. Commodity Buyer/ Broker B

Fees around $40 per $1 million of transaction value (www.proxcelglobal.com, 2011)

Risk related to the commodity

Transaction Costs

Brokerage fees

Legal & Jurist costs

Registration fees

Stamp duty Clearance

fees

Sales Tax

Delivery fees