Islamic organisation bans use of organised tawarruq

By Habhajan Singh
An influential international Islamic organisation has slapped a ban on organised tawarruq, a Shariah concept that has picked up steam in Malaysia in the last few years.
It is widely used in the Middle East particularly for cash financing. The decision by the International Council of Fiqh Academy, which wields authority on Shariah related matters including Islamic finance, may put a damper on the moves by local Islamic banks.
The banks had recently begun structuring new products, with tawarruq as its Shariah enabler, in order to make them acceptable beyond Malaysian shores.
The decision will likely force Islamic bankers to go back to the drawing board before deciding on their next course of action, which could very well be to ignore the Fiqh Academy decision and to carry on with the usage of tawarruq, several bankers and Shariah scholars told The Malaysian Reserve.
"We have to see how the industry and other Shariah scholars react to this decision. Even in the Fiqh Academy, there were scholars who were for and against the decision," said local Shariah scholar Dr Engku Rabiah Adawiah Engku Ali.
Tawarruq means purchasing a commodity on a deferred price, and later selling it to a third party with the objective of obtaining cash, according to a definition by Bank Negara Malaysia (BNM).
In March, the central bank introduced the Commodity Murabahah Programme, known as tawarruq in some jurisdictions, to provide a more diverse range of policy instruments in managing short-term liquidity in the Malaysian Islamic interbank money market. On the commercial front, outfits like Bank Islam Malaysia Bhd and Bank Rakyat Bhd were understood to have been studying the tawarruq concept to replace Shariah contracts like bai inah and qardh when offering credit card facilities.
The Fiqh Academy's decision is likely to echo the flurry of debates and discussions that ensued following comments by Sheikh Muhammad Taqi Usmani on sukuk in February 2008. Adding fuel to the fire were comments by the chairman of the Shariah Council of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), who said that a good number of Islamic bonds, or sukuk, were not Shariah-compliant.
Meanwhile, at a five-day session which ended on April 30 in Sharjah, the United Arab Emirates, the Fiqh Academy said it has resolved that it is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occur 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 was done after the council reviewed research papers on tawarruq, its meaning and its type (classical applications and organised tawarruq).
"This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered to contain the element of riba," the council ruled, according to an English translation of the ruling made available by the Kuala Lumpur-based International Shariah Research Academy for Islamic Finance (Isra).
In the translated document, tawarruq is described as follows: "Technically, according to the fiqh jurists, tawarruq can be defined as 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. This is the classic tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale (bai)."
The document also noted that the contemporary definition of organised tawarruq is when a person (mustawriq) buys a merchandise from a local or international market on a deferred price basis. The financier arranges the sale agreement either by himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price. Reverse tawarruq is similar to organised tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client, according to the document. In relation to this, the Shariah powerhouse has made two recommendations.
"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 actualisation of the Shariah objectives (maqasid Shariah).
"Furthermore, it will also ensure the progress and actualisation of the socio-economic objectives of the Muslim world. If the current situation is not rectified, the Muslim world will continue to face serious challenges and economic imbalances that will never end."
In its second recommendation, it urged financial institutions to provide qard hasan (benevolent loans) to needy customers in order to discourage them from relying on tawarruq instead of qard hasan.
"Again these institutions are encouraged to set up a special qard hasan fund," it said.

(This story appeared in The Malaysian Reserve on May 11, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)