Sunday, May 31, 2009

Shariah scholars turn to AAOIFI over tawarruq

by Habhajan Singh
The issue of tawarruq featured widely at a key meeting of regional scholars of Islamic finance in Jakarta, almost a month after the International Council of Fiqh Academy issued a ruling banning the mechanical use of the Shariah concept employed to raise cash financing.
It is understood that the issue of tawarruq was keenly discussed by the Islamic finance scholars from Malaysia, Indonesia, Singapore and Brunei, at the two-day regional meeting that aimed to bring about better understanding and coordination amongst Shariah scholars in this region.
"One common consensus of Shariah scholars at the muzakarah was to wait for guidance from AAOIFI," one Islamic finance scholar from a local Islamic bank told The Malaysian Reserve.
Unlike the Fiqh Academy whose Shariah board comprises experts from various fields, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is better regarded when it comes to matters concering Islamic finance as its board of experts comprise people with expertise relevant to finance.
"AAOIFI is more specialised in Islamic finance," the scholar said.
The scholar, who declined to be named, was one of the participants at the two-day regional Islamic finance Shariah scholars meeting "Muzakarah Cendekiawan Syariah Nusantara ke-3".
In 2008, he said AAOIFI had issued a standard on tawarruq in which it permitted its use only as a tool of last resort. "This tawarruq issue is not new. It had been discussed a number of times before,” said another Shariah scholar.
On May 11, The Malaysian Reserve reported that the decision by the Fiqh Academy, which wields authority on Shariah-related matters including Islamic finance, may put a damper on move by local Islamic banks. Banks had recently begun structuring new products, with tawarruq as its Shariah enabler, in order to make them acceptable beyond Malaysian shores.
In March, Bank Negara Malaysia 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 decision will likely force Islamic bankers to go back to the drawing board before deciding on their next course of action.
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).

(This story appeared in The Malaysian Reserve on June 1, 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)

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