Banks moving away from organised tawarruq

Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector. Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement, reports Reuters (Nov 18, 2009).
The report quoted Abdul Salam Al-Abadi, interviewed on the sidelines of a sharia scholars meeting in Malaysia, as saying: "I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,’ Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia. They are trying to do it the way it should be done."
He did not identify the banks, it added.
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The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
‘If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,’ law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.
Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
‘After all these discussions, the majority of the scholars say it is forbidden,’ said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
‘Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.’ Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
‘It’s the right of any scholar to say ‘That’s my view, it’s not forbidden,’ Al-Abadi said.
‘We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.’ Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools. — Reuters

RHB Islamic tawarruq deal

RHB Islamic Bank Bhd (RHB Islamic) last week signed an agreement with Sedania Media Group and E-Pay for the introduction of telecommunication air time in its tawarruq offerings.
Signing the agreement were (seated from left) Sedania group CEO Azrin Mohd Noor, RHB Islamic MD Jamelah Jamaluddin and E-Pay CFO Yap Chih Ming. Witnessing the event were RHB Islamic chairman Datuk Faisal Siraj (2nd from left), Sedania chairman Tan Sri Halim Ali (3rd from left) and Deputy Minister of International Trade and Industry Datuk Mukhiz Mahathir (2nd from right). Tawarruq is an Islamic-based product which allows for users to raise funds. (The Malaysian Reserve, Aug 17, 2009, p32)

Tawarruq structure valid if conditions met, says scholar

Tawaruq must meet the standards of industry body AAOIFI and cannot be a standalone funding tool, a top scholar said, outlining conditions for the use of a structure that has split the Shariah banking sector, a Reuters report said.
Tawarruq is a bedrock of the US$1 trillion (RM3.51 trillion) Islamic finance industry and is widely used as a financing and liquidity management instrument. But growing disputes about the permissibility of some forms of tawarruq under the Shariah have thrown markets into disarray, with practitioners warning of catastrophic consequences if the structure were to be revoked, the report added.
Seeking to calm investor worries, it said influential Shariah scholar Sheikh Yusuf Talal DeLorenzo said tawarruq is allowed when it is applied properly, adding that arguments against it are removed from commercial realities.
"Tawarruq from my perspective has been carefully researched and explained by AAOIFI," the 60-year old American scholar told Reuters in an interview, referring to the Accounting and Auditing Organisation for Islamic Financial Institutions, which sets guidelines used by much of the industry. "AAOIFI has developed a standard through its own methodology which is very thorough and that standard, as far as I'm concerned, still stands.
"There's a great deal of misunderstanding in the marketplace that's a disconnect between scholars who are actively involved in the field of finance and scholars who are not."

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Other prominent Shariah scholars such as Sheikh Nizam Yaquby, Mohd Daud Bakar and Mohammad Akram Laldin have also recently defended the use of tawarruq. The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, had earlier ruled organised and reverse tawarruq to be "a deception" that seeks to disguise the use of usury. Confusion over the structure's status has been compounded by by the fact that compliance with standards of Islamic finance industry bodies such as AAOIFI and IFSB is voluntary, and there is no ultimate arbiter in case of disputes. In its basic form, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar although the transactions are executed through banks. Reverse tawarruq is akin to organised tawarruq, although the buyer would be a financial institution seeking liquidity. "If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities," law firm Denton Wilde Sapte had said in a note in May. DeLorenzo, however, said tawarruq should not be used as a financing instrument on its own. "Modern tawarruq is not intended as a transaction in and of itself. Rather it is intended as a means to an end," said DeLorenzo, a scholar of Islamic transactional law, who sits on about 15 Shariah boards including AAOIFI. "What people don't understand unfortunately is that they think tawarruq is just a way of disguising a loan. It's really a link in a transactional chain." — Reuters

Organised tawarruq valid under Shariah: Nizam

The use of the organised tawarruq financing structure does not contradict Islamic law, prominent scholar Sheikh Nizam Yaquby said, disagreeing with a Saudi-based ruling to the contrary, reports Reuters.
Tawarruq is a key financing structure of the $1 trillion Islamic finance industry. But whether or not the way it is organised in modern banks contradicts sharia, or Islamic law, has triggered fiery debates between scholars as the industry is struggling with a decline in business during the global financial crisis, the report said.
The International Council of Fiqh Academy, a leading industry body based in Saudi Arabia, in April declared organised tawarruq "a deception" that carries elements of interest-based lending, prohibited under Islamic law.
"If proper procedures are implemented and checks and balances are put, then tawarruq is a useful tool and can be used," Yaquby told Reuters in an interview.
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Widely used as a financing and liquidity management tool, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset, such as a commodity, to a third party to get cash.
Under organised tawarruq, the transactions are organised through banks which are appointed as agents to sell off the asset, in what has been criticised as a mere paper trail circumventing Islamic law and blurring lines between the purchaser and the third party.
Yaquby said centuries-old Islamic finance tools needed to be reconciled with the procedures of the modern banking system.
"All these Islamic finance tools have certain amounts of organization and we must know that (given) modern contracts within the existing frameworks, legal structures, it is very difficult to do something which is not organized," he said.
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Yaquby is globally recognized as one of the top Islamic scholars, and in particular wields influence in the Gulf Arab region, one of the industry's most important regional centres.
He is listed by consultants Funds@Work as sitting on 46 sharia scholar boards, including at Islamic operations of BNP Paribas, HSBC and Standard Chartered.
Yaquby also said there were hardly any alternatives to tawarruq as a tool to satisfy legitimate financing needs, to which he gave more weight than how it is implemented.
He said the use of a bank in selling assets would help minimise the losses occurring from the additional transaction, which would be higher if the purchaser sold assets himself.
"How can sharia allow something which is burdensome on a person ... and not allow something which is organised and well done, and this man who is in dire need for cash will not suffer a lot," he said.
He voiced support for the standards of Bahrain-based AAOIFI -- the Accounting and Auditing Organization for Islamic Financial Institutions -- which he said provided the necessary checks to prevent the abuse of tawarruq.

(This story appeared in The Malaysian Reserve on July 27, 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)

Role of Shariah in equity-based financing

By Habhajan Singh
The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry, said a much sought-after Shariah scholar of Islamic finance.
"Since the inception of the industry, we have been very much biased towards debtbased financing, which is compliant by any standard.
"But moving forward, we should couple it with equitybased financing, because debt and equity are complementary to each other," said Dr Mohammed Daud Bakar in an interview in the latest bulletin pulished by International Shariah Research Academy for Islamic Finance (Isra).
Mohd Daud runs Amanie Business Solution Sdn Bhd and chairs the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM). He is also chairman of Isra's council of scholars.
On some of the pressing Shariah issues that the industry is currently facing, Mohd Daud said when looking at a wider perspective, there are some issues that are related to the growth of the industry, protection of the industry and issues that could affect the industry negatively. He noted that there are many Shariah issues related to equity.
"For instance, the issue of how debt can be converted into equity, the issue of quasi-equity, how to make equitybased financing more attractive to the issuer and investor, issues of the valuation of equities and so on.
So, Shariah should come in and try to solve the equity-related issues, to push the growth of the industry," he said. Risk management is one of the issues pertaining to the protection of the industry, Mohd Daud said.
"Somehow, we tend to take for granted that the conventional risk management system tends to be compliant because it does not contain any interest. But perhaps the background of this system does not suit the Islamic financial system.
"Shariah must come in and see how the scholars and jurists in the past were able to provide risk management tools, which are very much pertinent to our industry, rather than just following the conventional system," he said.
According to Mohd Daud, also of importance are concerns related to issues that may negatively affect the industry.
"For example, there is the issue of differences of opinion that could negatively affect the whole industry. So, this issue needs to be resolved amicably.
"If possible, we must provide solutions that can jive well with the products and acceptability by the market. So, we have to resolve this issue, by providing solutions that are not only Shariahcompliant, but also commercially viable," he said.
Mohd Daud also shared his thoughts on the issue of tawarruq. It should be noted, however, that the interview took place before the International Council of Fiqh Academy, in a meeting in end-April, issued a ruling banning organised tawarruq.
On why commodity murabahah (tawarruq) is tolerated by the scholars, Mohd Daud said this was another contention that some segments of people were saying, i.e. commodity murabahah is tolerated, whereby scholars transforms it to be compliant.
"For me, this is wrong from the economic perspective. If you were to refer to the books of past scholars, in most schools of thought, they endorse Murabahah without any issue.
"Murabahah or tawarruq in our case, has been used in the past and accepted in the past. There were no contentions and objections to the practice.
"However, some modern scholars, practitioners and economists object to the principle of organised tawarruq, where we have three or four parties coming together to facilitate the murabahah transaction, to be able to get cash at the end of the day.
"So, murabahah has been seen to be as a cash financing methodology, rather than (used for) the acquisition of assets for the real use of the asset," he explained.
"As such, this has been seen by some as bad because you are using murabahah to raise money. If that is the basis of the argument, then you would also have to disallow or discourage sale and lease back.
"Sale and lease back is also another structure that allows the owner of the asset to get credit or cash financing by selling his asset and taking it back on lease.
"But these are Shariahcompliant instrument that can be used to raise financing, for the purpose of getting the cash for the owner or customer. So, this statement is a bit out of context because we have to put some conditions," Mohd Daud said.
"For example, murabahah cannot be used to finance conventional banks, i.e. for them to get cash, as the money will be used for riba-based activities. "There are some conditions under the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) Shariah standard. We are bound by those conditions.
"It is not a jacket kind of a product that can be used by any party in the market. It should be used Islamically, to support Islamic products, which are Shariah-compliant," he said.

(This story appeared in The Malaysian Reserve on June 15, 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)

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)

Islamic Bank of Asia may shun LME transactions

The Islamic Bank of Asia, a venture of Singapore’s DBS Group Holdings Ltd, aims to stop using London Metal Exchange transactions as the basis for products after religious advisers said some may not comply with Shariah, reports Bloomberg (May 14, 2009).
The bank is in talks with Olam International Ltd to use its trading in commodities such as rice, coffee, cotton and cocoa as the basis for financing compliant with Muslim law, its chief executive officer, Vince Cook, said in an interview in Singapore recently, it said.
"Industry practice is based on the LME, but our Shariah board would like us to explore alternatives as they’re concerned some t rades through the LME may not involve the physical movement of goods," Cook told the newswire.
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Using contracts including Murabahah sale-and-deferredpayments and Ijarah leases, Islamic banks seek to comply with Shariah’s ban on interest and stipulation that financial agreements are based on the transfer of goods or services.
With the help of Shariah scholars who judge which products are compliant, the Islamic finance industry has attracted as much as US$1 trillion (RM3.56 trillion) of Muslim wealth, according to the Malaysia-based International Islamic Financial Services Board.
The Islamic bond market was roiled last year after a group of scholars led by Pakistan-based Sheikh Muhammad Taqi Usmani said as much as 85% of the securities may not comply fully with the precepts of Shariah. Sales of Islamic bonds, known as sukuk, plunged to US$13.9 billion in 2008 from a record US$31 billion a year earlier, according to data compiled by Bloomberg.
"Olam are doing real business, buying and selling food commodities," Cook said.
"We think we could use this to facilitate an awful lot of our business.
"There would be no time difference and it would also help the local commodity industry create better liquidity."
Olam, which is also based in the city-state, operates in 60 countries and trades more than five million tons of commodities each year, according to its website.
Pioneering work with The Islamic Bank may lead to the creation of a trade-finance system that other banks can use, according to K Ravikumar, Olam’s chief financial officer.
"There is a great requirement in the Islamic world for a product like this," he said in a phone interview from Singapore recently.
"Our commodities are all agri-products and are all Shariah-compliant, so no meat or tobacco."
The Islamic Bank’s board of Shariah scholars comprises Sheikh Nizam Yaquby, Sheikh Mohammed Elgari, Mohammed Daud Bakar and Abdul Sattar Abu Ghuddah, according to its website.
Bahrain-national Yaquby has advised the Islamic units of banks including BNP Paribas SA, Citigroup Inc and Standard Chartered plc, while Saudi Arabia-based Elgari’s clients have included Merrill Lynch & Co, according to the website of HSBC Holdings plc’s Amanah unit.

[See The Malaysian Reserve report on May 11, 2009, entitled 'Islamic organisation bans use of organised tawarruq']

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)

Tawarruq fatwa: Translation from ISRA

(Translation from the Arabic as provided by ISRA)
Resolution 179 (19/5) in relation to Tawarruq: its meaning and types (classical applications and organized tawarruq)

The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19th session which was held in Sharjah, United Arab Emirates, from 1 - 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:

Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolved about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.

The following were the resolutions:
First: Types of tawarruq and its juristic rulings:
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 classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay’).
The contemporary definition on organized tawarruq is: when a person (mustawriq) 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 mustawriq and the financier executes the transactions, usually at a lower spot price.
Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client.

Second: It is not permissible to execute both tawarruq (organised and reversed) because 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.

The recommendation is as follows:
To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end.
To encourage the 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 special Qard Hasan Fund.

Financial tawarruq may be here to stay, says scholar

By Habhajan Singh
The local Islamic banking fraternity may not go in the way of the International Council of Fiqh Academy with the usage of financial tawarruq, says a local Shariah scholar.
Dr Engku Rabiah Adawiah Engku Ali, an associate professor at the International Islamic University Malaysia (IIUM) and a Shariah advisor at a local bank, said that it would be an option moving forward in dealing with this issue.
Asked if the local Islamic finance fraternity may decide to carry on with the practice here, just as how they practice bai inah which is frowned upon in the Middle East, she agreed it could be a possibility.
"Compared to inah, this is less controversial. Inah is more controversial. So, if Malaysia had allowed inah, the possibility of allowing tawarruq is there," she told The Malaysian Reserve.
Bai inah, a concept of sale with an imediate repurchase, used to a great degree for personal and corporate financing, is widely used by Islamic financial outfits locally, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
At its meeting which ended on April 30, the influential Fiqh Academy announced that it had slapped a ban on organised tawarruq, a Shariah concept that had been widely used in the Middle East all these years and which began gaining currency locally in the last few years.
The decision, if adopted, would mean that local Islamic banks would have to steer away from the Shariah concept that is being injected into personal financing products like credit cards and personal loans.
"We have yet to see how the industry would react to this. It is to be seen if they would adopt this decision," she said.
Dr Engku Rabiah said the other possibility is to look for possible exceptions to overcome the objections towards deploying the tawarruq concept in Shariah contracts.
Upon an initial reading of the ruling, she said local banks could still apply tawarruq if they could weed out the parts that are found to be not permissible, since tawarruq itself is not the bone of contention. Locally, bankers from Islamic banks would start the process of trying to understand better the latest ruling from the Fiqh Academy.
"They are starting to talk about it. We need more information before we can decide on the next course of action, if any," said one banker with a regional Islamic bank.

(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)