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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