PhD in Islamic Finance

Issues on the Permissibility of Tawarruq Contracts

Fiqh Muamalat

Semester January 2010

By:

Abd Aziz Bin Mohd Nor

Matric No: 0900334

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Table of Contents

1. Abstract...................................................................................................3

2. Definitions of Tawarruq...........................................................................3

3. Differences and Similarities between Al-‘Inah and Tawarruq Contracts..4

4. Types of Tawarruq Contracts..................................................................6

5. Opinions and Issues of Tawarruq Contracts............................................7

6. Critical Observations.............................................................................16

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1. Abstract

Islamic banking refers to a system of banking or banking activity that is

consistent with the principles of Islamic law (Shariah) and its practical

application through the development of Islamic economics. Shariah

prohibits the payment or acceptance of interest fees for the lending and

accepting of money respectively, Interest for specific terms, as well as

investing in businesses that provide goods or services considered contrary

to its principles. In addition, Shariah prohibits transaction which contain

the elements of gharar (uncertainties or ambiguities) and maisir

(gambling) but encourages risk taking (ghorm) and kasb (value added) so

that transactions could have iwad (equivalent counter value) in order to

earn legitimate ghonm (profit). Tawarruq is one of the Islamic banking

products and with the phenomenal growth of Islamic banking, the use of

tawarruq has grown from its original classical form to many other forms

and thus inviteing controversies. This paper will discuss the issues relating

to tawarruq contracts including types of tawarruq contracts as well as the

related juristic arguments that allows or prohibits tawarruq.

2. Definitions of Tawarruq

2.1 Literal Meaning

This term is derived from the word paper and dirham coined from silver or

money minted from dirham. Its plural is ‘awraaq’ i.e. ‘paper replacing

monies/paper money’. It was so called, because the buyers of a certain

commodity sell that commodity using paper, with the purpose of getting

the paper (liquidity) and not the commodity. The term ‘paper’ here means

different types of money.1

2.2 Technical Meaning

1 Prof. Dr. Ibrahim Fadhil Dabu, Tawarruq, Its Reality and Types, p1 4

Tawarruq is actually a sale contract whereby a buyer buys an asset from a

seller with deferred payment and subsequently sells the asset to the third

party on cash with a price lesser than the deferred price, for the purpose of

obtaining cash. This transaction is called tawarruq mainly because when the

buyer purchases the asset on deferred terms, it is not the buyer's interest to

utilize or benefit the purchased asset but rather to facilitate him to attain

liquidity (waraqah maliah).2

Tawarruq is a term commonly used in the books of the Hanbali school of

thought while other schools mention the form of tawarruq under the rubric

of bay‘ al-‘inah (credit sale). Its technical meaning varies according to its

different types.

3. Differences and Similarities between Al-‘Inah and

Tawarruq Contracts

The scholars have differed in their technical definitions of al-‘inah due to their

differences of opinion regarding its forms, which will be mentioned soon;

however, one of its most famous definitions among early scholars was: “One

person sells a commodity to another for a specific price with payment

delayed until a fixed date, then buys it back from him at a lower price for

cash.3

The difference between al-‘inah and tawarruq - on the Hanbali usage - is

that al-‘inah implies the act, where a person sells a commodity on credit,

then buys it at a current price lesser than the selling price. But as for

tawarruq, the buyer is not the seller himself, but rather the first buyer will

have to sell the commodity to the third person. The third party has no

connection with the first seller. In case of al-‘inah, the commodity will go

back to the first seller, while in the case of tawarruq, it will not return to

2 Dr. Asyraf Wajdi Dusuki (2007), Commodity Murabahah Programme (CMP): An Innovative Approach to Liquidity Management, p163 Tawarruq in the Banking System: A Critical Analytical Study of Juristic Views on the Topic, p11

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the first seller, but rather in the free disposal of the buyer, in what he

possesses to sell it in the market at a current price, so as to acquire cash,

except that those who mentioned it among the forms of al-‘inah, only

viewed that it shares things with al-‘inah in commons. First similarity: The

first seller will sell the commodity on credit, at a price higher than the

current market price. Second: The aim in both is to acquire cash. Third:

Both transactions adopt a trick or way out to avoid any involvement in

loaning connected with interest.4

According to the Hanafi School of Thought, ‘inah is when someone buys

something at a known price (on deferred basis), and then resells it to the

original seller for cash, in which the second sale price is less than the

deferred sale price. According to the Maliki School of Thought, ‘inah

happens when someone sells a commodity of ten Dinar in cash to another

person. He then buys it from him (the same person) at twenty Dinar, i.e.

on deferred basis or vice versa.

According to the Hanbali School of Thought, ‘inah happens when someone

sells a commodity at a deferred price. He then buys it for cash (from the

same purchaser) at a lesser price or vice versa. According to the Shafi’i

School of Thought, ‘inah happens when someone sells a commodity to

another on deferred basis (for a known period), and then buys it back

from him at a price lesser than the deferred price. From the previous

definitions, according to the jurists, it has been shown that there is a

difference between ‘inah and tawarruq.

‘Inah consists of two parties; the seller is the party who buys the

commodity at a certain price, and the buyer is the second party who buys

the commodity at a higher price, and on deferred payment. But in

tawarruq, there are three parties, i.e. the seller, buyer and the third party.

The first party buys the commodity from the seller, and then sells it to the

third party who is not the first seller. ‘Inah is prohibited by majority of the

4 Taqi Usmani (2005)6

jurists, because it leads to riba. It falls within the prevention of things that

causes prohibited actions (saddu zhara’i). For example, the path that

leads to haram is also haram. ‘Inah leads to riba, because there is a

difference in the price, i.e. between the cash and deferred price. The

prohibition of ‘inah is reported in a Hadith of Ibn Umar-radiyallahu

anhuma, who says that, “The Prophet pbuh says, ‘when you deal with

‘inah, and pursue the tails of cow and leave jihad in the way of Allah, Allah

will then send unto you a disgrace which will not be raised for you until

you return to your religion.’” (Reported by Abu Dawud).

There is also the Hadith of Aisha - may Allah have mercy upon her - from

‘Aliyah bint Aifa’, that she said, “I, a maid and wife of Zaid ibn Arqom went

to Aisha, the maid said, ‘I sold a child of Zaid ibn Arqom at three hundred

Dirham to the Ata. Then I bought it from him for six hundred Dirham. She

(Aisha) said to her, ‘shame to what you bought, tell Zaid ibn Arqom that

he had spoilt his jihad with the Prophet until he repents.’” (Reported by

Ahmad).5

The similarities are as follows:

The first seller will sell the commodity on credit, at a price higher than

the current market price.

The aim in both is to acquire cash.

Both transactions adopt a trick or way out to avoid any involvement in

loaning connected with interest.6

4. Types of Tawarruq Contracts

Jurists have mentioned three types of tawarruq contracts as follows:7

a) Al-Tawarruq al-Fardi (Tawarruq on an Individual Basis)

5 Prof. Dr. Ibrahim Fadhil Dabu (2007), Tawaruq, Its Reality and Types, p2-46 Muhammad Taqi Uthmani (2009),Verdicts on At-Tawarruq and Its Banking Applications, p27 Sa’id Bouheraoua (?), Tawarruq in the Banking System: A Critical Analytical Study of Juristic Views on the Topic, p7

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The Islamic Fiqh Academy defined it as: “the purchase of a

commodity possessed and owned by the seller for a delayed

payment, whereupon the buyer will resell the commodity for cash to

other than the original seller in order to acquire cash (al-wariq).”

b) Al-Tawarruq al-Munazzam (Organized Tawarruq)

This is when the seller handles the process by which cash is

acquired for the mutawarriq (the seeker of cash). He does so by

selling a commodity to him for a delayed payment; then selling it on

his behalf for cash, taking the payment from the buyer and

delivering it to the mutawarriq.

c) Al-Tawarruq al-Masrafi (Banking Tawarruq)

It is the performance by the bank of a formally circumscribed

procedure in which a commodity (other than gold or silver) from an

international commodity market or some other market is sold to the

mutawarriq for a delayed payment, on the binding condition―either

by its stipulation in the contract or by the rule of custom―that the

bank will represent him in selling it to another buyer for cash,

whereupon the bank will deliver its payment to the mutawarriq.

5. Opinions and Issues of Tawarruq Contracts

Similar to other forms of sales contracts in Islamic banking, tawarruq is

also based on the trading or commercial or sales contract of al-bay’. In

order to make a tawarruq contract permissible, it should conform to the

well-known rules of al-bay’ (sale). The basic rules of sales in Islam are as

follows8:

i. The subject of sale must be in existence at the time of sale.

ii. The subject of sale must be in the ownership of the seller at the

time of sale.

8 Taqi Usmani (1998), Introduction to Islamic Finance p, p668

iii. The subject of sale must be in the physical or constructive

possession of the seller when he sells it to another person.

iv. The sale must be instant and absolute.

v. The subject of sale must be a property of value.

vi. The subject of sale should not be a thing which is not used except

for a haram purpose, like pork, wine etc.

vii. The subject of sale must be specifically known and identified to the

buyer.

viii. The delivery of the sold commodity to the buyer must be certain

and should not depend on a contingency or chance.

ix. The certainty of price is a necessary condition for the validity of a

sale.

x. The sale must be unconditional.

5.1 Juristic Opinion of Sheikh Taqi Usmani

In his research, a prominent scholar, Sheikh Taqi Usmani clarified and

expressed reservation on organized tawarruq, as follows9:

a. There are many sales, as practised in the international commodities

bourses which are not genuine sales, where the commodities are

not delivered to the buyers. Actually, the practice is just to record

those sales on the computer and then, a clearance happens for the

sales, on the basis of price differentials. The sales are classified into

future sales, which is prohibited and current sales, which do not

take into consideration the rules of sales as mentioned earlier, such

as the subject matter should be precisely determined and should be

owned by the seller. However, the sales are concluded by

exchanging papers of sale. Very often, the papers do represent

certain commodities. However, the papers represent the right of the

paper holder to collect a quantity of commodity from the

warehouses that have thousands of tonnes of the commodity.

9 Taqi Usmani (2008), Applications and Rules of Banking Tawarruq, p599

Furthermore, the quantity that is stated on the paper is not

distinguished from other quantities, which are available in the

warehouses. According to the same rules of sales above, before the

buyer can sell it again, the sold quantity should be owned by the

buyer. But the practice is not like that. The prevailing practice is

that the buyer sells the quantity before he possesses it, and even

before his quantity can be distinguished from other quantities.

Therefore, this process is not Shari’ah-compliant, due to guarantee

of profit for something that is not possessed. Sheikh Taqi Usmani

added that there should be fiqh scholars supervising the

transactions of these markets, so that legal sales are concluded.

However, that can be done by setting up a special way and

formulating new contracts by Shari’ah committees. Furthermore,

the parties involved should negotiate with the brokers and trader in

these markets, i.e. for adherence to the Shari’ah principles, as far as

possible. If that cannot be achieved, dealing with these markets is

not permissible, either for tawarruq or for anything else.

b. Suppose that the mechanism of such markets is very strict, where

the mechanism satisfies the legal conditions of a sale, and the

process of a tawarruq sale takes place, then the commodity must be

delivered to the buyer before he sells it to someone else. If the

mechanism is so, then the sale is valid because the mechanism

fulfills the condition that states the buyer must possess the

commodity, either by himself or through his agent. Furthermore, it

is not allowed for the bank to be the agent of the buyer (mustawriq)

to possess the commodity on behalf of the buyer. However, the

bank is the seller. Hence, the bank has to hand over the commodity

to the buyer (mustawriq) or to the buyer’s agent, who is definitely

not the seller.

c. Suppose that the broker is the agent for the buyer (mustawriq) and

the broker possesses the commodity from the bank before he sells

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it to the third party. This is fine, but the problem is that the broker

himself is the bank’s agent as well. The broker purchases the

commodity and he possesses it from first seller on behalf of the

bank. Then, he sells it to the mustawriq. Legally, the broker

assumes the position of the bank. Therefore, the broker cannot be

the agent for the mustawriq to possess the commodity. There are

two legal ways to make this sale Shari’ah-compliant. The first way is

initially, the bank has to hand over the commodity to the

mustawriq. The moment the bank is no longer liable for the

commodity, the mustawriq can assign the bank or the broker to sell

the commodity to a third party. However, if there is an upfront

agreement that states that the mustawriq has to appoint the bank

as his agent, then the sale is void.

Additionally, if the agreement is concluded after the bank possesses

the commodity and before the commodity is handed over to

mustwriq, then the sale is void as well, since the bank is still liable

for the commodity. Obviously, adhering to the previous conditions in

the international commodities markets is so difficult. The second

way is that there should be two brokers, i.e. one is to buy the

commodity on behalf of the bank and another to possess the

commodity and sell it on behalf of the mustawriq. Thus, there are

two brokers; one is the agent of the mustawriq and the other is the

bank’s agent. Therefore, considering the difficulty of applying the

first approach, the second approach should be adopted by Shari’ah

committees, and they should not allow anyone to use the first

approach.

d. The procedures of executing sales in modern bourses are just taking

place on the screens of computers. So far, I am sure that the

appearance of the name of a buyer on a computer screen does not

transfer the ownership and liability to him. To me, before judging on

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such contracts, there should be an independent study for contracts

that happens through computers, in light of the laws and rules.

It is obvious from the above mentioned that Sheikh Taqi Usmani

confirmed what is going on in the banks today and that leads to lending

with interest, i.e. by means of tawarruq. This makes some scholars say

that since there is any one school of thought that permits tawarruq, there

is no need to crack down on people and to open up an argument about

the validity of tawarruq. However, the tawarruq that has been approved

by jurists is based on an individual who performs a sale that is by fulfilling

the pillars of selling and buying. After this is done, another separate

operation commences. Actually, there is no contractual link at all between

the two operations.

Briefly, it is not acceptable to say that organized tawarruq is the same as

classical tawarruq, which is permitted by the jurists. Consequently, we

cannot say that organized tawarruq is permissible. The conclusion is that

organized tawarruq is not permissible, because it is not the same as the

classical tawarruq that has been permitted by the jurists. Without a doubt,

this opinion is notable, because it is evidenced by text, legal maxims,

Shari’ah objectives and social interests.

5.2 Islamic Fiqh Academy Rulings Related to Tawarruq Contracts

In its 15th session the OIC Fiqh Academy issued a statement about the

permissibility of Tawarruq10. But due to problems with specific structures

(including placing conditions in each of the sales contracts), the Fiqh

Academy later clarified this and specified its concerns with Tawarruq as

practiced in their 17th Session, claiming that some forms of agency

agreements and underlying procedures (e.g., transference of title) made

certain Organized Tawarruq programs non-compliant.

10 Nikan Firoozye (2009), Tawarruq : Shariah Risk or Banking Conundrum, p?12

In its first ruling on tawarruq, The Islamic Fiqh Academy has approved the

use of tawarruq as one of the Islamic banking products. Specifically, it has

approved the use of Al-Tawarruq al-Fardi (Tawarruq on an Individual Basis) in

the Islamic banks. The Islamic Fiqh Academy, in its 15th session, which was

held in Makkah al-Mukarramah on Saturday, November 1998, discussed the

issue on tawarruq for the first time. The academy has decided, as follows:

i. Firstly, tawarruq is the purchase of asset, which is in the possession of

the seller, on deferred payments and then selling it to another party on

the spot, in order to get cash (al-wariq).

ii. Secondly, tawarruq is permissible in Islamic law, as mentioned by the

majority of scholars. This is because the origin of sales is permissibility,

as Allah says in Surah al-Baqarah, “… and Allah has permitted sale and

forbidden usury.” In tawarruq, usury does not appear, either

intentionally or in form, because it is a financial tool that is necessary

for the settlement of one’s debt or matrimonial expenses or others.

iii. Thirdly, the permissibility of tawarruq is subjected to the buyer not

selling the asset for less than its original price which he had bought

from the first seller, either directly or indirectly. If he does that, then he

has done a sale and buyback transaction (bay’ inah), which is forbidden

in Islamic law, as it consists of a trick that leads to usury. This makes

the contract of bay’ inah unlawful.11

However, the years following the first ruling on tawarruq has seen the

proliferation on the use of tawarruq and the birth of new forms of tawarruq

contracts. The new form of tawarruq contracts are Al-Tawarruq al-Munazzam

(Organized Tawarruq) and Al-Tawarruq al-Masrafi (Banking Tawarruq)

products. Subsequently, this has forced the need for the Islamic Fiqh

Academy to issue another fatwa on tawarruq.

11 http://www.isra.my/fatwas/commercial-banking/financing/tawarruq/426-rules-of-tawarruq.html

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The International Council of Fiqh Academy, in its 19th session which was held

in Sharjah, United Arab Emirates, on 26 – 30 April 2009, decided that after

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.

The academy issued the following rulings:

1. Types of tawarruq and its juristic rulings:

Technically, according to the Fiqh jurists, tawarruq can be defined as: a

person (mustawriq) who buys 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 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 execute 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.

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.12

12 http://www.isra.my/index.php?option=com_content&view=article&id=355:oic-fiqh-academy-ruled-organised-tawarruq-impermissible&catid=11:tawarruq&Itemid=15

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The academy further recommended that 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. Islamic

banking should 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.

5.3 Selected Juristic Opinions of Scholars that Permits All Types of

Tawarruq

The Shariah Advisory Council of Bank Negara Malaysia in its 51st meeting

held on 28th July 2005 resolved that deposit product and financing based

on the concept of tawarruq is known as commodity murabahah is

permissible.13

The same council in its 8th meeting held on 12th December 1998 resolved

that that Bai` `Inah transaction in the Islamic Inter-Bank Money Market is

permissible.14 The same council went further in revisiting its ruling on Bai’

Inah at their Regional Shariah Dialogue which was held on 28th and 29th

June 2006. In this meeting, the council members decided that tawarruq

and bai’ ‘nah shall be ruled similarly since the basis relied upon to justify

the permissibility of tawarruq is similar with the basis to justify the

permissibility of bai` `inah.15

13 http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/ 07_shariah_resolution.pdf, p1214 Ibid, p1515 Ibid, p16-17

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In this meeting too, the council acknowledges that the permissibility of

bai` `inah and tawarruq is still a matter of juristic disagreement among

the Shariah scholars backed by their own basis of justifications.

For those who conclude that organized tawarruq is permissible has

provided justification based on the premise that the objective in a

tawarruq transaction is the intention to refrain from interest, not to

engage in it. Dr. Muhammad Ali Elgari, an ISRA Council of Scholars

member, argues that:

“Neither tawarruq nor any other transaction will be considered

as deceptive except if one intends to achieve an unlawful aim

at it because the fundamental constituent of a ruse (hilah), as

was mentioned by Ibn Taymiyah, is the intention. There is no

doubt that the modern mutawarriq (someone who deals with

tawarruq) does not intend to engage in unlawful dealing; just

the opposite, his intention is to abstain from unlawful dealing.

If he intended to be unlawful, there is no need to resort to a

ruse because it is available legally through banks in the form

of a loan. In fact, the complications and expenses of a loan are

less than that of tawarruq. He only abandoned that and took

tawarruq in order to refrain from the unlawful. Someone may

say that his intention is not to acquire the commodity; his sole

intention is to get its cash value, and this is what makes it a

ruse. The answer to this is that such a factor has not effect

because it is a lawful objective.”16

According to Dr. Mohamed Akram Laldin, who is executive director of ISRA,

organized tawarruq does not violate Islamic law principles as there is

nothing wrong with the transaction itself. However, his concern is that

organized tawarruq focuses on debt creation rather than economic

16 Dr Muhammad Ali Elgari, al-Tatbiqat al-Masrafiyyah li al-Tawarruq wa Mada Shar’iyyayatuha was Dawruha al-Ijabi, p99

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activity, which is a key tenet of Islamic finance. He encourages further

deliberation to strike a balance between debt instruments and equity

based instruments.17

The arguments to rule organized tawarruq permissible or otherwise is

focused on the intention of the mutawwarriq. The basis used is similar to

the arguments made in determining the legality of contracts in general

based on Shafi’i and Hanafi schools as opposed to Maliki and Hambali

schools. The former emphasizes on the form or the external aspects but

the later focuses on the substance, or the internal aspects i.e. intention, of

the contract.

6. Critical Observations

The recent ruling on Tawarruq is perhaps the most significant Shariah risk

event thus far. Tawarruq is firmly embedded in the Islamic Banking system in

a great many countries and an undiversified revenue stream for many Islamic

banks. Commodity Murabaha (a form of tawarruq) is one of the most

commonly used financing contract in Islamic Banking (73.9% of the total

Islamic modes of financing) and it is estimated that global tawarruq market is

more than $100 billion18.

The academy’s rulings in prohibiting the use of organized and banking

tawarruq contracts stems from the phenomenal growth on the use of

tawarruq in liquidity management. Also, since the end result of tawarruq

contracts is the creation of debt, this will increase the proliferation of debt in

the Islamic banking market. Over-borrowing and over-lending is one root

cause of the Asian economic crisis and is the use (and over use) of tawarruq

if allowed to continue, we may have another financial crisis looming on the

horizon which will impact the Islamic banking in general19.

17 http://www.arabianbusiness.com/557758-islam-allows-organised-tawarruq-asset-sales---scholar18 http://www.dawn.com.pk/wps/wcm/connect/dawn-content-library/dawn/news/business/11-scholars-raise-questions-over-islamic-finance--il--0719 Saiful Azhar Rosly (2005), Critical Issues on Islamic Banking and Financial Markets, p340

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Since debt is the end result of an organized and banking tawarruq, therefore

Islamic banks should look into the purpose of debt creation itself. If the

purpose of debt creation is to create a venture capital or for the purpose of

equity financing, for example, then Islamic banks should encourage the use

of mudarabah and musharakah contracts instead. These contracts would

lessen the impact of market risks of another financial crisis. If the purpose is

to create extra cash in itself, this should be discouraged since Allah says in

the Quran that, “wealth must not circulate only among the rich ones among

you.”

Since Tawarruq is extensively used by most Islamic financial institutions

for liquidity management purposes, an alternative workable solution must

be available in case Tawarruq is phased out. In my opinion, one of the

best ways for Islamic banks to return to a 100% cash reserve ratio, and

return to the genuine investment-based and profit-loss sharing products.

These will rule out the need for the fractional banking system that is

based on liquidity management. However, further research is required to

determine the anticipated impact to the banking business.

Organized Tawarruq is an immense undertaking and many Islamic banks

have put years of effort into developing such systems. Consequently even if it

falls into some disrepute, it is unlikely to go out of fashion without a fight.

Such a move represents a paradigm shift that challenges the very basis of

the existing banking structure, and would require strong political will to

institute – and could quite likely occur only in conjunction with an overall

philosophical review and revision of the basis and practice of the Islamic

commercial industry – and while there appears to be increasing demand

for such a revision (particularly in the aftermath of the recent economic

crash), it is difficult to predict when this may happen.

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In the more immediate future, as a parallel move, other helpful steps to

assist liquidity management include improving financial markets’

infrastructure to enhance the tradability of Sukuk, and using Mudarabah-,

Musharakah- and Wakalah-based inter-bank deposits.

If Tawarruq is to be made redundant, there would be a heightened need

to provide genuine Shariah-based product solutions that offer neutral

liquidity or “cash-in-hand” to the client. For such needs, Salam is probably

the most genuine product that was specifically sanctioned by the Prophet

precisely for meeting the liquidity needs of agricultural producers. It

should be noted that Salam can comfortably be utilized outside the

agricultural sector as well.20

However, Salam remains grossly underused and is disliked by banks

because of the perceived “price risk” associated with this product. This

apprehension in using Salam persists despite the existence of various risk-

mitigating tools, some of which include negotiating an initial Salam price

and the use of Parallel Salam. However, it remains that the very first step

towards any improvement must begin with a frank, unqualified and

meaningful appraisal and acknowledgement of the situation. Any

corrective measures taken must necessarily be a subsequent step. This

acknowledgement, it seems, cannot be readily observed at present in the

Islamic finance industry.

The difficulty arises since the main objectives of the majority of Islamic

banks’ formation are to maximize profit and maximize shareholders’ value

but not the proliferation of conformance to the Shariah and the

betterment of the Islamic ummah for Allah’s sake. This is because most

Islamic banks are publically owned. As long as it remains as such, Islamic

banks, whether consciously or unconsciously, will tend to use hillah

20 Dr Salman Khan (2009), Why Tawarruq Needs to Go?, Islamic Finance News Volume 6, Issue 35, p19-20

19

(strategems) to justify the continued use of organized and banking

tawarruq.

20