Bay’ Al-Inah & Tawarruq

Presentation byNik Nainunis bt Abdul GhaniNurul Nadia bt Abdul Rashid

Nur Shahidatul Akmar bt MahyedinNor Hafizah bt Samanal

Master in Islamic Banking and FinanceIFE 730 Islamic Banking Management & Operation

Bay’al-inah

Definition

Modus Operandi

Evidences Permissibility

Evidences Prohibit Condition

Application

Issues

*Definition *A sale in order to get cash not property or* a sale in which a commodity is sold for a deferred payment (thaman mu’ajjal) and *then resold to the seller on cash basis (which is cheaper than deferred price)*The owner of the commodity will get the commodity back plus the payment which is deferred whilst the customer will get ‘cash’ and settle the obligation of payment on installment basis.

Razli Ramli, Mohammad Khairi Saat, Haryani Aminuddin

Modus OperandiThere are two contracts involved : i) Contract of Sale; and

ii) Contract of Purchase.

*RM70 000 = Financing amount + profit margin = Bank’s selling price

Sell asset @ RM 70 000*

Pays on deferred term

1st contract : Bank sells certain asset to a customer on deferred term

2nd Contact : Bank subsequently purchases the asset back from the customer on cash basis

Purchase Asset @ RM 50 000**

Pays RM 50 000 by cash

**RM50 000 = Financing amount = amount of cash needed by the customer = bank’s purchase price

Permissibility of Bay’ Al-Inah

Different views of Muslim scholar in Bay’ Al-Inah

Mazhab Syafi’I supported by Ibn Hazm and shariah

Advisory Council of Bank Negara Malaysia

Majority of the Scholar including Hanafi, Maliki and

Hambali

Sale Is permissible

Sale is forbidden

Many Muslim jurist consider it is prohibited because it is open door to riba

(back door riba or hilah to riba)

Evidence : Permissibility & prohibition

Permissibility:“… In another vein, if a man buys a commodity from another vein, if a man buys a commodity from another person, and the payment is deferred to a stipulated time, there is nothing wrong if he sells it back to the person he bought it from or to another person for cash at a price lower or higher than the price at which he bought it, or for a debt or barter of a commodity at a value he chooses to assign to it. The reason here is that the second transaction is not linked to the first transaction”.

(Al-Shafi’i, Al-Umm, Volume 3, page 90)  

*Evidence : Permissibility

Qiyas (Analogical Reasoning). *Bay` al-Inah is valid. *Equivalent to sale to a third party. *The second sale is separate from the first sale. *The buyer has possessed by virtue of making installment. *Hence, it is his right to sell on to anyone (including the first seller), either based on cash or debt method, lower or higher pricing.

Malaysia Shariah advisory council’s resolution on Bay’ Inah

On 12 December 1998, there was a meeting held by the Shariah Advisory Council of Bank Negara Malaysia resolved that Bay’ al-Inah is permissibile subject to the following two condition: • Syafi’i school accepted if the transaction of Bay’ al -Inah is

strictly following the mechanism.• The transacted item is not involve in ribawi item ( goods

that are not in consonance with fiqh rules with respect to cash or items sold by weight and/or measure)

*Evidence : Permissibility

Ibn Umar reported that Rasulullah had said: ‘If you sell to one another with al-Inah, and follow (from behind) the bull’s tail and are satisfied with farming and abandoned al-jihad, Allah will force you into a state of humiliation and He will not remove it until you return back to your religion.

*Evidence : Prohibited

*Narrated by Abu Ishaq, from his wife Aliyah binti Anfa`: It was reported that Saydatina Aishah was asked by a mother (a slave belongs to Zaid bin Arqam) about a particular transaction dealt by her. She said: ‘O Ummu al-Mu’minin! I have sold a slave of Zaid bin Arqam to `Ata’ at 800 dirham in credit (on behalf of her master). Because of `Ata’ (the buyer) needed some amount of money (cash), I have purchased the slave back at 600 dirham in cash. Saydatina Aishah responded: ‘How could you fulfill such a bad sale. You should inform Zaid bin Arqam that the said transaction has removed all his rewards throughout his participation in jihad with the Prophet (peace be upon him), if he does not repent’. According to the majority of jurists, Aishah assertion clearly indicated that ‘Inah was unlawful contract.

*Evidence : Prohibited

*CONDITION *The ruled Bay’ al-Inah is acceptable subject to the following conditions :

I. The mechanism practiced is acceptable to the shafi’i school.

II. The transacted item is not a ribawi item(goods that are not consonance with fiqh rules with respect to cash or items sold by weight and/or measure).

III.The buyer must receive (take possession) the good before selling it back to the original seller

*application

Application

Working capital

financing

Islamic Credit Card

Personal Financing

BBA Financing

*APPLICATION

*ISSUES *Bay al-Inah have two contract which is sale contract and repurchase contract.*The issues raised in term of existing two sales in one sales.*The hadith have stated that prohibit the carrying out of two sale contract in one sale contract, as well as that of relating a sale with conditions contravening the requirement of that sale. *No actual selling and buying transactions (bai’) and the assets are never leave the bank also one of the issues pertaining to Bai inah

tawarruq

Definition

Modus Operandi

Evidences Permissibility

Evidences Prohibit Condition

Application

Issues

*definition *Tawarruq comes from the root word of “al-wareq”. It brings the meaning of dirham or money. (Dusuki, 2010) *Technically: As per define by OIC, Tawarruq means the commodity was bought by somebody (Mustawriq) at a deferred payment and sells it to the other person other than the first seller at a discount price and with immediate payment. (Tijani, 2013)

*FORM OF TAWARRUQ

ORGANIZECLASSIC

CLASSICAL TAWARRUQ

*CLASSICAL TAWARRUQDEFINITION:*Classical Tawarruq is the original practices of tawarruq process where the one who need the cash immediately will buy the asset from the seller by instalment and cash plus profit. And then he needs to find another buyer which is other than the first seller who willing to buy the same asset by cash but at a lower cost.

Commodity seller

(muwarriq)

Commodity buyer

Customer(mutawarri

q)BANK

1. Sell for immediate paymentRM 100 mil

2. Sell for deferred payment RM 110 mil

3. Sell for immediate paymentSale:RM 100 milCost:RM 110 mil

Sources 3: Money, Islamic Bank and Real Economy: 2010

ORGANIZE TAWARRUQ

*ORGANIZE TAWARRUQ *Define as: According to OIC Fiqh Academy Organize Tawarruq can be defined as the bank arrange the transaction where it sell the commodity to the customer by installment (cost plus profit) and at the same time the bank will act as an agent to the customers, finding the new buyers who’s willing to pay at the cash basis at the lower price. Then the bank will transfer the funds to the customers. (Hadad D. A., 2010)

*MODUS OPERANDI

BROKER A

BROKER B

1

654

32

Sources 4: Badri & Isaac: 2014

PERMISSIBILITY *LEGAL EVIDENCE

*First was based on the Qiyas (analogy) which the contract is similar to other sales and purchase contract in order to transfer the ownership. (Khalid, 2011)*Based on Al Quran, Surah Al-Baqarah :275 “Allah permitted trade and prohibits riba”. *On 28th July 2005 Bank Negara Malaysia had resolved that the deposit product and financing based on the concept of Tawarruq known as commodity murabahah is permissible. (BNM, 2007)

IMPERMISSIBILITY

*Imam Ibn Taimiyyah from Hanbalites schools regards that only permissible in the case of exceptional or necessity (darurhat). In his book it mentioned that Tawarruq is prohibited based on the reason of the “illah of Riba” (Ismon, 2011)*April 2009 International Islamic Fiqh Academy together with Organization of Islamic Conference (OIC) announced that Organized Tawarruq is impermissible. (Zuberi, 2009)

*AAOIFI the Islamic finance standard in the world also mentioned that Tawarruq is not permissible if it didn’t fulfil the stated condition as per AAOIFI’s stated the details meaning of tawarruq. (Shariah Standard No.30. Monetization (Tawarruq), 4/1, Controls on Monetization Transactions, Pg. 525.) (Khan, 2009)

*CONDITIONs *AAOIFI in its Parameters on Tawarruq transactions in its Shariah Standards No 30 outlines to ensure the genuine application of Tawarruq.

4/1 : The requirements of the contract for purchasing the commodity on a deferred basis should be completely fulfilled.4/2 : The commodity sold should be well identified so as to become distinct from the other assets of the seller4/3 : If the commodity is not made available at the time of signing the, the client should be given a full description.

Source: AAOIFI Shari’ah Standards for Islamic Financial Institutions (2010)

*CONDITIONs *AAOIFI in its Parameters on Tawarruq transactions in its Shariah Standards No 30 outlines to ensure the genuine application of Tawarruq.

4/5 :The commodity should be sold to a party other than one from whom it was purchased on deferred payment basis. 4/7: The institution shoul not arrange a proxy of a third party to sell the commodity on behalf of the client that purchased it from the institution.

Source: AAOIFI Shari’ah Standards for Islamic Financial Institutions (2010)

*APPLICATION

Products

Deposit product

Financing

product

Sukuk Ijarah

Bursa Suq’ Al-

Sila’

*DEPOSIT PRODUCT

TRADER A(muwarriq)

TRADER BBANK

(mutawarriq)

CUSTOMER

5) Sell on cash basis

2) Cash basis

1)Deposit money

3) Transfer ownership

4) Buy on deferred

*Bursa suq al-sila

Source: Bursa Malaysia

*ISSUES

•Good commodity•Something has valueCommodit

y •Object must exist•Non-deliveryPossession

and delivery

•The bank plays as financial intermediaries, but at the same time be an agent on behalf of customer.

Agency

*Other Countries

*differences ELEMENT Bay Al-inah & TawarruqObjective To obtain cash or liquidity

*SIMILARITIES

Elements Bay al-inah Tawarruq

Definition

a situation whereby a person sells his commodity to another for a specific price with payment delayed until a fixed date, and then he buys it back from the other person at a lower price in cash

A person who in need of cash will buy the commodity with the seller by instalment and at agreed mark up price. Then he sells the asset to the buyer who is willing to pay via cash basis at the original or lower price.

*differences Elements Bay al-inah Tawarruq

Contracting parties Involve 2 parties Involves 3 parties or more

Applications Personal Financing Working Capital Financing BBA FinancingIslamic Credit Card

Personal financing Deposit financing Sukuk Bursa suq Al- Sila’

Muslim scholars Majority of them not approve

Majority of them approve

Asset The asset return to the first seller

The asset does not return to the first sellers

Types No specified Classical Tawaruq and Organized Tawaruq

*conclusion *Both Al Innah & Tawarruq are both in controversial

issues and impermissible.*The root problem of these concept is come from the

underlying assets.*Suggestion: I. SavingsII. InvestIII. Ar rahnu

*references* Badri, M. B. (2014, March). Murabahah Sukuk A Brief Snapshot. p. 2.* BNM, I. B. (2007). Resolution of Shariah Advisory Council of BNM. Retrieved April 29, 2015,

from www.bnm.gov.my* Dusuki, A. P. (2010). Can Bursa Malaysia's Suq Al Sila'(Commodity Murabahah House)

Resolve The Controversy Over Tawarruq.* Hadad, D. A. (2010). Tawarruq Its Essece and Its Types:Mainstream Tawarruq and Organize

Tawarruq. Dubai.* Hassan, M., & Lewis, M. K. (2007). Handbook of Islamic Banking. UK: Edward Elgar

Publishing Limited.* Islamic Bank of Brunei. (2015). Retrieved April 29, 2015, from www.bibd.com.bn* Ismon, N. Y. (2011). Legality of Tawarruq in Islamic finance. Tazkia Islamic Finance and

Business review volume 7.1 .* Khalid, M. (2011). Retrieved April 18, 2015, from Academia: http://academia.com* Khan, D. S. (2009, September 4). Why Tawarruq Needs To Go;AAOIFI and OIC Fiqh

Academy: Divergence or Agreement. Retrieved April 29, 2015, from Islamic finance news: www.islamicfinancenews.com

* Munajjid, S. M. (n.d.). Rulings On Tawarruq Sales. Retrieved April 28, 2015, from Islamqa: islamqa.info

* Standard Chartered Saadiq. (2015). Retrieved April 29, 2015, from Standard Chartered Saadiq: https:www.sc.com/ae/islamic/saadiq-personal-finance.html#

* Tijani, I. M. (2013, September). Fatwa In Islamic Finance. A Snapshot of Tawarruq in Contemporary Islamic Finance .

* Zuberi, H. (2009, May 14). OIC Fiqh Academy Ruled Organized Tawarruq Impermissible. Retrieved April 29, 2015, from Islamic Finance Resources: ifresources.com