DR MOHAMMED A FARHAN outlines the emergence of Islamic banks in Yemen as well as the developments and challenges faced by these banks in the Islamic finance industry.
The renowned Muslim economist professor, Nejatullah Siddiqi lists the harmful effects of tawarruq as follows:
• It leads to the creation of debt whose volume is likely to go on increasing.
• It results in an exchange of money now with more money in the future, which is unfair in view of the risk and uncertainty involved.
• It leads, through debt proliferation, to gambling like speculation.
• It results in an inequity in the distribution of income and wealth.
• It contributes, by consolidating debt financing, to raising anxiety levels and the destruction of the environment.
He also dictates that the approval of tawarruq may benefit individuals. However, if this is practised on a large scale, it would result in the proliferation of debt in the society, which would result in a macroeconomic instability. Thus, before deciding on the Shariah compliance of such a product, the Shariah advisory board of any Islamic financial institution (IFI) must take into account the macroeconomic consequences of approving the product.
Comments
In reply to Siddiqi’s statement, which said that tawarruq may have benefited individuals, however, if this is practised on a large scale, it would result in proliferation of debt in the society, which would bring macroeconomic instability, I pointed out several points:
1) The result of the analysis is deemed relevant to the Shariah advisory board. However, I do not think these facts would prohibit tawarruq immediately. Especially when such a result is tied to ‘if practised on a large scale’, the new Shariah ruling (prohibition of tawarruq) will only come into the picture when that particular situation takes place and the large-scale definition is quite vague, since the maqasid is conditional upon a predicted situation that might or might not occur. Therefore, this kind of analysis will not greatly impact on the current ruling on tawarruq. However, as more accurate evidence is accumulated, the Shariah scholars may see the need to reconsider their earlier opinion.
2) Secondly, that is because the issue of ‘debt in the society’ is a real fact and almost every person has personal debts. Moreover Islam allows debt and deems a person who gives a benevolent loan to be 18 times better than giving charity. Debt also carries one of the maqasid Shariah, which is helping the one in need. If the Shariah scholars issued a fatwa based on the argument of the proliferation of debt in the society, the Shariah scholars might also have to prohibit all kind of debts in all products, such as Istisnah, Murabahah, Salam etc., because all of it also would result in proliferation of debt in the society. As for me, this kind of prohibition will contradict the maqasid Shariah, because a Muslim life will turn to be very difficult and no business can be made.
The experienced Islamic banker, Rafe Haneef seems to agree with the above statement when he posed a similar rebuttal against Siddiqi’s debt argument. He said: “Importantly mafasid also can be perpetrated through the contemporary Murabahah, Ijarah and all contemporary contracts. Contemporary Murabahah also creates debt and results in more money in future for the financier. Contemporary Murabahah also can lead to gambling-like speculation and also create instability in the economy. Contemporary ijarah can also create inequity in wealth distribution and inefficient resource allocation.
Why should only Tawarruq be prohibited?
Compared to other contemporary contracts, the nature of tawarruq has the potential to create greater abuse and spread of mafasid, but none of the learned tawarruq opponents were able to provide any empirical evidence to show that tawarruq has in fact spread more mafasid than the other contemporary contracts.”
Rafe later on proposed four controls, which he believes would limit the issue of excessive usages and abuses of the tawarruq concept. All of the suggestions are sensibly acceptable from my perspective, especially when looking to the current needs of Islamic financial institutions to be competent in managing their assets and liability and liquidity administration, reducing risk exposure to the interest rate and currency rate volatility and also attracting corporate clients who are in need of such similar hedging arrangements. Indisputably, we could realize that there is a contradiction between the harm and the benefit. Contrary to the potential harmful effects that were pointed out by Siddiqi, here is a list of the benefits (masalih) that could be achieved through commodity Murabahah:
• It converts the creation of conventional ribawi debt to which is carried out according to Islamic law, even if only from the micro level it is still believed to have initial effect to the betterment in the future.
• It gives an opportunity to the commodity owner to venture into the industry by offering its commodity to be used for the transaction. This is in turn would benefit many commodity owners, though it could not be realized today, but it will open a new potential market for the commodity owner to sell its commodity efficiently. This will link the organized tawarruq to the real development in economic activities. If not, it would at least furnish the owner with financial strength to provide opportunities to move forward.
• It provides Islamic financial institutions with a considerable opportunity to move forward in expanding their business size. Currently, assets under Islamic financial institutions’ management across the globe still barely reach 20% compared with their conventional counterparts. It is believed that organized tawarruq could play a positive role in increasing IFIs’ stability in the immense conventional market. Slowly, it is hoped, when the time comes, IFIs would be able to shy away from organized tawarruq to a better product.
Each and every single violation in the transaction should not be generalized to other organized tawarruq arrangements made by individual Islamic banks, as there are several other IFIs using Bursa Suq Al-Sila’ of Malaysia, Ableace Raakin and IdotTV airtime commodity as their product. While some others might have their own arrangement with the real seller, it is immaterial to prohibit the whole concept and its application by referring only to violations made by certain IFIs. Furthermore, the need for organized tawarruq is undeniably necessary to maintain the survival of the IFIs in this conventional financial framework.
According to the Islamic Banker’s editor, M Parker, tawarruq has been practised in most countries where Islamic finance is provided except perhaps in Qatar, where the Shariah scholars have discouraged its use per se. However, more and more Islamic banks in countries including Saudi Arabia, Malaysia, Kuwait and the UAE are now shunning tawarruq, even its accepted form, perhaps to avoid market confusion.
Bai al inah
Other than that, the concern that surfaces is whether or not it seems to fall into the bai al inah category, and that is when the commodities are being pre-arranged in the transactions where the commodities will eventually be returned to the original seller.
In the situation where there is no arrangement, the customary practices of the commodity’s seller would be crucial for reference. It is recognized in Islamic law that the customary practices will be considered as conditions, so it could be deemed that the transactions contain al inah elements. Still, the proponents and opponents’ views in this sense are fairly balanced.
In my view, in the case of organized tawarruq, at this present size of the Islamic financial institutions, is to balance the harm and benefit of the transaction, and it should be contained only for the hedging-related product where no other better concept is available.
Other than derivatives-related products, it should also be allowed in the event that other acceptable concepts cannot be practised due to various constraints, especially concerning the state law or regulation, which is beyond the control of the Islamic financial institutions. For example, in some markets, the law allows a conventional bank to give a home loan and take a mortgage over the native land, like Arab land or Malay reserve land. An Islamic bank, if it is to offer the Ijarah, Mushakarah or Murabahah concept to its customers, needs to own the land first before pursuing the next contract.
Unfortunately, the local laws forbid such ownership of native land, unless all the shareholders of the Islamic bank are natives. Because most of the Islamic banks or Islamic windows are part of a public listed company, such a requirement is highly difficult to fulfil. In another instance, a corporation won a license to run a cellular phone business in Saudi Arabia, and is in need of a large amount of cash to enable the operation.
The Islamic financier offered a simple tri-partied Murabahah product, where the financier would buy the license from the regulator and subsequently sell it to the corporation at a mark-up price. The regulator rejected the proposal, stating that the law only provided the sale to the corporation and it cannot be given to the financiers.
Even after the financier tried to use a Wakalah contract, and created a special purposes company to circumvent the state law, its efforts were wasted. These are two genuine instances, which require Islamic financial institutions to seek assistance from the organized tawarruq concept.
It is realized that, while the product might be acceptable on a micro level, it may not necessarily be allowed, when the overwhelming harm outweighs the benefits. For instance, purchasing goods on a credit basis is allowable in Islam, but if the buyer already expects to fall short in his payment obligation, the seller is permitted to refute the purchase, as it will inflict harm on either the seller or the buyer.
Conclusion
However, allowing the Shariah compliant product based on commodity Murabahah or tawarruq will neither bring any direct harm nor reciprocate it to either the Islamic world or the Muslim community, as the usage of tawarruq it certain product especially with regards to Shariah compliant derivative product could help the Islamic financial institutions to mitigate the unnecessary financial risks that inherited from conventional finance and its framework. Thus, such a restriction is not applicable in this matter.
Dr Zaharuddin Abd Rahman is a Shariah scholar and lecturer at the faculty of economics and management sciences at the International Islamic University Malaysia. He can be contacted at
[email protected]
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