Continuing with our discussion on Tawarruq, we shall learn the limited permission granted by scholars on its usage and why. But first, let us try to understand how Tawarruq is alien to Islamic finance.
It is a fact that Shariah principles are always supportive of the business environment and stand for positive contribution to economic development. A business can only be sustainable if it continues to make a profit. However, Shariah parameters recognize the loss situations as well and have provided complete guidance on how to deal with them.
It is to be noted that the loss circumstances should be a rarity if a trader truly follows Shariah principles and the necessary business acumen in his/her day-to-day routine. Also, the loss is a test from God Almighty on how steadfast a servant is when dealing with negative circumstances.
Viewing the Tawarruq from the said Shariah trading parameters, one would observe that customarily all Tawarruq transactions are geared to be loss-incurring since the buyer perpetually sells the good at lower than its purchased price and registers a negative outcome. Hence, it is undoubtedly established that the product of Tawarruq cannot be from the Islamic finance genus.
In the interest of clarity, I produce a full definition of permissible Tawarruq, the gist of which was quoted by me in the previous article. This is based on the Islamic Fiqh Academy’s Fatwa No 179 (5/19) issued in its council session No 19 held in Sharjah in the UAE in April 2009:
“According to Islamic jurists, Tawarruq means purchase by a person (Mustawriq) of goods on [a] deferred payment basis so as to sell the same on cash mostly at a lower price to a party other than its seller with a purpose to get cash. This Tawarruq is permissible in Shariah provided that the conditions of [the] sale as laid down by Shariah are met”.
In the same Fatwa manuscript, the Islamic Fiqh Academy provided an admirable recommendation for Islamic banks and financial institutions:
“The Islamic banks and financial institutions should employ Shariah compliant modes of investment and financing in all their activities and should avoid prohibited or ill-reputed modes, by complying with the Shariah principles in a way to accomplish the objectives of noble Shariah and to elucidate the excellence of Islamic economics to the world which is suffering from economic instabilities and crises one after another”.
It can be inferred that the Fatwa was issued in the midst of the global financial crisis which was at its peak in 2009, and as such one can sense the indication of the crunch in the Fatwa script.
Let us now examine the limited usage of the permissible Tawarruq. I have pulled the following Shariah guidance from my old Fatawa (plural of Fatwa) archive.
It is allowed as a special case under a necessity situation for an Islamic bank to help a customer get rid of Riba-based debt through Tawarruq and to stop forever the Riba-based dealings, subject to the customer strictly satisfying the following conditions:
a. The customer owes interest-bearing debt to a conventional financial institution or private lender. Here, the customer could be an individual person or a legal entity.
b. The customer is unable to repay the interest-bearing debt out of its own sources.
c. The Islamic bank is unable to finance the customer through any other Shariah compliant manner, the proceeds of which could be utilized to square up the interest-based debt.
d. The customer is repenting, and gives a written undertaking not to deal with interest-based transactions in future.
e. The customer also undertakes that all its future financial dealings will be carried out in a Shariah compliant manner.
f. The Tawarruq facility for extinguishing conventional debt has not been utilized by the customer earlier.
g. The Tawarruq transaction carried out by the Islamic bank should comply with the permissibility as per the Islamic Fiqh Academy’s resolution of 2009.
Readers will note how limited the scope of Tawarruq permitted by the Shariah scholars can be. In the said milieu, it is a disappointment that Islamic and conventional banks in certain jurisdictions have adopted Tawarruq as the only product through which they undertake all kinds of transactions, be they from consumer, corporate or capital market segments of banking.
Commenting on such widespread misuse of Tawarruq, a renowned scholar of our time sadly opined that although we do find the permissibility of Tawarruq among the eminent jurists of early Islam to deal with an exceptional liquidity need by a person, if they had a clue as to how the contemporary financial institutions will adopt Tawarruq, their opinion would certainly have been different.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: Discussion on Tawarruq should be concluded next week.