Pursuant to elucidating the stringent conditions for the utilization of Tawarruq in an exceptional situation in the last article, I would now like to divulge how it is actually practiced in a day-to-day manner in some Islamic banks in certain jurisdictions for all financing purposes. The following script would enable readers to comprehend what I am trying to convey:
a. Customer: Hello, I have a salaried account with the bank and also enjoy a car financing facility from you. Now I am in need of US$100,000.
b. Branch manager: Alright! For how long?
c. Customer: For five years. What is your rate?
d. Branch manager: Well, we charge 6% flat.
e. Customer: Agreed. How soon can I get the money?
f. Branch manager: Let me check your account in the system. (After sometime). You qualify to get the funds based on your satisfactory account history and credit score.
g. Customer: Oh, thank you so much. Please go ahead and complete the process as I need the money urgently.
h. Branch manager: Will you please sign this document?
i. Customer: What is this document?
j. Branch manager: This is a promise to purchase by you to the bank.
k. Customer: Purchase what?
l. Branch manager: You are promising the bank that you will purchase palladium from the bank on a five-year deferred payment basis at 6% profit for the bank.
m. Customer: Hold on. What is palladium and why should I purchase it from the bank?
n. Branch manager: Hey calm down. Do you need money?
o. Customer: Yes, of course. That is why I am here.
p. Branch manager: Well, in that case just follow my instruction. You will get the money provided you put your signature wherever I am telling you to.
q. Customer: Okay, but at least explain to me what it is about.
r. Branch manager: See, being an Islamic bank, we cannot lend you the money like conventional banks. So we need to purchase any metal. Currently, we are purchasing palladium which we sell to the customers on the basis of a Murabahah contract.
s. Customer: I understand the Murabahah contract since last year I purchased my car by signing it with the bank since I needed the car. But I do not need palladium. What will I do with it? I don’t even know what palladium is and where it is used.
t. Branch manager: Relax. You don’t have to do anything. See, when you sign the promise to purchase document, the bank will buy palladium from the dealer at a cost of US$100,000. The bank will then sell the palladium to you at a price which is the bank’s cost plus 6% profit for five years by signing the Murabahah contract with you. So, you become the owner of the palladium. At the same time, the broker through which the bank purchased the palladium shall sell your palladium in the market and get you US$100,000 in cash. It is that easy.
u. Customer: Gosh…Phew. What if the broker is unable to sell the palladium? How will I get the money? I will be stuck with palladium for nothing.
v. Branch manager: Every day we do just that for hundreds of our customers who need money and nothing has ever happened because everything is taken care of in an organized manner.
w. Customer: (halfheartedly). Ok.
x. Branch manager: Now, please sign the documents and go home. We will call you in a couple of days when the bank has bought palladium so that you purchase it from us.
y. Customer: Thank you.
The analysis of the said discussion is that as per both Shariah and legal requirements, a contract between any two parties can be entered into verbally as well as written. Here, the verbal contract between the Islamic bank and the customer for borrowing money at 6% interest was entered into between the Islamic bank and customer starting from item (a) to (g).
Also, contrary to car Murabahah where the customer was actually in need of a car, the customer is not in need of the metal. Last but not the least, it is known in the market that the practice of purchasing metal by a bank is mostly dubious and that at best it is confined to moving a few documents here and there without the involvement of any metal.
A scholar aptly quipped that if Islamic banking is all about Tawarruq, who would not want to go to conventional banks? At least they are straightforward in whatever they do.
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 Murabahah and Tawarruq has ended. We will explore another structure next week.