Classic Tawarruq is used as a means for a client to obtain cash and repay through deferred payments. It serves the same financial purpose as a loan, but because it involves trading transactions and no interest is payable, it is regarded as legitimate under Shariah. Some of the contemporary methods used for Tawarruq have caused unease amongst the scholars, notably when a client simultaneously sells the commodity acquired by the bank for cash before repaying the bank through deferred payments. It is evident that the client wants cash, not the commodity, and the trade could be regarded as deceitful, although the interests of none of the parties are actually harmed. Reverse Tawarruq is where a client purchases a commodity and then sells it to a bank for a mark-up, which subsequently sells on the commodity. Financially, the effect is the same as an interest bearing deposit but no interest is paid. It is this transaction that the International Council of the Fiqh Academy ruled impermissible at their meeting in Sharjah. Classic Tawarruq is used more widely than reverse Tawarruq, so the ruling will not directly affect most Islamic financial institutions in the GCC. Furthermore, as Shariah compliance is devolved in the GCC, there is no obligation for the Shariah board of each Islamic financial institution to follow the Fiqh Academy ruling. However, the bad publicity which Tawarruq has received has resulted in Islamic financial institutions referring to it less, and often not at all, in their promotional literature and marketing campaigns. In other words, the moral authority of the Fiqh Academy has an impact, even though there are no formal mechanisms to ensure that its rulings are enforced.
PROFESSOR RODNEY WILSON
Historically, the main Shariah issue with Tawarruq transactions is related to the fact that the intention behind the purchase of the commodity is not to own and use the commodity. Instead, the commodity is sold instantaneously in order to obtain the required funds. As a result, the asset is typically used as a means to an end to provide finance against a positive return. While the nature of Tawarruq may not strictly comply with Shariah principles, the reasons behind using this product should be taken into consideration on a case by case basis before the product is deemed to be non compliant. In the event Tawarruq is used purely to synthesize a conventional interest-bearing loan, the ICFA ruling should take effect. However, although Tawarruq may not be the most perfect instrument and has serious Shariah issues associated with it, it does serve a purpose when Value Added Tax (VAT), stamp duty or other taxation rules pose limitations on Islamic finance and the Tawarruq is the only feasible transaction type available. DR NATALIE SCHOON Head of product management, Bank of London and the Middle East
The Islamic banking and financial industry is still in its infancy and growing, continuing the process of developing different liquidity management products that are not only Shariah compliant but also serve the business needs of Islamic financial institutions. it is hoped that the recent ruling of the International Council of Fiqh Academy will simplify the framework under which Islamic financial institutions can design their products based on Tawarruq. The ruling aims to separate the various roles confined with the same financial institution as practiced in reverse Tawarruq in some markets. Moreover, the introduction of several independent parties in the transaction would also tone down the criticism of the current practices adopted by few Islamic banks. This ruling would also provide regulators with a fresh look on the issue. Moreover, Sukuk will take pivotal importance in the aftermath of this ruling for filling the gap for liquidity management in Islamic finance industry. Qard Hasan as an alternative suggested by the International Council of Fiqh Academy is economically and socially more appropriate, but there is a long way to go before the industry matures and a transparent and ethical financial system is established. This ruling may improve the image of the regulators and consequently the industry, that they are unbiased and neutral to the business needs of the industry when it comes to giving Islamic principles the absolute priority. AHMED ALI SIDDIQUI Executive vice-president, product development and Shariah compliance, Meezan Bank
The fatwa on the use of Tawarruq has the potential to become a larger issue for the Islamic finance industry than the AAOIFI ruling on Sukuk if it becomes accepted across the industry and is broadened to include commodity Murabahah. Although the latter is similar to Tawarruq and is in greater use, it is less controversial. However, regardless of whether the ruling is adopted and/or broadened, it highlights the difficulty facing the industry in developing products that function in a similar way to inter-bank money markets (outside of Malaysia). The lack of instruments for use in liquidity management represents a significant impediment to future growth of the industry as it forces Islamic banks to maintain higher levels of capital, which reduces profitability. On the bright side, having this additional liquid capital on Islamic banks’ balance sheets provides a buffer that may explain why there has been less disruption in the market as the real estate crash deepens in parts of the Gulf. Whether or not the Tawarruq and commodity Murabahah products remain accepted as Shariah compliant, it is clear that the industry needs to continue development on other mechanisms for liquidity management for Islamic banks in order for the industry to improve its ability to compete with the conventional financial industry. BLAKE GOUD Principal, SharingRisk.org
It would not have much effect because this ruling is not new. In fact, most of the GCC based banks have been using the Tawarruq as a last resort type of financing. MOHAMED RIDZA Managing partner, Mohamed Ridza & Co
It will bring more credibility to the industry and will enhance the resolution between riba-free and riba-based transactions. The scholars should be congratulated for taking this important step and we pray that more will be taken in order to focus less on “form” and more on the spirit, intent and substance of the Judeo-Christian-Islamic teachings that prohibit Ribit (the Jewish Bible and The Old Testament)/Riba (the Quran). DR YAHIA ABDUL RAHMAN Chairman and CEO, The LARIBA System
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