Strengthen the practice, rather than prohibiting it
The recent resolution of the International Fiqh
Academy Council on Tawarruq
has ignited anew the already controversial application of modern Tawarruq
, also known as Commodity Murabahah
. Various stakeholders of Islamic finance such as Shariah
scholars, bankers and accountants, have attempted to express their opinion on the matter. I, as a Shariah
scholar, am also involved in this discussion, though sometimes the general statement that I had made had been extended and used to impute implications on certain practices.
Anyway, in the numerous debates, many failed to appreciate that this resolution is not the first on Tawarruq
. The same resolution (in content) had been passed earlier by the Islamic Fiqh Academy
, one of the bodies under the Muslim World League
council. The academy had issued two resolutions regarding Bai al-Tawarruq
In 2005, the Council passed a resolution allowing the practice of classical Tawarruq
provided that it fulfils all the necessary requirement of valid sale contract. However in 2007, the Council passed another resolution prohibiting Tawarruq
if it is practiced as organized Tawarruq
If the practice of modern Tawarruq
is prohibited, why has AAOIFI
taken the effort to set up the Shariah
Standard for its application? This shows that the practice of Tawarruq
is not prima facie prohibited, but due to several violations of its practices.
If properly executed and it fulfils all its requirements, and all the violations have been eliminated, the practice of modern Tawarruq
should not be prohibited simply because it is somehow systemized and organized.
The practice of Tawarruq
is not new in Islamic law. It was widely practiced in the past, although at that time, the practice was not as sophisticated as now. At all times, it was implemented in an unsystematic manner, where a person will simply buy a commodity and agree to pay on a deferred basis, and then sell the commodity to a third party at a lower price.
That third party will pay cash, allowing the Mustawriq (the person who needs cash) to benefit from the money and has liability to pay the original seller of the commodity the selling price in a deferred manner. Though there was opposition to this practice, a majority of the jurists permitted Tawarruq
provided that it fulfils all the requirements of a valid contract in both stages.
It is understandable that the complexity of modern transactions and finance cannot accept a spontaneous and unstructured act by parties involved in a particular transaction. All modern financial transactions are organized and proper documentation that highlight the rights and liabilities of the parties involved must be clearly detailed for any possible dispute resolution or litigation later. This is the practice of the day.
To require any modern practice to be unorganized and undertaken on the spur of the moment would not only render the transaction impracticable in most circumstances but also expose the parties involved to very high and unexpected risk.
I do not deny that Tawarruq
in the classical way is implementable even in modern times, if it is to be done on an individual basis. But for it to be implemented within the modern financial system will be very hard, if not impossible. It has to be organized to some extent.
That does not mean that organized Tawarruq
is served on a clean plate. This “organized” situation has sometimes rendered the contract to be not genuine due to its failure to fulfill the necessary requirements of a valid sale contract.
In some circumstances, to speed up the process, various Shariah
requirements have been violated, either unintentionally or otherwise. This is the crux of the problem. This is what we should resolve and this is what the AAOIFI Shariah
Standard tries to address. I believe this is the right way in which the resolutions should be approached.
Several examples can be advanced here on possible violations of Shariah
principles in the practice of modern Tawarruq
. Among these:
• The suitability of the commodities as an underlying asset
As a normal sale contract, the subject matter must meet all the specifications of good commodities. In certain practices of Commodity Murabahah
, the commodities used are spoilt items. For instance, Sheikh Ali Qurrah Daghi revealed that in one Commodity Murabahah
that he encountered, the commodity sold was a “spoiled” aluminum from Russia that had been in storage for more than 10 years. In fact, the broker used that commodity because it could not be sold. Definitely, this kind of Commodity Murabahah
would not be allowed by any scholar, not because of the Tawarruq
contract but because of its failure to meet the necessary requirement of a valid subject matter of the sale contract.
• Possible redundancy in the commodities used
This concern has been raised due to the absence of proper monitoring of the practice by certain quarters. How can we ensure that the same commodities would be sold to one buyer only? There is talk that some commodities had been sold to more than one buyer. Though this has not been proved, it raised concerns over the genuineness of the contract. The only way is have a proper framework and allow for Shariah
audit on this issue, which some brokers may refuse to allow.
• Independence of one contract from another
It should be noted that modern Commodity Murabahah
in fact consists of at least three sale contracts. First is when the commodity is bought by the bank from the broker and the payment is made in cash. Next is when the bank sells to its client (or another bank) whereby the payment is on a deferred basis. The client will then sell the commodity to broker B who will pay cash. It should be noted that all these contracts shall be executed independently. In some Commodity Murabahah
transactions, it is mentioned that the second and third leg sales shall only be executed if the first leg is executed. I believe that this kind of tying all contracts in that manner is prohibited.
• Ability to deliver
This is another great concern in the practice of Commodity Murabahah
. All sale contracts must result in delivery of the subject matter from the seller to the buyer. Therefore, any clause that indicates that there is no intention by the buyer to take delivery would render the contract invalid, simply because the buyer is, by default, the owner of the commodity and as such entitled for delivery. He is free to do what he wants with the commodity, for his own use or to sell to someone else. Therefore, if he asks for delivery, the commodity shall be ready for delivery. If he sells the commodity to someone else, then it shall be delivered to that person.
In some Commodity Murabahah
transactions, the ability of delivery has been a subject of doubt. The seller was not prepared to deliver, even if the buyer asked for it. I do not think anybody will doubt that this sale contract is invalid since it fails to fulfill a very basic condition of a valid sale contract — the ability to deliver.
The commodity shall not revert back to the original seller. This is also a major concern. Though it has been stated that the commodities will be sold to the market at large, the inability to prove that has raised a lot of concern.
Even worse, it has been reported that some brokers refuse to allow the client to undertake an audit, which heightens the belief that the commodities are actually sold back to the original broker and ready to be trading again. No one can prove this unless a full audit is allowed, but concealing the matter by refusing an audit is sufficient to raise doubts over the practice.
scholar who had come across these violations would have an opinion other than to categorically condemn these Commodity Murabahah
practices due to the violations of various Shariah
rulings on sale contracts.
Last but not least, I believe that all the resolutions and Shariah
standards on the practice of Tawarruq
should focus more on how to strengthen the practice of Tawarruq
to meet all the requirements of the Shariah
rather than prohibiting it without proposing any viable alternative.
For the time being, though several instruments have been suggested to replace the function of the Commodity Murabahah
, it is undeniable that it is still largely needed for various products, especially those related to risk and liquidity management, or even to provide liquidity to the clients of Islamic banks.
It should be noted that under certain circumstances, no other possible financial modes can be applied. In Malaysia, for instance, if a client approached an Islamic bank to buy a piece of land and no separate title of ownership is issued, under the current practice, the bank cannot finance the purchase of the land by using the land as the underlying asset. The only way is to provide the client with the money to purchase the land. How? By the bank giving a benevolent loan? I doubt that this is practicable.
So, we have two options. One is to tell the client that we cannot assist him and he has to go to conventional banks, or provide him with a proper Tawarruq
transaction to allow him to get cash to purchase the land. It may be seen by some quarters to be “not so clean”, but until we have a better structure or law and practice, we may need to use that mechanism. This is just a very simple example.
What about larger issues like the risk and liquidity management of Islamic banks? All must be observed as a bigger picture, I believe. The Shariah
advisor of an Islamic bank should also monitor closely the practice of Commodity Murabahah
to ensure that all the requirements are fulfilled and also to ensure that Commodity Murabahah
itself is wisely utilized.
Nevertheless, all the resolutions and guidelines issued by the respective international Shariah
organization should be viewed from a positive aspect rather than assuming a negative point of view. The loose practice of Tawarruq
, where several violations of Shariah
requirements have been observed, should be strengthened by following the guidelines and Shariah
standards on this practice, especially those of AAOIFI
. Only in this way that we can continue to serve the needs of Islamic banks and their clients and at the same time remain within the boundaries of Shariah
. At the same time, the quest for a better structure via innovation shall prevail.