Definition of Tawarruq (Monetization): refers to the process of purchasing a commodity for a deferred price determined through Musawama (Bargaining) or Murabaha (Mark-up Sale), and selling it to a third party for a spot price so as to obtain cash. Whereas Inah refers to the process of purchasing the commodity for a deferred price, and selling it for a lower spot price to the same party from whom the commodity was purchased. (Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
The problem with Tawarruq is that what is often begrudgingly allowed for by some scholars for extreme, case-by-case situations, banks often turn into a retail product for ordinary customers to use. This is not the spirit of Islamic finance. And it is often not even the letter of Islamic finance.
Here is our response to one product we recently reviewed for a major financial institution and are recommending a complete restructuring for:
There are two important concepts:
- Bay al-Inah is composed of two sale transactions. In the first transaction, a seller sells an item for a particular price to be paid in deferred instalments. In the second transaction, after taking possession of the item, the buyer sells the item back to the seller for immediate payment of a lower price, to be paid before the instalments of the first sale are due. The overwhelming majority of scholars are of the opinion that Bay al-Inah is impermissible when the price of the second sale if lower than the first sale. However, jurists have ruled that Bay al-Inah is permissible in the instance when the price of the second sale is equal or higher than the price of the first sale.
- Bay al-Tawarruq in the strict definition of the jurists is defined as a Monetizer (mustawriq) who buys a merchandise at a deferred price in order to sell it in cash at a lower price. Usually he sells the merchandise to a third party with the aim to obtain liquidity. Jurists have ruled that this form of Tawarruq is permissible since the laws and rules of a valid legal Shariah sale have been fulfilled.
The contemporary definition of organized Tawarruq is when a Monetizer (mustawriq) purchases merchandise/commodities on the international commodity market on a deferred price basis either through Musawamah or Murabaha. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier executes the financial transactions, usually at a lower spot price.
The permissibility of Tawarruq has been explicitly deduced from the books of the Hanbali school while implicitly inferred from the juridical texts of the other schools of jurisprudence.
There are various transaction on the international commodity market that are not actual sales such as futures, etc. Moreover there are various non-Shariah compliant elements in such transactions. Therefore Tawarruq should be limited to individual need and necessity. Tawarruq should not be retailed to the public as this defeats the ideals and objectives of a viable sustainable Islamic economy. Rather the Islamic economy should be based on the ideal profit/loss sharing instruments of Mudarabah/Musharakah. Islamic banks and financial institutions should offer interest free loans (Qardh Hasan) as an alternative to Tawarruq.
- Tawarruq in currencies are not permissible even according to the most widely following Islamic finance standard in the world, AAOIFI. (Shariah Standard No.30. Monetization (Tawarruq), 4/1, Controls on Monetization Transactions, Pg. 525.)
- The bank cannot sell the goods on behalf of the client without the client taking physical or constructive possession of the goods. This does not take place. Islamic banks generally sell the warrants representing the metals and not the actual metals. Therefore, the bank does not take possession when purchasing the metals from the broker initially. The Mustawriq (monetizing client) does not take possession in any form of the metals. The bank is merely appointed as an agent to sell the metals on the metal exchange without any actual Shariah realization of the contractual positions required.
- All the transactions in a Tawarruq transaction should be separated and individualized. The various legs in the transaction in reference have not been individualized and separated, hence the product is not Shariah Compliant.
- Contemporary forms of organized Tawarruq are very similar to Bay al-Inah and have been largely detested by the majority of scholars including the International Council of Fiqh Academy. (Resolution 179 (19/5) in relation to Tawarruq: its meaning and types (classical applications and organized tawarruq)
- In general, much of the current day Tawarruq contracts are in violation of the AAOIFI controls on monetizing transactions and the general Shariah laws of finance and economics.
And Allah knows best,
Mufti Ismail Desai
Disclaimer from Ethica Institute of Islamic Finance (This article was originally published by Ethica Institute of Islamic Finance)
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