TAWARRUQ: ISSUE & CHALLENGE

By:
Shochrul Rohmatul Ajija, Mia Fathia, and Agusdiwana Suarni1

ABSTRACT

Commodity tawarruq financing has been the most widely used form of
liquidity management instrument to date, due to its ease of execution and
wide acceptability among IFIs and banks. In recent years, however, some
of the IFIs have been reluctant to use commodity tawarruq instruments
due to their disapproval of the concept of tawarruq. Therefore, analysis
about tawarruq is very essential and many studies have been done on it.
Nevertheless, study about the comprehensive review of tawarruq
according to scholar‟s view and analysis of tawarruq in practice is limited
and this paper attempt to fill this gap. Using literature analysis, this paper
attempts to provide the views and verdicts of jurist regarding tawarruq in
the banking system. Furthermore, it will also critically provide their
textual evidence and rational arguments in order to reach a final juristic
judgment.

Key words: Tawarruq, Scholar‟s View

1. Introduction
In the name of Allah, the most Beneficent the most merciful
All praise for Allah, may peace and blessing be upon the messenger of Allah
Muhammad, the last messenger of Allah, his household, his companions, and, those
who follow and support him.
One of the most widely discussed topics of the Islamic banking system in
recent times has been that of tawarruq which was invented on 1421 H, by several
banks in Saudi Arabia fallowed by other banks in Bahrain, Kuwait, Qatar, and United
Arab Emirates. That is because Islamic banks have employed this financial instrument
extensively. They do so because they believe it ensures that depositors will continue
to do business with them and because it provides the liquidity that is considered to be
their lifeblood. (Bouheraoua, 2009)

1
Master Student of Economics, IIUM. Any information, please contact me at
shochrul_iesp@yahoo.com
(+6014-9306816)

1
 Juristic views about it are divided. Some scholars permit it, based on the
legality of sales founded on mutual consent, as well as the presence of a third party
that excludes it from the form of the prohibited „inah sale. Others stipulate certain
conditions for its acceptability; while others prohibit this type of transaction
altogether, considering it a ruse by which Islamic banks provide legal sanction for
riba (usiry/interest), which is unanimously agreed to be prohibited. (Bouheraoua,
2009).

Therefore, this paper attempts to provide the views and verdicts of jurist
regarding tawarruq in the banking system. Furthermore, it will also critically provide
their textual evidence and rational arguments in order to reach a final juristic
judgment. The structure of the paper is as follows: Section 2 provides the definition
and form of tawarruq. Section 3 analyzes the similarities and differences between
tawarruq and „inah. Section 4 attempts to tackle tawarruq in practice used case study
of Bank Islam Malaysia. Section 5 discusses the scholar‟s view and evidence in
tawarruq, and the last section is conclusion and recommendation.

2. Definition and Forms of Tawarruq

2.1. Definition of Tawarruq

2.1.1. Literal Meaning of Tawarruq

According to Bouheraoua (2009) tawarruq comes from “masdar” the verb taqarruqa
is said Tawarruq al-hywan which it means the animal at the leaves. Khayat (2006)
also mentions that tawarruq comes from the word wariq as it mentions in surah Al-
Kahfi: 9
‫فابعثوا احدكم بورقكم ىذه الى المدينو‬
“So send one of you with this silvery coin of yours to the town.”
Which it means Dirhams made of silver. However, there are two different
accents in the Arabic language (wariq-warq). Furthermore, Tawarruq and the verb
derived from al-warraq are not directly traceable in the Arabic language; linguists
mention only variable nouns, as an al-Iraq (which applied to become rich) and al-
istiraq (which applied to a man who is seeking Dirham or money). So the term
tawarruq is invented by the scholars for the one who may be pressure himself on how
to obtain “al-wariq.”

2
2.1.2. Technical Meaning of Tawarruq
Dusuki (2008) defines tawarruq technically as the purchasing of a commodity on
credit by the mutawarriq (seeker of cash) and selling it to a person other than the
initial seller (3rd party) for a lower price on cash. Actually, tawarruq is a sale contract,
whereby a buyer buys an asset from a seller on deferred payment and subsequently
sells the assets to the third party for cash, with a price lesser than the deferred price.
This transaction is called tawarruq, mainly because when the buyer purchases the
asset on deferred terms, it is not the buyer‟s intention to utilize the benefit from the
purchased asset, rather to facilitate him to attain liquidity (waraqh maliah).
Khayat (2006) explains that according to Malikis, tawarruq means selling
something on deferred basis and then buying it back in cash, albeit at a lower price
than the deferred price. For example, someone sells his commodity at a price that is
already known to be paid by the deferred payment. He then buys it at a lesser price
than the deferred price. It is known because of obtaining the money for sahib al-inah.
This is because al-ain is the present property from the money. This is one of the
practices of the Hanafis.
According to the Shafi‟is, tawarruq means selling something on deferred
payment, and then buy it back in cash, albeit at a lower price than the deferred price.
Furthermore, the Hanbalis said in kitab Syarh Muntaha Al-Iradat, known as Daqaiq
Awla An-Nahyu Li syarhi Al-Muntaha that bai‟ al-„inah by the name of tawarruq is
the need for cash, buying the equivalent of thousands and more to expand its price and
there is nothing wrong with that and it is known as tawarruq. In Muntaha Al-Iradat Fi
Jam‟i Al-Muqni‟ Ma‟a At-Tanqih Wa ziadat, “If someone bought something on credit
or he did not pay the price, it then becomes forbidden and the sale is invalid to its
buyer by cash purchase less than the first price, and it is a tool to the second, except
change its feature and it is known as the problem of „inah, because the commodity of
the buyer in deferred is taken instead of it.

2.2. Forms of Tawarruq

According to Bouheraoua (2009), the kinds of tawarruq are two. Those are classical
tawarruq (Al-Tawarruq at-Fardi) and organized tawarruq (Al-Tawarruq al-
Munazzam). Classical tawarruq is defined as the purchase of a commodity possessed
owned by the seller for a delayed payment, whereupon the buyer resell the commodity
for cash to other than the original seller in order to acquire cash (al-wariq).

3
 Whereas, Fahmy et.all (2008) mentioned that the contemporary definition on
organized tawarruq is the transaction that a person (mustauriq) buys commodity from
local or international market at a deferred price. Simultaneously, he (mustauriq) will
ask the financier in his own capacity or through his agent or by special agreement
with mustauriq to rearrange the sale transaction usually at a lower spot price.

2.3. Modus Operandi of Tawarruq

Modus operandi of classical tawarruq is shown as following picture:

Figure 1: Classical Tawarruq

1. Purchase
commodity on cash

Trader Islamic Financial Trader

A Institution B
2. Transfer commodity
ownership 4. Transfer
commodity 5. Sell
ownership commodity
* on cash
3. Sell commodity on
deferred price (Cost +
Profit)
6. Transfer
ownership
Counterparty

*In practice, the Counterpart will appoint the bank as his agent to sell the commodity to Trader
B on cash basis in the commodity market

Source: Fahmy et.all (2008)

According to Fahmy et.all (2008), the modus operandi of classical tawarruq is:
1. The Islamic Financial Institution (IFI) purchases commodity from Trader A in
the commodity market on cash basis;
2. Ownership of the identified commodity will then be transferred to IFI;
3. Thereafter, the IFI sells the commodity to the Counterparty (e.g. other Islamic
financial institutions, or client) on deferred price, i.e. cost price plus profit
margin);
4. The ownership of the commodity will be transferred to the Counterparty;
5. The Counterparty will then sell the commodity to Trader B on cash basis in
the commodity market;

4
 6. Finally, the ownership of the identified commodity will be transferred to
Trader B.
In addition, the most important thing that must be underlined is that in the
classical tawarruq structure, each transaction shall be independence. Nevertheless, in
practice, to achieve cost effectiveness, IFI will be appointed as an agent to sell the
commodity to third party on behalf of the Counterparty; that is called organized
tawarruq.

Figure 2: Organized Tawarruq

1. Deliver warrants
Islamic Financial Trader
Institution 1. Pay Spot A

3. Appoint IFI as
agent to sell
2. Sell 3. Sell Warrant
warrant
warrants as Agent

5. Pay
Deferred

Counterparty Trader
B

Note:
Majority of commodity Murabahah transactions use London Metal Exchange (LME) base
metals as an asset since they meet all criteria for a commodity (i.e. no-perishable, freely
available and can be uniquely identify) and are easily identifiable via warrants.

Source: Fahmy et.all (2008)

The organized tawarruq is usually practiced on the commodity murabahah

which is the most commonly used liquidity management instrument by IFI. This is
because IFI can get a fix return from this instrument. Furthermore, following figure
illustrates how organized tawarruq works in the case of commodity Murabahah when
an IFI provides funds to its counterparty to earn profit.
The description of organized tawarruq is as following steps:
1. IFI purchases warrants from Trader A and pay spot.
2. IFI will then sell the warrants to the Counterparty. The Counterparty accepts
the offer from the IFI to purchase warrants on a deferred payment basis, where
the mark-up and the repayment date are pre-agreed.

5
 3. The Counterparty appoints IFI as an agent to sell warrants on its behalf. The
IFI now acts as an agent to sell the warrants at spot to another Trader B.
Alternatively; the Counterparty could sell the warrants in the open market.
4. Payment made to the Counterparty; ownership of warrants transfer to the end
buyer. In most of the case, whether the Counterparty requests the IFI to sell
the warrants on its behalf or arrange to sell to third party by itself, the
Counterparty will be paid the spot counter value of the warrants.
5. Deferred payment will be made by the Counterparty to the IFI. This payment
takes place at a pre-agreed time in the future and consists of the principal of
the original purchase plus a pre-agreed mark-up.
The net result of the above movements of warrants and cash is that the
counterparty now holds an amount of money against an offsetting payment to the IFI
for a pre-agreed principal plus a mark-up at a pre-agreed future date, thus creating a
synthetic deposit.
From that explanation, the tawarruq process seems to be very simple.
However, extra care should be taken while undertaking such transaction, and it should
be ensured that the transaction does not become a mere exchange of papers between
two brokers, and one or two financial institutions. IFI needs to understand that
tawarruq arrangement should be used in extreme cases where no option is available to
avoid interest. Widespread use of this tawarruq is harmful to the industry in the long
run. Therefore, Shariah Board needs to strictly monitor all tawarruq based transaction
which includes the commodity Murabahah.

3. The Similarities and Differences between Tawarruq and ‘Inah

The similarities and differences between tawarruq and „inah must be known
especially there are many scholars that claim tawarruq as „inah which is prohibited by
many scholars.
Bouheraoua (2009) describes that tawarruq and „inah are congruent in terms
of the purpose behind them, which is to acquire cash. In addition, they are also
congruent in that they result in the payment of a greater amount of immediate cash in
consideration of the delay. Generally, the modus operandi of „inah is as following
picture:

6
 Figure 3: Modus Operandi of ‘Inah

How can I borrow

RM100,000 to get
married?

RM 150,000

RM100,000

Source: Dusuki (2008)

However, tawarruq and „inah differ in terms of the return of the commodity
sold. The requester of „inah will return the commodity back to the seller, whereas the
mutawarriq in the individual form of tawarruq will sell the commodity to a new
buyer other than the first buyer with neither the arrangement nor the knowledge of the
first seller. However, in organized tawarruq he arranges with the first seller to sell it
to a third party or return it to its first seller.

4. Tawarruq in Practice: Case Study of Bank Islam-Malaysia

Firoozye (2009) mentions that tawarruq in practice has become an institution and as
in many institutional frameworks, has been streamlined and risk managed. The actual
goal of securing finance for a fixed term is emphasized over all else, since classical
tawarruq has too many moving parts and risk managers the world over could
complain. The result is that the bank plays the intermediary in all transactions, the
client having essentially no ownership (nor interest in actual or legal sense) in the
underlying asset. The end result is called organized tawarruq.
Moreover, Dabu (2008) stresses that the goal of tawarruq actually is to get
cash which is clearly stated in the notices of Islamic Banks and their brochures. The
major reason that prompts the said banks and financial institutions to practise

7
tawarruq is that in most cases, is to free from the constraints of the balance sheet, as
the financial accounting rules take into account the principle of capital adequacy, and
provision for managing bad debts (doubtful debts), which would hinder the activities
of finance in general, slow down the circulation of capital and reduce the profitability
of the Bank. In this case, tawarruq is considered an appropriate substitute, due to the
fact that it can rotate part of the liquid assets for tawarruq of non-liquid assets that
guarantee the bank‟s debts to the other person, without an increase of risks to the bank
that is without any need for a special supervision in the general budget.
One example of bank that practices tawarruq in Malaysia is Bank Islam.
According to Bank Islam (2009), in regards to Murabahah Commodity, Bank Islam is
executed to serve house and fixed asset financing, vehicle financing and personal
financing.
Moreover, step by step process flows of tawarruq practiced in Bank Islam are
explained on this following picture:

Figure 3: Tawarruq Structure Diagram of Bank Islam

Source: Bank Islam (2009)

8
Descriptions:
1. The costumer applies financing product based on tawarruq concept from the
bank. Bank obtains tawarruq transaction documents from the costumer.
2. Bank will buy the commodity at LME through broker 1.
3. Under the murabahah contract, bank then sells the commodity to the costumer
at bank‟s selling price (principle profit) on deferred payment term.
4. Under the wakalah contract, costumer requests bank to sell the commodity in
the market.
5. Acting as the appointed sale agent for the costumer, bank sells the commodity
to broker 2.
6. Bank then credits the wariq (proceed) from the sale of commodity to the
costumer‟s account.
7. Finally, costumer pays amount due to the bank (principal + profit) by way of
agreed installment method.
Furthermore, to ensure the product is inline with Shariah, Alhadad (2003)
mentions that there are some conditions that must be met by Bank Islam in carrying
out the above transaction:
1. The contract of deferred sale should be Shariah compliant, either by
negotiation or murabahah and make sure that the commodity exists and
possessed by the seller before he sells it. In case of binding promise, the
promise should only be from one party. Moreover, the subject matter should
not be gold, silver or currencies;
2. The commodity must be precisely determined, either by possessing or by
serial number of its documentation, such as the serial numbers of warehouses
certificates;
3. If at the time of concluding the contract, the commodity does not exist, then
the seller must provide full information regarding the description, quantity and
the place the commodity is stored to the client, in order to ensure that the sale
is genuine not nominal. Preferably, the transaction should use local
commodities;
4. There should be real possession of the commodity, and there should not be any
obstacle that prevents the client to hold the commodity;

9
 5. The commodity should be sold to a third party, and not to the first seller, so
that sale of „inah is avoided. Additionally, the first seller should not get back
the commodity by any condition, collusion or through customary practices;
6. There should not be any link between the contract of purchase at deferred
price and the contract of sale at cash price, by a way that forbids the client to
hold the commodity, either the link is stated in the contract or due to
customary practices or by the nature of the procedures;
7. The client should not appoint the company (which deals with the international
markets of commodities) or its agent to sell the commodity that the client has
bought. However, if the system in the market does not allow the client to sell
the commodity by himself, the client can assign the company as his agent to
sell the commodity, on condition that the sale should be done after the client
has held the commodity;
8. The company should not appoint another agent to sell the commodity (which
was sold by the company – first seller) on behalf of the client;
9. By taking other provisions into account, the client should sell the commodity
himself or through another agent (not the company); and
10. The company should provide full information, in order to enable the client to
sell the commodity, either by himself or through his agent.

5. Scholar’s View and Evidence in Tawarruq

There are two scholarly views on tawarruq. The first view is that tawarruq is
permitted, either by absolute permission or disapproved permission and the second
view is that tawarruq is prohibited.

5.1. The Scholars that Permitted Tawarruq

In regard with the prohibition of tawarruq by some Muslim Scholars or jurists such as
Umar bin Abdul Aziz, Ibn Taymiyyah, Ibn Alqiyym and Mohammed bin Allasan
Alshaibani, conversely, some of Muslim jurists agree to the implementation of
tawarruq. The evidences that are used to allow real tawarruq are as follows:
Firstly, tawarruq is form of trade or sale which is permissible by Shariah. It is
included in the general commandment of Allah that said: “Allah has allowed trade
and has prohibited riba.” (Surah: Al-Baqarah: 257). So, the tawarruq is kind of trade
that permitted except there is statement from source of Islam that prohibit it. It is clear

10
that tawarruq sale is legally permissible, because the basic ruling on sales is al-ibaha
(legalization) as mentioned in the previous surah, al-Baqarah 257 and there in no
trace of a riba in this type of sale, whether deliberately or ostensibly, and because it is
the need that calls for that for refunding of debt, or marriage and so on and so forth.
It was reported by Abu Said al-Khudri and Abu Hurayrah (R.A) that the
Messenger of Allah (peace be upon him) appointed a man as his agent in Khaybar. He
brought some junayb dates to the Prophet (peace be upon him), who asked him, “Are
all the dates of Khaybar like this?” The man replied, “No, I swear by Allah, O
Messenger of Allah; we exchange a sa‟s of this kind of date for two sa‟s of another,
and two sa‟s of this for three sa‟s.” Allah‟s Messenger (peace be upon him) said, “Do
not do that! Sell [your] batch [of dates] for dirhams and then pay for the junayb dates
with the dirham.” Their angle of reasoning from the Hadist is that something may be
unlawful because its format is not in line with the format endorsed by Shariah, but if
we are able to reformat it to a format approved by the Shariah it becomes permissible.
Tawarruq is a sound form of trade transaction characterized by its conditions and
essential elements and free of any factors that would render it flawed or invalid, and
its aim is to achieve monetary liquidity so that people may avoid falling into riba.
Secondly, tawarruq is different from „inah, which leads to riba. „Inah is
prohibited because the commodity is sold back to the person from whom it was
purchased. Therefore, according to the four schools of thought, Maliki, Hambali and
Shaif‟I see the differences between „inah and tawarruq, where as some of Hanafi
school of thought name tawarruq as „inah, but the majority of them preferred the
view of Ibn Al-Hammam that „inah is restricted to the situation where commodity
goes back to the original seller. But where commodity is sold to the market, the
transaction is valid and permissible without any detestation.
Obviously, „inah consists of two parties which the seller is the first party who
buys the commodity at certain price, and the buyer is the second party who buys the
commodity at a higher price, and on deferred payment. On the contrary, tawarruq
consists of three parties. The first party buys the commodity from the seller, and then
sells it to the third party who is not first seller. By this differentiation, the Maliki‟s
jurists who are very strict regarding with the issue of Bay‟ al-Inah, do not see the
major problem in tawarruq. To them, if not, the buyer only purchase it from the third
party and in such case, there is no prohibition. It is supported also by Hanbali and
Shafi‟i jurists who generally allow tawarruq.

11
 Moreover, the majority of past and present jurists have just allowed the first
form tawarruq named as real tawarruq, due to the fact that is free from riba and it
does not contain any form of „inah contract. However, the second form, organized
tawarruq is prohibited, because of riba‟ that found on it. The reality of this
transaction is that it is loan with interest form from the bank to the customer. This fact
happens when a person buys a commodity from the one Islamic banking on credit. He
then makes the bank his agent to sell the commodity for him, which has not received.

5.2. The Scholars that Prohibited Tawarruq

Zuhaili (2006) explains that the Maliki School of Jurisprudence, Umar bin Abdul
Aziz, Ibn Taymiyyah, Ibn Alqiyym, the Hanbalis Mohammed bin Allasan Alshaibani
and Allalkafi from the Hanafi School of Law forbid „inah and tawarruq for some
following reasons.
Firstly, according to Ibn Taymiyyah (Zuhaili, 2006), his student Ibn
Alqiyyam (Alhadad, 2003), Maliki (Khayat, 2006) and Hanafi School of Thought
(Uthmani, 2003) the concept of tawarruq is like „inah, where tawarruq contains all
the prohibited pretexts, such as the narrowed meaning of „inah, explicit usury, loan,
sale of debt, transfer of debt, debt scheduling, buy or sell of nasi‟ah (deferred
payment of ribawi items), buying something at a marked up price, and selling
something to the first seller or to somebody else at a price lower than the original
purchase price.
Ibn Taymiyyah said that in „inah, the seller sells a commodity to a buyer at
deferred price and the buyer resells the commodity to the seller at a lower cash price.
There is an incident that happened to the mother of the son of Zaid bin Arqam when
she said to „Aishah (may Allah be pleased with her), „I bought from Zaid a slave at
800 deferred price and I sold him to Zaid at 600 cash price. However, „Aishah said,
“What a bad you bought and sold! Tell Zaid that he has spoiled his jihad with the
Messenger of Allah, unless he repents. The mother of son of Zaid said, „O mother of
believers, what if I just take my capital? „Aishah responded her by reading verse, “So
whoever receives an abomination from his Lord and stops eating riba shall not be
punished for the past; his case is to Allah (to judge)” (Surah Al Baqarah: 275).
Khayat (2006) explains that the evidence of Malikis actually is based on what
Ahmad said in “az-zuhdi”, narrated from Ibn Umar, “There is a time that comes
toward us and we find that none of us says that he has the right of Dinar and Dirham

12
from his Muslim brother. Then, he said, “I heard Rasulullah pbuh said, “If people
practice „inah, then they follow the tails of cows and leave jihad in the way of Allah
and Allah will punish them and not forgive them until they come back to their
religion”. Ibn Rashid said, “Someone who sells a commodity on deferred basis and
then buys it either with its specify or before or after and every each of three either
buys it same with what he sold either less or more which is different from the two.
This involves buying a commodity in cash and selling it on credit, where the deferred
price is less/equals to/more than the cash price. Therefore, according to Malik and
most ahl-madinah, this is impermissible.
Khayat (2006) mentions that the Hanbalis sees tawarruq as impermissible,
according to what was explained by Al-Mardawi in kitab “al-insof: If I need cash as
buying rights to the equivalent of one hundred one hundred and fifty, then this is
impermissible. This is known among the Hanbalis as tawarruq.
Secondly, tawarruq is a trick of riba, as Ibn Alqiyyam conveyed from his
Sheikh, Ibn Taymiyyah (Zuhaili, 2006). Uthmani (2003) mentions that the great
scholar Ibn Al-Qayyim said, "If asked, what will you say if the commodity does not
return back to him, but rather to a third person? Will you name it as „inah (i.e. credit
sale)? It will be said, „this is the issue of tawarruq, because the aim from it is al-wariq
(searching for Dirham), which Imam Ahmad had stated in the narration of Abu
Dawud that it is from al-„inah and designated its name to it. However, the
predecessors had disagreed in the ruling whether is disliked or not; „Umar bin Abdul
Aziz made a verdict to make it a disliked act by saying: “Tawarruq is capable of
dragging one to ar-riba (Interest)", while „Iyas bin Mu‟awiyah legalized it.
There are two stated reports from Ahmad; he justified the ruling for the
detestation in one of them, i.e. it is a compelled sale, whereas Abu Dawud reported
from „Ali that the Prophet pbuh had forbade the compelled sale. So, Ahmad pointed to
the fact that al-„inah can only occur when a man is forced to cash, because as the
affluent will grudge to him in loaning, he will rather be forced to purchase a
commodity, and then sell it. If the seller buys it from him, it is then al-„inah, but if he
buys it from another person, then that is tawarruq, and his intention in the two
subjects is the price. Therefore, the delayed price is a financial obligation on him,
instead of an immediate price that is lesser than it. In that case, there is no meaning
for ar-riba‟ (interest), except this, but it is the riba‟ ailm (faultless interest), as his

13
purpose has not been achieved, except through hardship and if he did not intend it,
that is simply riba‟.
In addition, Ibn Taymiyyah said that Allah has prohibited riba‟, because it has
much harm. These harm are actualized in tawarruq and „inah, with additional
cheating, deceiving, pain and so on and so forth. Moreover, the intention is not the
sale itself, but the intention is to sell money with money. Furthermore, they (the
parties of the sale) make the transaction longer and eventually, they fall into riba. So,
they are the people of riba‟ and they are tormented in this world, before they are
tormented in the Hereafter. Dr. Wahabah says that we can argue that the intention of
the mustawriq (who seeks liquidity) is to avoid riba‟. Hence, he did not go to the
conventional banks. Instead, he lefts them and takes tawarruq, with the aim of
avoiding the prohibition.
Thirdly, tawarruq is actually like the sale of a forced person or sale of talji‟ah
(Zuhaili,). Talji‟ah is something is enforced on a person to do it, and he does not have
any choice. For example, two persons agree to conclude a contract of selling a house
in front of people and in order to make the sale more credible, they witness some
people on the contract but secretly, the two parties admit that there is no sale. The
„sale‟ agreed upon earlier was done because they are afraid of the unfair ruler. In fact,
this is the meaning of the sale of talji‟ah, and it is prohibited. Moreover, according to
Hanafi School of Thought, this sale is avoidable. However, the Prophet pbuh
prohibited the sale of talji‟ah, sale of gharar and the sale of fruits before it ripens.
Additionally, there is another tradition that witness for this tradition, i.e. that
was narrated by Hoziyfah when Prophet pbuh said, “…. Unless the compelled person
sells something which is prohibited, the Muslims are brother to each other. So, there
is no cheating and betrayal among them”. Ibn Alqiyyam said, “Usually, „inah is
practiced by somebody who is forced to get liquidity from another person who has
that liquidity, but does not want to give him the liquidity as loan. Instead, he sells to
the „compelled person‟ a commodity to get profit, much as a seller wants to profit
from selling. Therefore, there are three cases for a forced person, as follows:
a. If he returns the commodity to the seller, then it is called „inah;
b. If he sells the commodity to a third person, then it is called tawarruq; and
c. If he returns the commodity to someone who is involved in the transaction
between the forced person and the first seller, then in this case, the person is
called mu‟ialel alriba, which means he is making riba permissible.

14
 However, these three cases are practiced by those who deal with riba and he
lesser evil of these cases is tawarruq. Umar bin Abdul Aziz disapproved tawarruq,
and he said that tawarruq is the basis of riba. Imam Ahmad gave two opinions on
tawarruq; one is allowing it and another one is disapproving it. In the latter, he
indicates that the person who deals with tawarruq may be forced to do so. However,
this is Imam Ahmad‟s understanding, but usually; anyone who deals with tawarruq is
actually compelled to engage in it. Ibn Alqiyyam said, “My sheik (Ibn Taymiyyah)
prohibited tawarruq, and people asked him again and again to allow it, but he still
prohibited tawarruq. Furthermore, he added that the „illah of riba is achieved in
tawarruq. However, tawarruq is worse than riba, because tawarruq entails a higher
cost and losses. Therefore, the Shari‟ah does not forbid a lower harm (riba) and
allows a higher harm (tawarruq).”
Wahabah said that the two previous traditions are arguable, where both are
weak. Therefore, they do not provide proof. Alkha‟iabi stated that the tradition of the
sale of a forced person has in its chain an unknown man; we do not know who that
man is. In his book, Almu‟illa, Ibn Hazam established that the two traditions, i.e. of
Ibn Umar and „Aisha are mursal. So, it not allowed in the Shari‟ah to accept mursal.
However, the Shafi‟i and Hanbali Schools of Law allowed the sale of compelled
persons but generally, the sale is disapproved (makruh) by the majority of jurists.

6. The Criticism of Current Scholars Regarding Tawarruq as It Is

Currently Being Practiced by Banks

Firoozye (2009) mentioned that in its 15th session the OIC (Organization of Islamic
Countries) Fiqh Academy issued a statement about the permissibility of tawarruq.
But, due to problems with specific structures, the Fiqh Academy later clarified its
statement. Furthermore, according to Al-Suwaylim (2008) the Islamic Fiqh Academy
of the World League in its seventeenth session held in Makkah agrees that organized
tawarruq is not allowed. Moreover, as early as 2006, Shaykh Dr Hussein H Hassan, a
professor of fiqh, and a prominent member of many shariah boards including AAOIFI
(Accounting and Auditing Organization for Islamic Financial Institutions) claim that
many scholars had reached a consensus that organized tawarruq was haram
(impermissible).

15
 According to Shaykh „Abd al-Rahmaan ibn Ibraaheem al-„Uthmaan (Muslim,
2009), the prohibition of organized tawarruq by many scholars actually is because of
some following reasons. Firstly, it is riba. Secondly, the mustawriq is not interested
in the product per se, rather he is interested in the money, and the sale in question is
an illusionary sale. The whole issue boils down to obtaining cash immediately, to be
paid for later on with a greater amount.
What indicates that this sale is something illusionary is the following: The
bank does not take possession of the product purchased from the global market in any
real sense, and it does not receive any original receipts from the warehouses where
this product is kept; the product is traded on the stock market and moves from one
purchaser to another until it ends up with the final consumer, who is able to take
possession of what he has bought.
In the case of the mustawriq it is even worse: he does not take possession of
the product in a real sense or even on paper. Hence he is selling something that he has
never acquired and that is not even specified, because what the bank sells to its
customer is something that is owned by the bank, which is defined by a number used
to identify the product, and this number does not refer to small quantities of the
product, but it is a number that is used for the big unit that the bank divides among
those who seek tawarruq.
Thirdly, appointing the bank to act on behalf of the customer in the case of
bank-type tawarruq is contrary to what is expected of the agent, because what the
bank is doing in its role as agent is contrary to the interests of the mustawriq, which is
selling the product for a lower price than that for which the mustawriq bought it. (If
there is any aim to be achieved from a contract in the true sense of the word, and there
is a condition stipulated that contradicts this aim, then this contract is self-
contradictory in that it both affirms and denies the aim of the contract, so nothing can
be achieved and this kind of condition is invalid.) Appointing the bank as one‟s agent
in this tawarruq is one such condition, even though it is not stipulated. If there was no
such appointment, the mustawriq would not have bought from the bank in the first
place.
Fourthly, giving guarantees to the last purchaser. The bank makes a deal with
an independent party that commits to buying the product that is being used in this
transaction. This commitment ensures that the selling price will not go beyond a
certain limit as a protection against fluctuation in prices. In return for this assurance,

16
the bank is committed to selling it for him, in the sense that the bank is not entitled to
sell the product in the open market even if the price rises above the price agreed upon
with the second purchaser. Thus these assurances come from both parties: from the
bank which commits to sell to the second purchaser, and from the purchaser who
agrees to buy it at a certain price.
Fifthly, organized tawarruq differs from the kind of tawarruq which is
permitted by the majority of fuqaha‟ in several ways, such as the following:
a. The bank is in charge of selling the product that was bought from it, to
whomever it wants, whereas when the mustawriq is the one who is in charge
of selling when he enters into a tawarruq transaction by himself, and the first
seller has nothing to do with the sale of the product to the final purchaser.
b. There is prior agreement between the bank and the final purchaser which
guarantees that he will purchase whatever the bank offers at the price for
which the bank bought it, as stated above, whereas in individual tawarruq, the
mustawriq is the one who sells the item for the price that he paid for it, or
more or less.
Sixthly, organized tawarruq comes under the heading of bay‟ al-„eenah which
is haraam, because the bank is the source of cash for the mustawriq in both cases.
Cash is acquired via the bank and through its mediation; if the purchaser did not know
that the bank would give him cash later on, he would not have embarked on this
transaction in the first place.
Seventhly, organized tawarruq through the bank is not the same as bay‟ al-
„eenah which is permitted by al-Shaafa‟i, because he stipulated that there should be
no connection between the two sales, and that one should not show any intention of
acquiring cash; neither condition is met in this case.
Eighthly, it nullifies the aims of Islamic banking in many ways:
a. It imitates the riba-based banks in offering financing and insurance.
b. It limits itself to this and no other forms of investments. Tawarruq now
represents 60% of the bank‟s financing services.
c. It creates confusion between Islamic and riba-based banks.
d. It negates the efforts to encourage Islamic banks to offer financing in the form
of investments via mushaarakah (partnerships), mudaarabah (profit sharing),
and so on.

17
 Ninthly, it causes Muslim money to leave the country, because tawarruq
transactions take place in the global market, so Muslim money leaves the country in
order for others to benefit from it.
In addition, Fahmy et.all (2009) explain that in tawarruq, the client buys
commodity from the bank and sells it back for a cash amount less than the deferred
price to a third party. Therefore, it creates a debt that is more than the cash received
and it encourages debt-based financing. This debt creation or debt finance is
inefficient and inequitable due to; finance provided goes to the most credit worthy
client and it redistributes wealth in favor of suppliers of finance (bank), irrespective of
actual productivity of the finance supplied. It is also fundamentally unfair as the
concept of exchanging money with money with the underlying concept of buying and
selling commodity is also accompanied by the uncertainty of the value that may
involve in the long run. As such, by allowing tawarruq, it leads to a debt market
where the underlying mechanisms are no longer linked to the real market and
naturally, speculation plays a role in debt markets.
However, the nature of the instruments enhances the role of speculation in this
market unmatched by any other market. In addition, there are no standards in
evaluating the quality of a debt being repaid as agreed and debt prices are susceptible
to fluctuations in response to manufacturing rumors or false news that may
manipulate the market prices. Realistically, when all these factors are observed, in a
macroeconomic perspective, the market for debt instruments are much more
vulnerable to gambling like speculation than the markets for goods and services.
Therefore, some has agreed that it is better not to have a debt market and to disallow
tawarruq together.

7. Conclusion and Recommendation

Commodity tawarruq financing has been the most widely used form of liquidity
management instrument to date, due to its ease of execution and wide acceptability
among IFIs and banks. In recent years, however, some of the IFIs have been reluctant
to use commodity tawarruq instruments due to their disapproval of the concept of
tawarruq. From the discussions above, it can be asserted that organized tawarruq is
not allowed by many Muslim scholars. Therefore, tawarruq should be reduced even
avoided from the practice of IFI today.

18
 Some IFIs which find the commodity tawarruq model objectionable, have
devised an alternative scheme to replace tawarruq, such as scheme based on the
wakalah al-istismar (investment agency) concept, government investment issues
(GII), bay al-dayn (sale of debt), sukuk al-ijara and sukuk al-istismar. However,
according to Haneef (2008), the most ideal solution to prevailing liquidity
management challenges faced by the Islamic finance industry is sukuk ijarah. In
addition, IFIs should provide Qard Hasan (benevolent loans) to the needy costumers
who need the personal financing.
Allah is the One to guide us and all Muslims to the best of words and deeds;
and all praise is due to Allah, the Lord of the worlds.

References
Alhadad, Ahmad bin Abdul Aziz. 2003. “Tawarruq, Its Essence And Its Types:
Mainstream Tawarruq And Organized Tawarruq”. Accessed on December 18,
2009. [Available at http://isra.my/media-
centre/downloads.html?task=finish&cid=81&catid=20&m=0]

Al-Suwaylim, Sami ibn Ibrahim. 2008. “Tawarruq Banking Products”. Accessed on

December 18, 2009. [Available at http://isra.my/media-
centre/downloads.html?task=finish&cid=88&catid=20&m=0]

Al-Zuhaili, Wahbah. 2006. “Tawarruq, Its Essence And Its Types: Mainstream
Tawarruq And Organized Tawarruq”. Accessed on December 18, 2009,
[Available at http://isra.my/media-
centre/downloads.html?task=finish&cid=79&catid=20&m=0]

Bank Islam. 2009. “Mechaniscs (modus Operandi) of Product”. Accessed on January

10, 2010. [Available at http://www.bankislam.com.my/Shariah_Concept.aspx]

Bouheraoua, Sa‟id. 2009. “Tawarruq In The Banking System: A Critical Analytical

Study Of Juristic Views On The Topic”. Accessed on December 18, 2009.
[Available at http://isra.my/media-
centre/downloads.html?task=finish&cid=86&catid=20&m=0]

Dabu, Ibrahim Fadhil. 2008. “Tawarruq, Its Reality and Types”. Accessed on
December 18, 2009, [available at http://isra.my/media-
centre/downloads.html?task=finish&cid=75&catid=20&m=0]

Dusuki, Asyraf Wajdi. 2008. “Islamic Financing Instrument”. Kulliyah of Islamic

Banking System and Operation

Fahmi, et.all. (2008). “Revisiting OIC Fiqh Academy Rules on Organized Tawarruq”.
Paper IB1006 of Part 1 of Certified Islamic Finance Professional (CIFP)

19
Firoozye, Nikan (2009). “Tawarruq: Shariah Risk or Banking Conundrum”, accessed
on January 10, 2010, [available at
http://www.opalesque.com/OIFI12/Featured_Structure_Tawarruq_Shariah_Ri
sk_or_Banking862.html]

Haneef, Rafe. 2008. “Islamic Treasury Money Market Instruments for Liquidity
Management”. Islamic Banking and Finance Institute Malaysia

Khayat, Abdul Aziz. 2006. “Tawarruq, Its Concepts, Its Practices And Its Economics
Implication On Its Promotion By Islamic Banks”, accessed on December 18,
2009, [available at http://isra.my/media-
centre/downloads.html?task=finish&cid=90&catid=20&m=0]

Muslim. 2009. “Tawarruq via the Bank and Differences in Fatwas Concerning it from
Fiqh Councils and Banks”, accessed on January 10, 2010, [available at
http://www.scribd.com/doc/21445765/Revisiting-OIC-Fiqh-Academy-Rules-
on-Organised-Tawarruq]
Uthmani, Muhammad Taqi. 2003. “Verdicts On At-Tawarruq And Its Banking
Applications”, accessed on December 18, 2009, [available at
http://isra.my/media-
centre/downloads.html?task=finish&cid=83&catid=20&m=0]

20