CIFP 2012

SH1003 Shariah Rules in Financial Transactions

Session; September 2012

Student Name: Hani Hazaa Abdulbari Hazaa Student ID: 1200189

INCEIF
Facilitator Name: PROF. DR ZAINAL AZAM ABDUL RAHMAN

Tawarruq and its Contemporary Applications

Contents of this Study; 1. 2.0 Abstract of this Study. Definition and Forms of Tawarruq. 2.1 2.2 2.3 3.0 4.0 5.0 Definition of Tawarruq. The Original Tawarruq. The Modern Form of Tawarruq as practiced by modern Islamic banks.

Legality of Individual Tawarruq. Legality of Banking Tawarruq. Discuss the Evidences Adopted by Each Team. 5.1 5.2 Looking at the Motive and Intention of the Contracting Parties. Looking at the Existence of Collusion and Fraud Elements that Permitted Committing the Forbidden Acts (Harram). 5.3 Looking at the Result of those Acts.

6.0 7.0

The Final Results of Islamic Banking Tawarruqs Process. Conclusion.

1. The Abstract; Allah SWT Says; [Say, "Have you seen what Allah has sent down to you of provision of which you have made [some] lawful and [some] unlawful?" Say, "Has Allah permitted you [to do so], or do you invent (things) to attribute to Allah."](YUNUS: 59). The objective of this study is to make a critical analysis of Tawarruq process. We will discuss in depth the original process of Tawarruq as mentioned in FIQH textbooks and as was discussed by ancient scholars. Here we will discuss the legality and application of the original Tawarruq process. Then, we will come to discuss the Tawarruq process as practiced by the so called Islamic Financial Institutions. Here we will discuss the legality arguments and evidences which those institutions stood on to justify their process of Tawarruq. 2. Definition and Forms of Tawarruq. 2.1 Definition of Tawarruq; Tawarruq literally derived from the Arabic word al-Warq or al-Waraqa, which means minted dirham or any silver that issued to serve as a medium of exchange, in this concept; it is designated to someone who has an abundance of silver coins. In another term Tawarruq comes from masdar the verb taqarruqa is said Tawarruq al-hywan which it means the animal at the leaves (Bouheraoua, 2009). The term of basically tawarruq comes from the word wariq (Khayat, 2006) as it mentions in Surah Al-Kahfi: 9 (So send one of you with this silvery coin of yours to the town.). Thereafter, the meaning has expanding to include seeking for and striving to obtain money in any form, be it silver, gold or any other currency. Thus the literal meaning of Tawarruq implies any means of obtaining finance or liquidity.

Technically, Tawarruq as described by the Fiqh Academy of Jaddah as the purchase of a commodity that is in the ownership and possession of the seller against a deferred price, and its subsequent sale by the purchaser to a party other than the seller on cash, for the purpose of obtaining cash, that is Wariq. Forms of Tawarruq; 2.2 The Original Tawarruq or the Classical Tawarruq; This form of Tawarruq is that that was discussed by the ancient scholars and also has been mentioned in Jurisprudence (Fiqh) Encyclopedia in the research of Bay al-inah, sales that are forbidden, and usury (Riba). The definition of it (Tawarruq) came in formulate that is close to that of the Islamic Fiqh Academy of the Muslim World League and also Kuwaiti Jurisprudence Encyclopedia Tawarruqs definition. According to them, Tawarruq means a transaction where one party buys some goods on credit at a marked-up price and sells the same at a lesser value on cash to a third party other than the initial seller, in order to get cash. It is clear from this definition that this tawarruq process characterized by the following: a. - In terms of the contractual relationship: the existence of three different contractual parties. b. In terms of the Shariah guidelines of contracting process: the existence of two separate and completely independent contracts without pre-understanding or collusion among the parties. c. In terms of the purpose and intent: to get cash flow. This form of Tawarruq is also called Tawarruq Fiqhi relative to the ancient books of fiqh, and also called (Individual Tawarruq) relative to those who practice it are ordinary people.

2.3 The Modern Form of Tawarruq as practiced by modern Islamic banks; This Tawarruq is called Banking Tawarruq, which is considered as one of Islamic products. The contract is offered by Islamic financial institutions and some conventional banks which have Islamic windows. The contract offers another way to finance people and companies to obtain money accordance to Islamic law. This modern form of Tawarruq which is in modern banking practice is defined as a contract to obtain money according to the concept of Tawarruq in Islamic law. The contract is offered by the financial institutions to their client that the financial institutions buy specific commodities for immediate payment then offer the commodities to their clients for deferred payment with extra sum. Then the financial institutions offer to the clients to be agents, by themselves of other agents, to sell the commodities again in the markets for immediate payment. At the end the financial institution credits the money in the clients accounts. In this type of Tawarruq, the Bank: In the first stage, the Bank itself purchase the commodities from the original vendor based on a prior promise of the customer to buy those commodities from the Bank. The bank sells those commodities purchased for the customer on credit at a specified price based on Murabaha. At a later stage, the bank sell those commodities which are owned by the customer to anyone want to purchase them on cash, based on the power of attorney given by the client to the Bank to do so, and the final buyer of the commodity may be; a. The original seller, which commodities were purchased from him. In this case, the Tawarruq process is done through three parties.

b. Or the buyer is other than the original seller. In this case, the Tawarruq process is done through four parties. Some says that the purpose of this Organized Tawarruq is for quick completion of the Tawarruq transaction, and reducing the proportion of losses that surround the customer when re-sell these commodities in the open market. 3.0 Legality of Individual Tawarruq; There is no doubt that Tawarruq has been known since the early eras of Islam, it was mentioned in the books of Islamic jurisprudence (Kotob al-Fiqh), those Fiqh Books have mentioned that the term of Tawarruk did not mention except at Hanbali jurists. Scholars had differed concerning the legality of Tawarruq, some scholars have admitted its permissibility, while some others on the other hand went to say that its makrooh. The majority of jurists from Hanafi, Maliki, Shafiee and Hanbali schools; except some of the Hanafi and Maliki scholars urged that if the first seller and second buyer know the need of the mutawarriq (one who is doing the transaction because of his need of money), then it is a reprehensible (makrooh) act. Those who admit the permissibility of Tawarruq urge that; a. Tawarruq is based on trade and debt; and both of them are permissible in the Quran. Allah says: [ Albaqarah: 275] and Allah says: " [ " Albaqarah: 282] b. The general principle in deeds (Muamalat) is permissibility and tawarruq lies under this category. c. Analogy of tawarruq on common trade deal; i.e., the ultimate goal of any tradesman is to earn profit which is nothing but the money, similarly mutawarriq also can intend money.

d. Tawarruq is permissible due to the absence of any Quranic verse or a Hadith that rules it unlawful, or the practice of the prophetic companions indicating its impermissibility. Scholars who disapproved tawarruq have mainly concentrated on the aspect of intention. They urge that the intention here is to procure money, which could tantamount to the sale of money against a different amount of money, while the asset serves as a medium. 4.0 Legality of Banking Tawarruq; For Organized Tawarruq (Banking Tawarruq), opinions of contemporary jurist had varied regarding its legality. The Islamic Fiqh Academy, which belongs to the Islamic World League, discusses the contract of tawarrq in the traditional form and the contract of organized tawarruq as practiced today in the financial institutions. The resolutions on the two contracts are different, however. According to the Islamic fiqh academy, the traditional form of tawarruq is permissible (In the Circle 15th, Makka,1998) whereas the new form of tawarruq which is called banking tawarruq or organized tawarruq is prohibited (In the Circle 19th, Makka, 2003). According to proponents of this view, there are three differences between the two forms; the first difference is that the role of agency which is been played by the financial institutions changes the nature of the contract, bringing it close to the form of inah sales which is prohibited in Islamic law according to the majority scholars, whether the agency of the financial institution is indicated as a condition of the contract or is very common in this type of contract. Secondly, this kind of contract, in many cases, does not reflect the concept of possession in Islamic law. Thirdly, the reality of this type of contract is to finance the client (al-mustawriq) who applies for some money and to charge him extra; the

financial institute arranges the procedure of the contract, by obtaining the commodity and selling it in the market on behalf of the client, to achieve this purpose. Those who regard organized tawarruq as unacceptable support their opinion with the following arguments: a. Narrated Amr Ibn Shuaib on his fathers authority from his grandfather that the prophet P.B.U.H said, The condition of a loan combined with a sale is not lawful, nor two conditions relating to one transaction, nor the profit arising from something which is not in ones charge, nor selling what is not in your possession. The Hadith shows that having two conditions relating to one transaction is not lawful, and organized tawarruq involves even more than two conditions, as it has been mentioned above. b. The ruling of organized tawarruq isnt considered as the traditional form of tawarruq, which has been considered as a lawful transaction according to the majority of scholars in Islamic law, because there are significant differences between them. c. Organized tawarruq seems to be closer to the Inah contract than to any kind of sales in the traditional fiqh, because the seller which is the financial institutions arranges the contract from the beginning until the end by selling the commodity to the buyer on installments for a higher price, then it sells the commodity on behalf of the client for less than what the client paid. The role of the client is merely to ask when the money will be in his account, without being really involved in performance of the contract, so there is no significant difference between selling the commodity again to the first seller which is the financial institution, as in the Inah sales or the commodity being sold by the seller, as an agent, to a third party.

d. Looking carefully at the contract of the organized tawarruq, it can be argued that there is no difference, in terms of aim and result, between it and usury in Islamic law. To clarify the point, assume that there are two clients who want to be financed for any reason; the first client applies for a loan with interest, which is a form of usury by way of deferment in Islamic law, and he borrows 10,000 for 11,000 to be paid within two years. Then the second person applies for financing by organized tawarruq to buy copper from the financial institution for 11,000 to be paid within two years. The client knows that the financial institution has bought the copper from the international market for 10,000, and the financial institution will sell the copper in the international market on behalf of the client for 10,000. As shown, there is no difference between the forms in term of the aim, which is to finance the client, and the result, which is to charge the client more than what he receives. In addition, financing by organized tawarruq may cost the clients more than taking a loan with interest, because in the latter case the financial institution lends to the client directly instead of engaging in a long procedure to buy commodities and sells them again in the same market. Thus, the loan with interest may be processed faster than the organised tawarruq, because the client may obtain money directly after the contract, whereas the client who asks to be financed through the organised tawarruq would have to wait until the commodities are sold in the market! Evidences of Those Who Support Tawarruq in the Banking System: a. The general ruling of sales is given in the verse, Allah has permitted trading and forbidden usury b. The general rule of business transactions in Islamic law is that any kind of transaction is permissible unless there is evidence to show that it is not so. Organized tawarruq is a new

form of transaction which is a means to finance people through the concept of tawarruq in Islamic law with some changes by organizing the procedure of the contract to make the financing easier and faster than the normal form of tawarruq. Consequently, there is no acceptable evidence to show that organized is tawarruq prohibited, and that means that it is lawful according to the rule. c. People need this kind of transaction. Assume that a person needs money to obtain a house or the like, and he cannot find anyone to offer him an interest-free loan. There are not many choices to obtain money to meet his needs, so one of the options is to buy a commodity from the market for a deferred sale then resell the commodity again in the market for immediate payment, to acquire money, by what is called tawarruq in Islamic law. This was based on the Legal Maxim that says al-darurat tubih al-mahdurat. 5.0 Discussing the Evidences Adopted by Each Team; Follow through the evidences presented in researches, we can ascribe the differences of the rule of the legality of tawarruq banking primarily to differences in application of the important Legal Maxim Bridging Pretexts. Pretexts as well known are the means followed by someone and be a way lead to whether Muharram (forbidden) or Halal (Permissible), and if those means been used as a way for the Muharram, so, they are forbidden and must be bridged, if used as a pathway for the Halal (permissible) then it is legal and lawful. Every act of behaviors and contracts done by human mainly includes the motives that stand behind doing them, and the final results of such acts of behaviors and contracts. Hence it is clear that the judgment acts, including the sale Tawarruq differs according to the consideration of their motives and their final results.

Therefore, its very important for us to be able to discuss the legality of organized tawarruq from the point view of the proponents and opponents to have a look at the issue that is relating to the Means and Pretexts from three dimensions; 1- First dimension; Looking at the motivation and intention of the contractors which obliged them resorting to the organized tawarruq. 2- Second dimension; Looking at the existence of collusion and fraud elements which had permitted committing the forbidden acts (Muharram). 3- Third dimension; Looking at the results without resorting to the motives and intentions. 5.1 Looking at the motivation and intention of the contracting parties which obliged them resorting to the organized tawarruq; Proponents of organized tawarruq have their own reasoning about the legality of it (organized tawarruq). They say; the legality of a contract isnt judged by the motivations or intentions of the contracting parties. They quoted the Hadith recorded by al-Bukhari and Muslim. The Hadith recorded by the companion Abu Said al-Khudri narrates that a man from the region of Khaybar who had been contracted the upkeep of a plantation came to the Holy prophet with some dates of good quality. When the prophet asked him whether all dates of Khaybar were of similar quality, the man replied in the negative, and added that they used to obtain a measure of better dates against two measures of ordinary dates, and two measures against three measures. The prophet forbade him from doing that, and directed him to sell the low quality dates against silver coins and then purchase better dates against silver. They say that the Hadith indicate the permissibility of employing the described method for avoiding involving in riba overtly or covertly. They

confirm that the thing may be forbidden for the non-achievement of its legitimate form as stated in abovementioned Hadith, and it turns into a Halal (permissible) once changing its forbidden form though the main purpose stood the same. Its clear from this view that the only thing to be taken into consideration is the format and the form of the contract but not the intentions and purposes. Opponents of this type of tawarruq depend on the legal maxim al umur bi maqasidiha, which means that acts are judged by their goals and purposes and not words and forms. They also depend on the Hadith deeds are judge by intentions, according to this, acts to be permissible depending on the intentions. They say that the when the purpose of Mutawarriq is to get money now against more money in the future makes the tawarruq tantamount to riba. Ibn Taymiyyah has mentioned in his fatwas that the way to Halal are the legitimate and intended contracts where no deceive nor prohibition is detected. 5.2 Second dimension; Looking at the existence of collusion and fraud elements which had permitted committing the forbidden acts (Muharram); The intention and purpose against word and formula in contracts are of the issues that made Islamic jurisprudence go into two streams, and the more doctrines, taking with words and forms are al Shafei and madhhab of Abu Hanifa. While the doctrines of Ibn Hanbal and Imam Malik stressing on the intention and purpose but not words and forms. Even those who take with words and formats, they prevented contracts in case of the appearance of collusion and fraud which as a result would make the tawarruq sale haram (forbidden). The question presented here is, does collusion and fraud on usury really has no existence in

tawarruqs contracts? If it does not exist in individuals tawarruq contracts, is it also absent in the banking Tawarruq? Opponents of banking Tawarruq believe that collusion and fraud on usury is clear in the forms of banking tawarruq, this has came in a fatwa of Al Rajhi Banking Shariah Board that said Tawarruq in Islamic banks is an exposed helah (ploy) to make riba permissible 5.3 Looking at the results without resorting to the motives and intentions; Opponents of banking tawarruq adopted the basis of the results of the deeds, this is a bases which had agreed upon by the majority of scholars. The actions under this base, takes the rule which is consistent with the final results, regardless of the actor's intention and purpose, and the judgment of those acts be it permitted or prohibited depend on the final results arose from such acts. 6. Final results of Islamic banking tawarruqs process; a. Banking tawarruq as practiced by Islamic banks lead to providing cash funds to its clients: Islamic banks go beyond their real function as investment intermediaries by offering tawarruq. In this case the role of Islamic banks would be limited to providing liquidity facilities to its clients by providing complex and fake mechanisms which conventional banks are not in need to apply them, and their returns would be achieve through trading money against more money but by using complex mechanisms. b. Banking tawarruq will lead Islamic banks to dispense with the other forms of financing contracts: as stated by Al Rajhi Shariah Board If banking tawarruq was allowed,

Islamic banks will dispense with all Islamic contracts and tools, and the process of Tawarruq would be the dominant process. c. Banking tawarruq would make Islamic banks loose the main purpose and basis of its existence. 7. Conclusion; We conclude that the permissibility of Banking Tawarruq is no longer a debatable issue since even those who are the proponents of banking tawarruq, they prevented contracts in case of the appearance of collusion and fraud which as a result would make the tawarruq sale haram (forbidden). Or even they (the proponents) would better to stop practicing the banking tawarruq in that it is located in the Shubuhat (doubtful matters) spot as a result of conflicting opinions regarding its permissibility. Working with the following Hadith that narrated by al-Bukhari and Muslim; On the authority of an-Numan ibn Basheer (may Allah be pleased with him), who said: I heard the Messenger of Allah (peace and blessings of Allah be upon him) say, That which is lawful is clear and that which is unlawful is clear, and between the two of them are doubtful matters about which many people do not know. Thus he who avoids doubtful matters clears himself in regard to his religion and his honour, but he who falls into doubtful matters [eventually] falls into that which is unlawful, like the shepherd who pastures around a sanctuary, all but grazing therein. Truly every king has a sanctuary, and truly Allahs sanctuary is His prohibitions. Truly in the body there is a morsel of flesh, which, if it be whole, all the body is whole, and which, if it is diseased, all of [the body] is diseased. Truly, it is the heart. Narrated by al-Bukhari and Muslim.

References;
1- SH1003 Shariah Rules in Financial Transactions, Enhanced Edition of CIFP Module 2010. 2- Tawarruq, Permissibility and Viability, Mohammed Muslehuddin Musab 2011 3003 -3 . 4- www.islamicfi.com/arabic/research/Research_Archivefull.asp?id=58164#1