Tawarruq

from Theory to Practice

OUTLINES
The Concept of Commodity Murabahah
(Tawarruq)
Tawarruq Vs Bai al- Inah
The Applications of Tawarruq:
1.
2.
3.

Islamic money market

Personal financing
Swap

Costs and Benefits Analysis of Tawarruq

LINGUISTIC MEANING
Taqarruqa

tawarruq comes from masdar

the verb taqarruqa is said
Tawarruqa al-hayawan: the
animal has eaten the leaves of
trees

Wariq
Awraqa

(Al-Kahfi: 9)
So send one of you with this
silvery coin of yours to the town
Dirham that is manufactured
from silver
Plural of waraqah: paper , trade
for money. Means have much
dirham
Al-Tawarruq is taken from this
which means lots of Money

SCHOLARS DEFINITIONS
Malikis

tawarruq means selling something on deferred basis and

then buying it back in cash, albeit at a lower price than
the deferred price

Shafiis

tawarruq means selling something on postponed

payment and purchase it back in spot payment at a
lesser price

Hanafis
Hanbalis

tawarruq is bai al- Inah using a third party

tawarruq is the need for cash, buying the equivalent of

thousands and more to expand its price

CLASSICAL TAWARRUQ

Buy commodity
from Trader on
cash at (x) & sells it
on deffered basis at
(x+y)

BANK

CUSTOMER
Sells the
commodity to
Trader on cash
payment at (x)

Sells the
commodity from
customer to Bank
at (x) by cash

TRADER

ORGANIZED TAWARRUQ
Diagram 1
1. Purchase commodity
on cash @ x

Trader A

BANK

2. Transfer commodity
ownership

Trader B

4. Transfer
commodity
ownership

5. Sell
commodity*
on cash @ x

3. Sell commodity on
deferred price @ (x+y)
6. Transfer
ownership

CUSTOMER
*In practice, the customer will appoint the bank as his agent to sell the commodity to
Trader B on cash basis in the commodity market, so it call organized TAWARRUQ
Source: Fahmy et.all (2008)

CLASSICAL VS ORGANIZED
ORGANIZED TAWARRUQ

CLASSICAL TAWARRUQ

Four-parties arrangement
(may also be three parties)

Three-parties arrangement

Involves unilateral promise to purchase by the

client (mutawarriq)

Involves no promise to purchase

Involves additional purchase prior to the two

basic sales

Involves only two basic sales

Involves signing of an overall agreement /

memorandum of understanding delineating the
procedure to be followed

No signing of such an agreement

Involves the client appointing the bank as his

agent to carry out the second basic tawarruq
sale

The client will sell the commodity on his

own

Transfer of possession is only limited to signing

of the contracts of sale that includes clauses on
transfer of rights and liabilities pertaining
to the items. Thus, transfer of possession
throughout the procedure is only held to
materialise constructively

Seems to have envisaged the two basic

sales giving rise to complete transfer of
possession physically after each contract

TAWARRUQ IN BANK ISLAM

Diagram 2

Source: Bank
Islam (2009)

TAWARRUQ Vs INAH
How can I borrow RM100,000
to get married?

RM 150,000

RM100,000

Source: Dusuki (2008)

CONT
NO.

ITEMS

AL-INAH

AL-TAWARRUQ
Buying a commodity at
deferred, then sell it to
third party other than
seller for cash but at
lower price from initial
price

1.

Concept

A sale contract with

immediate buy back by
the seller

2.

Purpose

To facilitate cash and

liquidity shortage.

To facilitate cash and

liquidity shortage.

Two parties involve for

two transactions

Three parties (at least)

involve for three
transactions

Return back to the

original seller.

Transferred and
possessed by third party.

3.

Parties

4.

Subject Matter

10

The PROPONENTS VIEW

The majority of scholars allowed tawarruq because:
1. tawarruq is form of trade or sale which is permissible
by Shariah.
1.
2.

Basic ruling of Muamalah is al Ibahah

Allah has allowed trade and has prohibited riba (Surah: AlBaqarah: 257).

2. 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

The OPPONENTS VIEW

Some Jurists such as Umar bin Abdul Aziz, Ibn
Taimiyah, Ibn al-Qoyim and al- Shaibani disallowed
tawarruq because:
1. Tawarruq is a trick of riba. the riba is actualized in
tawarruq with additional cheating, deceiving, pain
and so on.
2. The similarity with Inah, because the intention is
not the sale itself, but the intention is to sell money
with money
3. Tawarruq is sale of a forced person (bai taljiah)
which is something is enforced on a person to do it,
and he does not have any choice

TAWARRUQ IN FINANCING

Dusuki(2010)

TAWARRUQ IN DEPOSIT

Dusuki(2010)

ISSUES IN TAWARRUQ
When broker A and broker B is the same company, the

organized murabahah is there, as similar with tripartite al Inah which is unacceptable, according to
Organization of Islamic Conference (OIC) Islamic
Fiqh Academy conference.
To solve that problem, Bursa Malaysias Suq al-Sila
developed mechanism which is a random selling and
buying as following:

COMMODITY MURABAHAH IN
PERSONAL FINANCING

Commodity Murabahah Employed in Tawarruqbased Credit card

RM20,000

1
2

Broker
A

RM35,000
deferred

4
Broker B
RM20,000

Custome
r 5
Special
Account

Merchant

Commodity Murabahah (Tawarruq) Employed in

Model of Home Financing
Property

4
RM200,000

RM200,000

2
Electrical
Appliance

Electrical Appliance
Worth RM200,000
RM200,000

RM350,000
Deferred

Commodity Murabahah Deposit-i

1
$10 million

Customer

Broker
A

$10
million+
profit on
deferred

$10 million

Broker B

Analysis of The Costs and

Benefits to Each Party In
Commodity Murabahah

PARTIES

BENEFITS

COSTS

1. Financier/ Investing Bank

(Muwarriq)

Earn price of cost plus

profit
Earn fixed return

2. Client/ Investee Bank

(Mutawarriq)

Get liquidity

Higher deferred payment

Transaction costs

3. Commodity Supplier/
Broker A

Fees around $40 per $1

million of transaction value
(www.proxcelglobal.com,
2011)

The opportunity cost of the

commodity being used for
productive purposes

4. Commodity Buyer/ Broker Fees around $40 per $1

B
million of transaction value
(www.proxcelglobal.com,
2011)

Transaction costs

Risk related to the

commodity

Brokerage
fees
Legal &
Jurist costs

Delivery fees

Sales Tax

Transaction
Costs

Clearance
fees

Stamp duty

Registration
fees