Question

Explain in details:

Criteria of Personal Financing-i (Tawarruq) from Al Quran & Hadith

Answer 1

Islamic banking or Islamic finance or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).

A Tawarruq (literally "turns into silver", or "monetization") contract/product where the client/customer can raise cash to be repaid later by buying and selling some readily saleable asset. An example of this would be a customer wishing to borrow $1000 in cash having their bank buy $1,100 worth of a commodity such as iron from a supplier, buying the iron from the bank on credit with 12 months to pay the $1100 back, immediately selling the metal back to the bank for $1000 cash to be paid on the spot. The bank resells the iron to the supplier. (This would be the equivalent of borrowing $1000 for a year at an interest rate of 11 per cent.)

Like Bai' al inah, the greater complexity of this transaction means more fees and higher costs than a conventional bank loan, but (in theory) compliance with shariah law because of the tangible assets that underlie the transactions . However, critics complain that "billions of dollars" of putative commodity-based tawarruq transactions have evaded the required commodity trades; and Islamic scholars both contemporary and classical have forbidden the practice. Nonetheless, as of 2012 Islamic banks using Tawarruq include the United Arab Bank, QNB Al Islamic, Standard Chartered of United Arab Emirates, and Bank Muamalat Malaysia.

One of the most controversial Islamic financial product is considered to be Tawarruq as it is believed by some of the scholars that it contains elements of usury and hilah (legal Stratagem).

Tawarruq means “to buy on credit and sell at spot value.” This transaction is nowadays being used by many Islamic banks for liquidity management and as a mode of financing especially for personal financing and credit cards.

Key -

1) Tawarruq is an arrangement whereby a person, in need of liquidity, purchases a commodity from a seller on credit at a higher price. The person who acquires commodity in this way is called 'Mutawarriq'.

2) The difference between “Inah” and “Tawarruq” is that "Mutawarriq" sells the commodity to a third party, while in "Inah" the buyer resells it to the same seller from whom he had bought the commodity.

3) There are two versions reported from Imam Ahmad Ibn Hanbal about the permissibility of 'Tawarruq'. Majority of the Hanbali jurists have preferred the version according to which 'tawarruq' is permissible. However, Ibn Taimiyyah and Ibn Qayyim have held 'Tawarruq' as impermissible.

4) The Shafi'i jurists have allowed 'Inah', and therefore it seems that 'Tawarruq' is permissible with them with a greater force.