Question

ISLAMIC CONTRACTS

a) The underlying of Tawarruq

- Definition

- Criteria from Al Quran & Hadith

- Types, Pillars & Conditions

- Termination of Contract

Answer 1

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.

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.

5) Maliki jurists are very strict about 'Inah', but it appears from their books that they do not see a problem in 'Tawarruq'.

6) Some Hanafi jurists of later days have held that 'Tawarruq' is ‘Inah’, hence makrooh. But majority of the Hanfi jurists have preferred the view of Ibn-ul-Humam that ‘Inah’ is restricted to the situation where the commodity comes back to the original seller but where the commodity is sold in the market, the transaction is valid and permissible. However, lending money (without interest) is more preferable.

7) Thus, the preferred view in all the four schools of Islamic fiqh is that Tawarruq is permissible. However, lending (without interest) is more advisable.

8) This is the position with regard to the original concept of Tawarruq, but the ruling may change if the transaction is infiltrated by some other elements.

9) If the bank appoints the Mutawarriq himself as its agent to purchase the commodity on behalf of the bank, then to sell it to himself, this transaction is invalid. However, if the bank appoints him as an agent only for the purchase of a commodity on behalf of the bank, then once it is purchased, the bank itself sells it to Mutawarriq through a proper contract with offer and acceptance, the transaction is valid, but not advisable.

10) If the 'Mutawarriq' after purchasing the commodity from the bank, appoints the bank his agent to sell it in the market and this agency is stipulated in the contract of sale as a condition, the translation is not valid. However, if the agency was not a condition in the sale contract, and it has been affected after unconditioned sale, the transaction is valid, but not advisable.

11) If 'Tawarruq' is carried out through the international commodity exchange, it is vulnerable to many violations of Shariah, because many conditions of a valid Islamic sale may be lacking.

12) However, if all the condition of a valid sale are properly observed, the transaction may be valid, but its extensive use is not advised.