Question

Explain in details:

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

Answer 1

Tawarruq Iis Ia Ifinancial Iinstrument Iin Iwhich Ia Ibuyer Ipurchases Ia Icommodity Ifrom Ia Iseller Ion Ia Ideferred Ipayment Ibasis, Iand Ithe Ibuyer Isells Ithe Isame Icommodity Ito Ia Ithird Iparty Ion Ia Ispot Ipayment Ibasis I(meaning Ithat Ipayment Iis Imade Ion Ithe Ispot). IThe Ibuyer Ibasically Iborrows Ithe Icash Ineeded Ito Imake Ithe Iinitial Ipurchase.

Later, Iwhen Ihe Isecures Ithe Icash Ifrom Ithe Isecond Itransaction, Ithe Ibuyer Ipays Ithe Ioriginal Iseller Ithe Iinstallment Ior Ilump Isum Ipayment Ihe Iowes I(which Iis Icost Iplus Imarkup, Ior Imurabaha).

Islamic Ibanking Iadheres Ito IShariah, Iwhich Iis Ithe IIslamic Ireligious Ilaw Ias Idefined Iin Ithe IQuran, Ihadith Iand Isunnah. IThe Idifference Ibetween Iconventional Iand IIslamic Ifinance Iis Ithat Ino Imoney Iis Iactually Iloaned Ito Ithe Iclient Ias Ithe Ibank Iwill I“buy” Ithe Iitem Ifor Iclients Iand Isell Iit Iback Ito Ithem Iat Ia Imarked Iup Iprice.

Islamic Ibanking Iis Igoverned Iby Iboth IIslamic Ilaw Iand Ifinancial Iindustry Irules Iso Iit Iis Ialso Itightly Iregulated, Ilike Iits Iconventional Icounterpart. IIslamic Ibanks Imust Icomply Iwith Ia Ivariety Iof Iprinciples Ibesides Inot Icharging Iinterest, Isuch Ias Iensuring Ithe Iproducts Ioffered Ito Iclients Iare Ihalal Iand Ishariah Icompliant. IIn Iorder Ito Ido Iso, Ithere Iare Ishariah Iboards Iwhich Iconsist Iof IIslamic Ischolars Iwho Iare Iqualified Ito Igive Iopinions Ion IIslamic Ifinancial Iproducts.

Islamic IPersonal IFinancing

Personal Iloans Ifrom IIslamic Ibanks Iare Ibased Iby Iutilising Ithe Iconcept Iof IBai’ Al-‘Inah (the Iinstrument Iis Iprohibited Ias Iper IHadith I- IProphet IMuhammad's Itradition-however Ivalidity Iof IHadith Iis Idisputed Ias Iper IEl Igamal-2003) Ibut Iits Iused Iin IIslamic IBanks Iof IMalaysia. IIt Iis Ia Iconcept Iwidely Iused Iby IIslamic Ifinancial Iinstitutions Ifor I‘personal Ifinancing’ Iwhich Iis Ia Icommonly Iused Iterm Iin IIslamic Ibanking Iinstead Iof Ithe Iterm I‘personal Iloan’ Ias Iper Iconventional Ibanks.

Bai’ Al-‘Inah Iis Ia Iconcept Iwhich Iinvolves Ithe Iselling Iand Ibuying Iback Itransaction Iby Ia Iseller I(bank) Ion Ia Ideferred Ipayment Ibasis. IA Iseller Iwill Isell Ito Ia Ibuyer I(client) Ion Ia Icash Ibasis. IThe Iseller Iwill Ilater Ibuy Iback Ion Ia Ideferred Ipayment Ibasis Iwhere Ithe Iprice Iis Ihigher Ithan Ithe Icash Iprice. IIt Ican Ialso Ibe Iapplied Iwhen Ia Iseller Isells Ito Ia Ibuyer Ion Ia Idiffered Ibasis. IA Iseller Iwill Ilater Ibuy Iback Ion Ia Icash Ibasis Iat Ia Iprice Iwhich Iis Ilower Ithan Ithe Ideferred Iprice, Ithus Ithe Itransaction Iamounts Ito Ia Iloan. IIn Ipersonal Ifinancing, Ithe Iasset Iinvolved Iin Ithe IBai’Al-‘Inah Iconcept Iof Ibuying Iand Iselling Iwould Ibe Ithe Icash.

Islamic Ifinancial Iinstitutions Iwill Ithen Icharge Icustomers Ian Iamount Iknown Ias I‘profit Irate’ Ifor Iproviding Ithem Iwith Ia Ipersonal Ifinancing Ifacility. IAgain, Ithis Iis Ibecause Icharging Iinterest Iis Inot Iallowed Iin IIslamic Ibanking. ISo Iunlike Ipersonal Iloans Ioffered Iby Iconventional Ibanks, IIslamic Ibanks Iwill Ioffer Ipersonal Ifinancing Iwith Ia Iprofit Irate Ithat Iwill Ibe Idefined Iin Ithe Ipersonal Ifinancing Icontract. I

How Idoes Iit Iwork?

There Iare Itwo Iways Ithat Ia IShariah Icompliant Ipersonal Iloan Ican Ihappen: IMurabahah Ior ITawarruq. IBoth Iconcepts Iare Isimilar, Ibut Irequire Idifferent Isteps Ito Iachieve Ithe Isame Ithing.

In Ia IMurabahah, Ithe Ibank Ipurchases Iwhatever Ithe Icustomer Iwants Iand Isells Iit Ito Ithem Iwith Ia Imarkup. IIn Ithis Icase, Ithe Irepayment Iis Idone Iin Iinstallments Iand Ithe Iprofit Ithat Iwould Ihave Icome Ifrom Icharging Iinterest Iis Iinstead Ireplaced Iwith Ithe Iprofit Ifrom Ithe Isale Iof Ithe Iasset.

A Inotable Idifference Iwith Iconventional Ipersonal Iloans Iis Ithat Ithe Icustomer Iwill Ibe Iinformed Iof Ithe Itotal Iamount Ithat Ineeds Ito Ibe Irepaid Ifrom Ithe Ivery Istart.

A ITawarruq Icontract Ibuilds Ion Ia IMurabahah, Ionly Iwith Imore Isteps Ito Ireach Ithe Idesired Igoal.

In Ithis Itype Iof Ifinancing, Ithe Icustomer Ibuys Icommodities Ifrom Ithe Ibank I(paying Ifor Ithe Ivalue Iplus Ithe Ibank’s Iprofit Irate). IAt Ithis Istage, Ithe Ipayment Iis Ideferred Ibecause Ithe Icustomer Iclearly Idoesn’t Ihave Ithe Ifunds Iyet.

Next, Ithe Icustomer Isells Ithe Icommodities Ito Ia Ithird Iparty Ito Iobtain Icash. IFrom Ihere, Ithe Icustomer Iis Iexpected Ito Ipay Ithe Ibank Iback Ifor Ithe Iinitial Ipurchase Ion Ian Iinstallment Ibasis.

For Iexample: IYou Iapply Ifor IRM200,000 Iin Ipersonal Ifinancing Ifrom IBank IIslam. IYou Iwant Ito Itake Iyour Imaximum Iamount Iof Itime Ito Ipay Ithis Iback, Iso Iyou Iask Ifor Ia I10 Iyear Itenure Iperiod.

In Ithis Icase, Ithe Ibank Iwould Ihelp Iyou Ibuy IRM200,000 Iworth Iof Icommodities. IIn Ithis Icase, Ilet’s Isay Iit’s Ibeef I(almost Iany Iphysical Iobject Ican Ibe Ia Icommodity). IYou Inow Iowe Ithe Ibank IRM200,000 Iplus Ia Iprofit Iof Isay I8%. ISo Ioverall Ithe Ivalue Iof Ithe Itransaction Iis Inow IRM216,000.

At Ithis Ipoint, Iyou Iowe Ithe Ibank Imoney Iand Iown Ia Iwarehouse Ifull Iof Ibeef. ITo Iget Ithe Iactual Ifunds, Iyou Iwould Ithen Isell Ithe Ibeef Ito Ia Ithird Iparty Ifor Iexactly IRM216,000. IGiving Iyou Ithe Ifinancing Ithat Iyou Iwanted Iin Ithe Ifirst Iplace.

This Ientire Iprocess Iis Iperformed Iby Ithe Ibank, Iso Ithe Icustomer Idoesn’t Ieven Ineed Ito Ibe Iaware Ithat Iall Iof Ithis Iis Ihappening.

It Ishould Ibe Inoted Ithat Igold, Isilver, Iand Icurrencies Icannot Ibe Iused Ias Icommodities Ifor Ithe Ipurpose Iof Ia ITawarruq Itransaction.