Question

EXPLAIN THE USE OF BAY AL-INAH AND TAWARRUQ CONTRACTS IN CONTEMPORARY ISLAMIC FINANCING PRODUCTS IN TERM OF permissibility persepective

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.

Bay' al-Inah is a sale contract with immediate repurchase. It takes place when a person sells an asset in credit and immediately buys back the asset in cash at lower price.

Below are the challenges to Tawarruq and Bay' al-Inah as it doesnt meet the following criteria

1 Validity of Purpose Issue: To be valid from a Shar’iah perspective, a sale contract must be valid in form and valid in purpose. According to Al-Jarhi (2016), validity in form means that the contract must involve a buyer, a seller, a sold object that is lawful to trade and a price. The seller must own and possess the sale object, except for the sale of something that can be acquired in the market under Salam or Istisna.

2.Tawarruq as Hilah to give a loan with interest: It has been alleged that most contemporary Tawarruq structures are a hilah (trick) to legitimize or circumvent interest-taking (Meera (2015) and Noor & Azli (2009)). In fact, the deception in the practice of modern Tawarruq was a major reason the OIC Fiqh Academy ruled it as impermissible

3 Resembling Inah: The Hanbali scholar, ibn Taymiyyah, and his student ibn al-Qayyim had strongly disapproved of Tawarruq and included it in the same category as the Inah sale.

4 The Bank as a dual agent: The most recent Shar’iah Standards and Operational guidelines on Tawarruq issued by the BNM’s SAC permit the implementation of dual-agency in Tawarruq contracts. Dual agency here means that a bank is acting as an agent to buy the underlying asset on behalf of the customer while at the same time, being the agent to sell that asset on behalf of the customer or in term deposit accounts to sell it to him.

5 Charging a delivery process fee: Upon examining the product disclosure sheet of Standard Chartered Saadiq’s Personal Financing-i based on commodity Murabahah, we observed that the customer is to solely bear the cost of physical delivery of the commodity (plastic resins). The situation is not different in the current practices at the BSaS (Bursa Suk al-Sila). The question is: Why should there be a separate charge for delivering the sold commodity to the buyer? We believe this element is what gives the incentive of purchasers not wanting the commodity delivered.

6 Encouraging the proliferation of debt: The wide usage of Islamic debt instruments such as Tawarruq increases the proliferation of debt according to some (Dusuki, 2010). This is because private debt accumulation in a supposedly Shari’ah-compliant way has been made easy by instruments such as Tawarruq.

7 Accounting risk Bacha & Mirakhor (2013) note that Islamic Money Market instruments, of which the Tawarruq structure used by BSaS belongs face accounting risk. By accounting risk, we mean that as the underlying commodity is traded from one party to another, the right monetary values may not be reflected in the books of the parties concerned. However, with appropriate audit of the books of the IFI, this problem can be addressed.

8 The use of Base Financing Rate (BFR) in profit as benchmark: In cases of variable rate financing for products based on Tawarruq , most times a benchmark is used in deciding the issuer’s profit. An example of this is can be seen in Islamic home financing. Here, the bank’s EPR (Effective Profit Rate) is based on the BFR which is a conventional interest rate. Some say benchmarking in Islamic banking should be a non-issue saying that if a transaction fulfils the necessary conditions, merely using the interest rate as a benchmark for determining profits does not render the transaction as haram. To us, determining profits based on what is happening in the conventional banking sector will mean that the Islamic finance industry and the conventional will move in tandem with one another. An issue can then be raised that the two are not so different after all.

9 Tawarruq as a barrier to true risk-sharing We are of the view that Tawarruq discourages the widespread use of products based on true risk-sharing like Mudharabah and Musharakah. In Tawarruq-based transactions like fixed deposit accounts and commodity Murabahah the capital and return are guaranteed

10. Mafasid overwhelm Masalih Moreover, some scholars forbid Tawarruq because of mafasid overwhelm masalih. The calculus of masalih and mafasid has been an essential tool of Islamic jurisprudence since the earliest days. Among the harmful effect of Tawarruq are it leads to creation of debt whose volume is likely to go on increasing, it results in exchange of money now with more money in future, which is unfair in view of the risk and uncertainty involved and it leads, through debt proliferation, to gambling like speculation32 . It is the cause for Tawarruq to be impermissible in Islamic banking system.