The International Council of Fiqh Academy (ICFA), which is an organ of the Organization of the Islamic Conference (OIC), has published a resolution on Tawarruq, a cash management instrument used by some Islamic banks.
The resolution was adopted by the ICFA at its recent session held in Sharjah.
While bankers have welcomed the resolution in principle, a number of them are keen to get further clarification as to whether the resolution also applies to commodity Murabaha contracts as they are currently practiced.
Badlishah Abdul Ghani, CEO of CIMB Islamic Bank, stressed that "The classical concept of Tawarruq is acceptable under Shariah principles". He said: "There are certain applications of Tawarruq that have caused concern in the market. We would like further clarification between the so-called organized Tawarruq and reverse Tawarruq on the one hand and the classical commodity Murabaha contract." In the classical Tawarruq, the third party has to be identified and cannot have any link with the financier or bank. In a commodity Murabaha this is not necessarily the case.
Resolution 179 reads: "Tawarruq can be defined as a person (Mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical Tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale."
The ICFA jurists clearly stipulate in Resolution 179 that: "It is not permissible to execute both organized and reverse Tawarruq because simultaneous transactions occurs between the financier and the Mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba."
The Fiqh Academy recommends: "To ensure that Islamic banking and financial institutions adopt investment and financing techniques that are Shariah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques. All transactions must conform to Shariah rules in order to ensure it meets the objectives of Shariah (Maqasid Shariah). In addition, such a move will ensure the progress and actualization of the socio-economic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end. The council encourages the application of Qard Hasan and establishment of Qard Hasan funds by financial institutions to shift the people who are in need of fund from Tawarruq."
Shariah resolutions relating to Fiqh Al-Muamalat (Islamic law relating to financial transactions) can have a direct and sometimes negative unintended impact on the Islamic financial market. The statement by the Shariah Committee of the Bahrain-based Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) in February 2009 relating inter alia to ownership rights and guaranteeing of principal in Musharaka and Mudaraba Sukuk, for instance, did unwittingly cause confusion in the market especially relating to retrospective application of the ruling. Some Islamic capital market players confirmed that it partly contributed to the slowdown in the market, which was already being affected by the fallout of the credit crunch and the global financial crisis.
Another major decision relating to Shariah issues was the ruling in April 2009 by the Malaysian Appeal Court that the Al-Bai Bithaman Ajil (BBA) deferred payment contract as practiced in Malaysia is a valid Islamic sale contract.
The appeal court overturned a ruling earlier by a lower court that it was not a valid Islamic contract and is tantamount to a loan, which is riba and therefore not permissible. The earlier judgment had caused considerable anxiety amongst Islamic financial institutions in Malaysia for fear of potential increases in defaults in their BBA contracts and uncertainty as to the validity of BBA agreements. The Malaysian Appeal Court ruled that BBA agreements are valid and binding in Malaysia; these agreements must not be compared to loan agreements, as the BBA contracts are sale transactions and not money lending transactions.
In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted.
Tawarruq has hitherto been practiced in most countries where Islamic finance is provided except perhaps in Qatar where the Shariah scholars have discouraged its use per se. However, more and more Islamic banks in countries including Saudi Arabia, Malaysia, Kuwait and UAE, are now shunning Tawarruq, even the accepted form, perhaps to avoid market confusion.
