2.3.2 EXCHANGE BASED CONTRACTS BAY' AL-TAWARRUQ

UMC090
SHARI'AH CONTRACTS FOR ISLAMIC

FINANCIAL INSTRUMENTS

EXCHANGE BASED CONTRACTS:

BAY' AL-TAWARRUQ

By: Dr. Wan Noor Hazlina Wan Jusoh

Learning Outcomes

At the end of this topic,
students should be able to:
To explain bay' al-'tawarruq
contract.

Contents

1. Introduction
2. Definition
3. Evidences
4 Pillars of Bay' al-Tawarruq
5. Flow of Bay' al-Tawarruq
6. Types of Bay' al-Tawarruq
7. Simalarities & Differences between Bay' al-Tawarruq & Bay' al-'Inah
8. Conditions of Bay' al -Tawarruq
9. Opinions of Scholars
10. Modern Applications in Islamic Finance
11. Conclusion

1SECTION

Introduction

INTRODUCTION Therefore, the concept suits most of
the facilities provided by
conventional banking, such as
deposit, loan, bond and money
market instruments.

Tawarruq is one of the Shari’ah- This mode of cash-based
compliant modes used for cash- instrument, which is widely known in
based financial instruments due to the Gulf Region, has become
the nature of the tawarruq popular in Malaysia as an
mechanism, that is, to provide alternative to bay’ al-‘inah, which
cash liquidity. was adopted in the early days.

2SECTION

Definition

DEFINITION

Literally: Minted silver; seeking silver money
Technically:

Buying a commodity with deferred payment and
selling it to a person other than the buyer for a
lower price with immediate payment.

Purchasing a commodity on credit and selling it
to a person other than the initial seller for a lower
price on cash.
Tawarruq is a term commonly used by Hanbali school
of law.
Other school mention the form of tawarruq under the
rubric or bay’ al-ajal and bay’ al-’inah.

3SECTION Evidences

EVIDENCE

Qiyas:

Permissible based on
analogy, the contract is
similar to other sale and
purchase contracts i.e. the
transfer of ownership is taken
place.

4SECTION

Pillars of Bay' al-
Tawarruq

Pillars of Commodity Original
Bay' al- Seller
Tawarruq

Wariq Final
Buyer

Mutawarriq

5SECTION

Flow of Bay' al-
Tawarruq

FLOW OF BAY' AL-TAWARRUQ

CUSTOMER

BANK

ORIGINAL FINAL
SELLER BUYER

6SECTION

Types of Bay' al-
Tawarruq

TYPES OF BAY' AL-TAWARRUQ

Tawarruq Fardi Tawarruq Tawarruq Masrafi
Munazzam
The Islamic Fiqh Process where the IFI
Academy of OIC It happens when the formally organizes the
defines this as "the seller handles the sale of a commodity
purchase of a process by which cash is market or other
commodity possessed acquired for the market and the
and owned by the mutawarriq (the seeker mutawarriq, for a
seller for a delayed of cash). In the first leg, delayed payment on
payment, whereupon the seller sells a a binding condition
the buyer will resell commodity to the that may be
the commodity for mutawarriq for a delayed stipulated in the
cash to other than payment. In the second contract or according
the original seller in leg, the seller sells the to the custom and
order to acquire same commodity on the norms guiding such a
cash". mutawarriq's behalf to a commodity.
3rd party for cash, and
hands over the cash to
the mutawarriq.

Differences between Tawarruq Fardi &
Tawarruq Munazzam

Tawarruq Fardi Tawarruq Munazzam

Original seller does not play any role in The original seller act as an intermediary
the resale of commodity & has no relation by selling the commodity for cash on
behalf of the mutawarriq.
with the final buyer. The mutawarriq receives the cash from
The cash will be taken by the mutawarriq
directly from the final buyer without the the original seller, to whom he owes the
delayed price.
seller being involved.
The original seller has not information and The original seller might agree
beforehand with the final buyer that he
relation with the final buyer

will purchase the commodity.
Rejected by majority of jurist. But
Accepted by majority of jurists (Hanafi, accepted to be practice by current fiqh
Maliki and Hanbali) and Majma’ al Fiqh al scholars and IFI Shariah Advisory Council

Islami

7SECTION

Similarities &
Differences between
Bay' al-Tawarruq &
Bay' al-'Inah

Simalarities & Differences between
Bay' al-Tawarruq & Bay' al-Inah

Similarities Differences


Tawarruq and 'Inah differ in terms
Tawarruq and 'inah are of the return of the commodity
sold. The requester of „inah will
congruent in terms
of the purpose behind them, return the commodity back to the
which is to acquire cash. In seller, whereas the mutawarriq in
the individual form of tawarruq will
addition, they are also sell the commodity to a new buyer
congruent in that they result
in the payment of a greater other than the first buyer with
amount of immediate cash neither the arrangement nor the

in consideration of the knowledge of the first seller.
delay. However, in organized tawarruq he
arranges with the first seller to sell
it to a third party or return it to its

first seller.

8SECTION

Conditions of Bay' al-
Tawarruq

CONDITIONS OF 1.Each sale and purchase contract in a tawarruq shall satisfy all the
BAY' AL- necessary conditions of a valid sale and purchase contract under
TAWARRUQ Shariah.

2. All sale and purchase contracts in the tawarruq shall be
executed by entering into a separate and independent sale and
purchase contract.

3. Execution of each sale and purchase contract in the tawarruq
must be respectively evidenced by appropriate documentation or
record.
4. The purchaser in each sale and purchase contract in the
tawarruq shall have the right to take delivery of the asset.
5. The sale and purchase contract in the tawarruq shall not contain
any terms and conditions that restrict the purchaser from taking
delivery of the asset or create an obligation for the purchaser to sell
the underlying asset.
6. Payment of any amount of the deferred selling price including
profit shall not be made to the seller before entering into the sale
and purchase contract.

9SECTION

Opinions of Scholars

OPINIONS OF SCHOLARS

Scholars are divided into two groups:

1) PROPONENTS OF 2) OPPONENTS OF
TAWARRUQ TAWARRUQ

Most fiqh scholars Ibn Taymiyyah
allowed tawarruq to prohibited tawarruq
be practiced in some of his
irrespective of fatwas.
whether it is directly
stated in their
treatise or not.

Justifications of The Proponents

The competitive positions of Tawarruq is one of the forms of trade
Islamic banking with regard to which Allah SWT has permitted in
conventional banking requires general.
that any opportunity should not
be missed by the Islamic banks in 5 1
increasing the profitability.

Necessity calls for this kind of 4 The initiatial assumption for
transactions is that they are lawful
transaction as not everyone who 2 unless there is proof that prohibits such
wants to borrow money finds
someone to lend it to them. a particular transactions & there is no
Shari'ah proof that forbids this one.
3

The objective of traders from their
transactions is to acquire more money
in exchange for less moneyby means of

some commodity which serves as an
intermediary between the seller and

buyer.

Justifications of The Opponents

The commodity exchanged as part of 5 Banking tawarruq needs to be evaluated
abanking tawarruq may either be a mere 3 in light of its objective. The objective of

document, such as certificate that are the repeated sales in tawarruq is to
sent from one place to another and are proqure immediate cash in exchange for
usually in the possession of a broker, or a deferred payment of a larger amount

a defective commodity stored in a of cash.
warehouse which becomes the subject
of repeated murabahah transactions. 1

Banking tawarruq is not a 4 Banking tawarruq leads to the same
replacement for currency-based result as riba, regardless of the outer
2 form of the contract.
financing (loans on interest),
rather it bears a close resemblance

to it.

Banking tawarruq is a form of 'inah,
which is a kind of transaction
involving interest.

10SECTION

Modern Applications
in Islamic Finance

MODERN APPLICATIONS IN ISLAMIC FINANCE

Bay’ al-tawarruq has been used to construct numerous
financing product offered by the bank in Malaysia:

Personal financing

Islamic Overdraft Working Capital
Financing

Murabahah Sukuk Asset financing

Islamic credit card Education financing
Home financing

Classical Tawarruq

Source: Fahmy et al., 2008 The modus operandi of classical tawarruq
is:
1. The Islamic Financial Institution (IFI)
purchases commodity from Trader A in the
commodity market on cash basis;
2. Ownership of the identified commodity
will then be transferred to IFI;
3. Thereafter, the IFI sells the commodity
to the Counterparty (e.g. other Islamic
financial institutions, or client) on
deferred price, i.e. cost price plus profit
margin);
4. The ownership of the commodity will be
transferred to the Counterparty;
5. The Counterparty will then sell the
commodity to Trader B on cash basis in
the commodity market;5
6. Finally, the ownership of the identified
commodity will be transferred to Trader B.

Tawarruq al-Munazzam

Source: Fahmy et al., 2008 The description of organized tawarruq is as
following steps:
i1. IFI purchases warrants from Trader A and
pay spot.
2. IFI will then sell the warrants to the
Counterparty. The Counterparty accepts the
offer from the IFI to purchase warrants on a
deferred payment basis, where
the mark-up and the repayment date are
pre-agreed.
3. The Counterparty appoints IFI as an agent
to sell warrants on its behalf. The
IFI now acts as an agent to sell the warrants
at spot to another Trader B.
Alternatively; the Counterparty could sell the
warrants in the open market.
4. Payment made to the Counterparty;
ownership of warrants transfer to the end
buyer. In most of the case, whether the
Counterparty requests the IFI to sell
the warrants on its behalf or arrange to sell
to third party by itself, the
Counterparty will be paid the spot counter
value of the warrants.
5. Deferred payment will be made by the
Counterparty to the IFI. This payment
takes place at a pre-agreed time in the
future and consists of the principal of
the original purchase plus a pre-agreed
mark-up.

11SECTION

Conclusion

CONCLUSION

Commodity tawarruq financing has been the
most widely used form of liquidity
management instrument to date, due to its
ease of execution and wide acceptability
among IFIs and banks.
Contemporary scholars agree that the
classical tawarruq is permissible.
However, there is disagreement concerning
organized Tawarruq, which is widely applied in
the current Islamic banking system.
Hence, any Shari’ah resolution issued by the
authorized bodies might impact on the
operational aspect of the Islamic banks where
the tawarruq principle underlies the banking
product and the transaction shall abide by the
issued ruling.

12SECTION

References

REFERENCES Ajija, S. R., Fathia, M., & Suarni, A. (2010). Tawarruq: Issue &
Challenge. Paper presented at the International Conference on
Islamic Finance, Brunei Darussalam.
Bank Negara Malaysia. (2018). Tawarruq, Policy Document,
https://www.bnm.gov.my/documents/20124/938039/pd_reissuanc
etawarruq_dec2018.pdf/bcc4b359-381c-5035-f9f0-3908faebb92a?
t=1592249563244
ISRA., (2020). Islamic Financial System: Principles & Operations (2nd
Ed.), Kuala Lumpur: International Shari’ah Research Academy for
Islamic Finance.
Khalid, M. M., (2012). Bay' al-'Inah,
https://www.scribd.com/doc/97553110/Bay-al-Inah (PowerPoint
Slides)
Mohamad, N., & Ab Rahman, A. (2014). Tawarruq application in
Islamic banking: a review of the literature. International Journal of
Islamic and Middle Eastern Finance and Management, 7(4), 485-501.

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