Thursday, October 22, 2009

Revisiting OIC Fiqh Academy rules on Organised Tawarruq

Interesting to note that the Tawarruq concept has been the key financing structure used and up to $1 trillion in the Islamic finance industry. But whether or not the way it is organized in modern banks contradicts Shariah, or Islamic law, has triggered fiery debates between scholars as the industry is struggling with a decline in business during the global financial crisis. The discussion or debate rises especially when the The International Council of Fiqh Academy, a leading industry body based in Saudi Arabia, in April declared that organised tawarruq "a deception" that carries elements of interest-based lending, prohibited under Islamic law. Thus it is in need to evaluate the differences of opinion (proponents and opponents of tawarruq) between scholars and analyze the relevance of the scholars arguments that support the use of Tawarruq in the industry as long as it fulfill the Shariah requirements.

A holistic and integrated understanding of structure and mechanism of commodity murabahah as an innovative liquidity management tool is essential since its being widely use in the Islamic finance industry. The effectiveness and efficiency of liquidity management mechanism via the usage of commodity murabahah currently is expanding from time to time. Liquidity management lies at the heart of confidence in finance industry. Therefore, this paper provides insights into the structure and mechanism of Commodity Murabahah or also known as Tawarruq as an instrument to serve the liquidity need and investment opportunity of Islamic financial institutions in Malaysia and the Middle East.

Fatawa on Tawarruq: Reappraisal

Tawarruq has been a quite contoversial issue lately since the recent resolution of the International Fiqh Academy Council on Tawarruq. It has ignited a new the already controversial application of modern Tawarruq. Due to the fatawa, various stakeholders of Islamic finance such as Shariah scholars, bankers and accountants, have attempted to express their opinion on the matter.

Shariah scholars like DeLorenzo, Dr Nikan Faroozye, Dr Aznan Hasan, Dr Akram Laldin, Shaikh Nizam Yaquby and Monzer Kafh are among scholars that responded to the matter with some unique arguments. These scholars (and we believe many more) understand and sees that matter from a global perspective in responding towards the resolution made.

They hold the view that Tawarruq is permitted provided that it is properly axecuted and fulfills all its requirements of a valid sale contract as well as proper documentation that highlight the rights and liabilities of the parties involved clearly detailed for any possible dispute resolution or litigation later. They supported the AAOIFI standard to be referred to and provide the necessary checks and balances to prevent the abuse of Tawarruq.

First is that it is better to strengthen the practice, rather than prohibiting it. Meanwhile, it is encourage for people in the industry to understand that the permissible come with responsibilities where by the implementation and practices of tawarruq in the products or instruments use must fulfilling the requirement made by the Shariah Advisory Council in order to avoid miss-used of such concept.

If we understand the usage of Tawarruq globally and see it from a bigger picture, it is understandable that not only Tawarruq.concept can be miss-used. It also goes to any products or services offered by the institutions if the usage is not fulfill the requirement or the standard acquired in order for it to be Shariah compliance. Thus this shows that the practice of Tawarruq is not prima facie prohibited, but due to several violations of its practices. That is why a proper monitoring is needed by the respective regulatory bodies.

Therefore, if the Tawarruq is properly executed and fulfilling all its requirements, and all the violations have been eliminated, the practice of modern Tawarruq should not be prohibited simply because it is somehow systemized and organized. Explain of modern financial instruments, it should be understandable that any modern practice has to be organized. Without it to be undertaken on the spur of the moment would not only render the transaction impracticable in most circumstances, but also expose the parties involved to a very high and unexpected risk.

However, we should see and evaluate each of these arguments addressed carefully without denying it has its merits of course. Moreover, we also could not deny the fact that Tawarruq is a hugely popular financing method, and is probably the most used single liquidity providing scheme and is used in virtually every country which practices Islamic Finance as an alternative concept rather than Bay al-Inah or Bay Bithamanil Ajil that are more criticize by the scholars in Islamic finance. Due to that we can obviously seen the distinction between the Tawarruq and Bay al-Inah drives the careful specifications of Tawarruq transactions.

Tawarruq: The way forward?

In conclusion, we hope that people who directly and indirectly connected to the markets and the practice of Tawarruq is not ease by the counter-arguments, we just hope that the actual fine print of Shariah rulings is more likely to be adhered to more closely in the future, with Islamic financial institutions are striving to show that their Tawarruq (although an organized Tawarruq) complies with every detail of the Shariah.

The dispute between scholars opinion on this is healthy, but the questioned arises how other people will view on it? This is due to the decision that is quick and does not quench one’s thirst about the íllah behind the decision made. There should be an economic study done to analyze the impact of the instruments and the implication of the fatwa.

Eventually we do hope that the ruling will likely lead to other alternatives being developed in order for Islamic financial institutions practicing ideally as according to Memon and Ansari who believe that we should not try to pull the legs of an infant who is just trying to take his first step towards a long journey just because of which only reflects to one more element in the confusing array of opinions and decided to put the nail into the coffin of Tawarruq. However, we should try to ensure that he commences his journey the right way, on a strong footing. More appropriately, it will serve us well when we are in a position to implement the complete Islamic way of living.


p/s: To read further you can read and download full research paper here.

Ibn Yusof

10.38 p.m

22 October 2009 / 4 Dhul-Qa`dah 1430

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