Category Archives: Challenges and criticisms

Are more and more Islamic banks shunning Tawarruq?

Are more and more Islamic banks shunning Tawarruq?

milk

The Islamic finance market has welcomed the recent resolution passed by the International Council of Fiqh Academy, which is an organ of the Organization of the Islamic Conference (OIC), on the contentious contract of Tawarruq, which is used as a cash management instrument by some Islamic banks. Some Islamic bankers and others providing such services, especially in Europe and Asia, are keen for further clarification as to whether the resolution merely applies to Tawarruq per se or also to commodity Murabaha contracts as they are currently practiced.

According to the International Council of Fiqh Academy ruling "technically, according to the Fiqh jurists, 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."

However, in recent years the practice of organized Tawarruq has emerged. This is defined — "when a person (mustawriq) buys merchandise (commodity) from a local or international market on a deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price. Reverse Tawarruq, is similar to organized Tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client."

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OIC Fiqh Academy Ruled Organised Tawarruq Impermissible

OIC Fiqh Academy Ruled Organised Tawarruq Impermissible

Text of resolution:

Resolution 179 (19/5)

in relation to

Tawarruq: its meaning and types (classical applications and organized tawarruq)

The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19th session which was held in Sharjah, United Arab Emirates, from 1 – 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:

Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolved about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.

The following were the resolutions:

First:  Types of tawarruq and its juristic rulings:

  • Technically, according to the Fiqh jurists, 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 Shari’ah requirements on sale (bay’).
  • The contemporary definition on organized tawarruq is:  when a person (mustawriq) buys a merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the  mustawriq and the financier executes the transactions, usually at a lower spot price.
  • Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client.

Second: It is not permissible to execute both tawarruq (organised and reversed) 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 recommendation is as follows:

To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic 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.

To encourage the financial institutions to provide Qard Hasan (benevolent loans) to needy customers in order to discourage them from relying on Tawarruq instead of Qard Hasan. Again these institutions are encouraged to set up special Qard Hasan Fund.

Sukuk transparency needed to spur growth: Moody’s

Sukuk transparency needed to spur growth: Moody’s

sukuk

The Islamic finance industry needs to be clearer about the nature of its sukuks, or Islamic bonds, if their growth is to be sustained in the long term, ratings agency Moody’s said in a reported on Wednesday.

The nascent Islamic finance industry is debating whether it should replicate conventional financial products or develop its own structures.

"For the long-term health and sustainability of the market, Moody’s believes all parties need to be very clear about the ‘substance’ of the underlying sukuk risk in question to avoid the situation where some parties will be confused … by complex Islamic terminology or legal jargon," the report said.

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Sukuk market in the Gulf needs to be regulated

Sukuk market in the Gulf needs to be regulated

burj al arab

The Gulf can foster growth in Islamic bonds (sukuk) market by adopting regulations and going in for measures such as credit rating, say analysts.

Even as the GCC holds a lion’s share in the global sukuk market, estimated at $130 billion (Dh477bn), it lags behind when it comes to regulations. And a model like the one followed by Malaysia can help it tap the massive potential that the segment holds, they said.

"The GCC market holds a significant share of global market when it comes to volume. But if we talk of a regulated market, the comfort levels of having prudent policy guidelines from regulators are still not there, whether it is related to type of issuances or ratings," said Moinuddin Malim, Head of Corporate and Investment Banking, Badr-Al-Islami. Mashreq.

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The answer to the global financial crisis lies in Islamic finance

The answer to the global financial crisis lies in Islamic finance

burj-dubai-skyscraper-2

A small idea is developing into a big hope in the Middle East. It is that the answer to the global financial crisis lies in Islamic finance.

Proponents of the $800bn industry argue that the prohibition on dealing in interest has saved Islamic institutions, preventing them from investing in all the dubious structures that have brought down high-flying international institutions.

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