Tag Archives: Tawarruq

Organized tawarruq is permissible: Sheikh Nizam Yaquby

Organized tawarruq is permissible: Sheikh Nizam Yaquby

The use of the organised tawarruq financing structure does not contradict Islamic law, prominent scholar Sheikh Nizam Yaquby said, disagreeing with a Saudi-based ruling to the contrary.

Tawarruq is a key financing structure of the $1 trillion Islamic finance industry.

But whether or not the way it is organised in modern banks contradicts sharia, 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 International Council of Fiqh Academy, a leading industry body based in Saudi Arabia, in April declared organised tawarruq "a deception" that carries elements of interest-based lending, prohibited under Islamic law.

"If proper procedures are implemented and checks and balances are put, then tawarruq is a useful tool and can be used," Yaquby told Reuters in an interview.

Widely used as a financing and liquidity management tool, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset, such as a commodity, to a third party to get cash.

Under organised tawarruq, the transactions are organised through banks which are appointed as agents to sell off the asset, in what has been criticised as a mere paper trail circumventing Islamic law and blurring lines between the purchaser and the third party.

Yaquby said centuries-old Islamic finance tools needed to be reconciled with the procedures of the modern banking system.

"All these Islamic finance tools have certain amounts of organization and we must know that (given) modern contracts within the existing frameworks, legal structures, it is very difficult to do something which is not organized," he said.


Yaquby is globally recognized as one of the top Islamic scholars, and in particular wields influence in the Gulf Arab region, one of the industry’s most important regional centres.

He is listed by consultants Funds@Work as sitting on 46 sharia scholar boards, including at Islamic operations of BNP Paribas, HSBC and Standard Chartered.

Yaquby also said there were hardly any alternatives to tawarruq as a tool to satisfy legitimate financing needs, to which he gave more weight than how it is implemented.

He said the use of a bank in selling assets would help minimise the losses occurring from the additional transaction, which would be higher if the purchaser sold assets himself.

"How can sharia allow something which is burdensome on a person … and not allow something which is organised and well done, and this man who is in dire need for cash will not suffer a lot," he said.

He voiced support for the standards of Bahrain-based AAOIFI — the Accounting and Auditing Organization for Islamic Financial Institutions — which he said provided the necessary checks to prevent the abuse of tawarruq.


Are more and more Islamic banks shunning Tawarruq?

Are more and more Islamic banks shunning Tawarruq?


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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