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Islamic Contract – Arguments Supporting the Use of Tawarruq in the Banking System
Q1: Why do some scholars and Islamic finance practitioners support tawarruq?
Answer
Scholars who permit tawarruq in the banking system argue that:
tawarruq is a lawful trade-based mechanism that provides liquidity without directly engaging in ribā.
They rely on:
✅ Qur’ānic principles;
✅ Prophetic traditions;
✅ general permissibility of trade;
✅ commercial necessity;
✅ practical financial needs.
1. Tawarruq Falls Under the General Permissibility of Trade
Argument
Supporters argue that Allah (SWT) states:
“Allah has permitted trade and prohibited ribā.”
(Qur’ān 2:275)
Thus:
Application to Tawarruq
Tawarruq:
✅ involves sale contracts;
✅ contains identifiable commodities;
✅ fulfils legal contractual requirements.
Therefore:
Case Scenario 1 – Personal Liquidity Financing
A customer requires:
Step 1
Islamic bank sells commodity:
Step 2
Customer sells commodity:
Difference
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Supporters’ Analysis
Supporters argue:
Critical Analysis
Critics respond:
Thus:
2. Hadith of Dates Exchange Supports Restructuring Into Sharī‘ah-Compliant Form
Argument
Supporters rely on the famous hadith narrated by:
Hadith Summary
A man exchanged:
Supporters’ Reasoning
Supporters argue:
an unlawful structure may become permissible if reorganised into Sharī‘ah-compliant sale contracts.
Thus:
Case Scenario 2 – Restructured Financing
Instead of:
❌ borrowing RM100,000 with interest,
the customer:
Supporters’ View
The financing becomes:
✅ trade-based;
✅ contractually Sharī‘ah-compliant.
Critical Analysis
Critics argue:
3. Original Rule in Transactions Is Permissibility
Argument
Supporters invoke the legal maxim:
“The original rule in commercial transactions is permissibility.”
Thus:
Burden of Proof Argument
Supporters argue:
those prohibiting tawarruq bear burden of proof.
Because:
Critical Analysis
Critics counter that:
4. Traders Aim to Increase Wealth Through Commodities
Argument
Supporters argue:
profit-making itself is not prohibited.
In ordinary trade:
Distinction Made by Supporters
Ordinary Trader
Aims:
Mutawarriq
Aims:
Case Scenario 3 – Commodity Intermediary
A business purchases:
Supporters’ Analysis
The commodity:
✅ lawfully intermediates liquidity generation.
Critical Analysis
Critics argue:
5. Necessity and Public Need Support Tawarruq
Argument
Supporters argue:
not everyone can access benevolent loans (qard hasan).
Thus:
Case Scenario 4 – Financial Hardship
A family urgently needs:
Islamic bank offers:
Supporters’ View
Tawarruq:
✅ prevents resort to conventional ribā loans.
Critical Analysis
This argument is based on:
6. Tawarruq Solves Liquidity Problems
Argument
Supporters argue:
tawarruq effectively addresses liquidity shortages.
It benefits:
✅ individuals;
✅ corporations;
✅ banks;
✅ governments.
Practical Applications
Tawarruq is used for:
Case Scenario 5 – Interbank Liquidity
An Islamic bank faces:
Supporters’ Analysis
Tawarruq:
✅ stabilises Islamic financial markets;
✅ enhances operational continuity.
Critical Analysis
Critics worry:
7. Islamic Banks Must Remain Competitive
Argument
Supporters argue:
Islamic banks must remain commercially competitive with conventional banks.
Therefore:
Case Scenario 6 – Banking Competition
Customers require:
Supporters’ View
Tawarruq:
✅ allows Islamic banking growth;
✅ expands financial inclusion;
✅ offers Sharī‘ah-based alternatives.
Critical Analysis
Critics caution:
Thus:
Overall Critical Analysis of Supporters’ Arguments
Main Supporting Themes
Supporters emphasise:
✅ general permissibility of trade;
✅ legal validity of contracts;
✅ public need and necessity;
✅ financial practicality;
✅ banking competitiveness.
Main Counterarguments
Critics emphasise:
❌ substance-over-form concerns;
❌ synthetic liquidity generation;
❌ resemblance to conventional lending;
❌ weakening of genuine trade-based finance.
Core Sharī‘ah Debate
The fundamental issue remains:
Does organised tawarruq represent:
Contemporary Regulatory Trend
Modern regulators increasingly seek:
✅ reduction of excessive tawarruq dependency;
✅ diversification of Sharī‘ah contracts;
✅ stronger real-economy linkage;
✅ value-based Islamic finance development.
Q1: Why do some scholars and Islamic finance practitioners support tawarruq?
Answer
Scholars who permit tawarruq in the banking system argue that:
tawarruq is a lawful trade-based mechanism that provides liquidity without directly engaging in ribā.
They rely on:
✅ Qur’ānic principles;
✅ Prophetic traditions;
✅ general permissibility of trade;
✅ commercial necessity;
✅ practical financial needs.
1. Tawarruq Falls Under the General Permissibility of Trade
Argument
Supporters argue that Allah (SWT) states:
“Allah has permitted trade and prohibited ribā.”
(Qur’ān 2:275)
Thus:
- all forms of trade are generally permissible,
unless:
❌ clear Sharī‘ah evidence specifically prohibits them.
Application to Tawarruq
Tawarruq:
✅ involves sale contracts;
✅ contains identifiable commodities;
✅ fulfils legal contractual requirements.
Therefore:
- supporters argue:
Case Scenario 1 – Personal Liquidity Financing
A customer requires:
- RM50,000 cash.
Step 1
Islamic bank sells commodity:
- RM60,000 deferred.
Step 2
Customer sells commodity:
- RM50,000 cash to third party.
Difference
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Supporters’ Analysis
Supporters argue:
- this arrangement remains:
✅ sale-based;
✅ contractually valid;
✅ distinct from direct interest lending.
Critical Analysis
Critics respond:
- although legally structured as sales,
the economic substance may still resemble:
Thus:
- debate centres on:
2. Hadith of Dates Exchange Supports Restructuring Into Sharī‘ah-Compliant Form
Argument
Supporters rely on the famous hadith narrated by:
- Abu Sa’id al-Khudri
and - Abu Hurairah.
Hadith Summary
A man exchanged:
- lower-quality dates
for: - better-quality dates
unequally.
- it involved ribā.
- sell lower-quality dates for cash;
- use cash to buy better-quality dates.
Supporters’ Reasoning
Supporters argue:
an unlawful structure may become permissible if reorganised into Sharī‘ah-compliant sale contracts.
Thus:
- tawarruq restructures liquidity needs into:
✅ lawful sale arrangements.
Case Scenario 2 – Restructured Financing
Instead of:
❌ borrowing RM100,000 with interest,
the customer:
- buys commodity on deferred basis;
- sells commodity for cash.
Supporters’ View
The financing becomes:
✅ trade-based;
✅ contractually Sharī‘ah-compliant.
Critical Analysis
Critics argue:
- unlike the hadith case,
modern organised tawarruq may:- lack genuine trading intention;
- merely replicate cash financing.
3. Original Rule in Transactions Is Permissibility
Argument
Supporters invoke the legal maxim:
“The original rule in commercial transactions is permissibility.”
Thus:
- unless there is:
❌ clear prohibition,
transactions remain lawful.
Burden of Proof Argument
Supporters argue:
those prohibiting tawarruq bear burden of proof.
Because:
- they seek exception from general permissibility.
Critical Analysis
Critics counter that:
- organised tawarruq may violate:
- anti-ribā objectives;
- maqāṣid al-sharī‘ah;
even if no explicit textual prohibition exists.
4. Traders Aim to Increase Wealth Through Commodities
Argument
Supporters argue:
profit-making itself is not prohibited.
In ordinary trade:
- traders buy and sell commodities to:
- increase wealth.
- tawarruq uses commodities as:
Distinction Made by Supporters
Ordinary Trader
Aims:
- profit through trade.
Mutawarriq
Aims:
- obtain liquidity/cash.
- both use lawful sale contracts.
Case Scenario 3 – Commodity Intermediary
A business purchases:
- metal commodity on deferred basis.
- commodity for spot cash
to finance operations.
Supporters’ Analysis
The commodity:
✅ lawfully intermediates liquidity generation.
Critical Analysis
Critics argue:
- commodity may merely serve symbolic role;
- no real economic trade objective exists.
5. Necessity and Public Need Support Tawarruq
Argument
Supporters argue:
not everyone can access benevolent loans (qard hasan).
Thus:
- tawarruq provides:
✅ lawful liquidity alternative.
Case Scenario 4 – Financial Hardship
A family urgently needs:
- RM30,000 for medical expenses.
Islamic bank offers:
- tawarruq financing.
Supporters’ View
Tawarruq:
✅ prevents resort to conventional ribā loans.
Critical Analysis
This argument is based on:
- necessity (ḥājah);
- public need;
- financial practicality.
6. Tawarruq Solves Liquidity Problems
Argument
Supporters argue:
tawarruq effectively addresses liquidity shortages.
It benefits:
✅ individuals;
✅ corporations;
✅ banks;
✅ governments.
Practical Applications
Tawarruq is used for:
- treasury operations;
- liquidity management;
- trade deficit financing;
- short-term funding.
Case Scenario 5 – Interbank Liquidity
An Islamic bank faces:
- short-term liquidity shortage.
- tawarruq liquidity arrangement
to provide funding.
Supporters’ Analysis
Tawarruq:
✅ stabilises Islamic financial markets;
✅ enhances operational continuity.
Critical Analysis
Critics worry:
- overreliance on tawarruq may:
- excessively financialise Islamic banking;
- weaken real-sector linkage.
7. Islamic Banks Must Remain Competitive
Argument
Supporters argue:
Islamic banks must remain commercially competitive with conventional banks.
Therefore:
- practical financing alternatives are necessary.
Case Scenario 6 – Banking Competition
Customers require:
- immediate liquidity;
- fast financing products.
- Islamic banks may struggle to:
- compete commercially;
- retain customers.
Supporters’ View
Tawarruq:
✅ allows Islamic banking growth;
✅ expands financial inclusion;
✅ offers Sharī‘ah-based alternatives.
Critical Analysis
Critics caution:
- excessive focus on competitiveness may:
Thus:
- balance between:
- practicality;
- maqāṣid al-sharī‘ah
remains crucial.
Overall Critical Analysis of Supporters’ Arguments
Main Supporting Themes
Supporters emphasise:
✅ general permissibility of trade;
✅ legal validity of contracts;
✅ public need and necessity;
✅ financial practicality;
✅ banking competitiveness.
Main Counterarguments
Critics emphasise:
❌ substance-over-form concerns;
❌ synthetic liquidity generation;
❌ resemblance to conventional lending;
❌ weakening of genuine trade-based finance.
Core Sharī‘ah Debate
The fundamental issue remains:
Does organised tawarruq represent:
- genuine Sharī‘ah-compliant trade,
or - merely a legal mechanism replicating interest financing?
Contemporary Regulatory Trend
Modern regulators increasingly seek:
✅ reduction of excessive tawarruq dependency;
✅ diversification of Sharī‘ah contracts;
✅ stronger real-economy linkage;
✅ value-based Islamic finance development.
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