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Islamic Contract -Comparison of the Types of Tawarruq
Introduction
Generally, tawarruq is divided into:
1. Tawarruq Fiqhī (Classical Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of Original Seller
Agency
Receipt of Cash
Flow of Transaction
Step 1
Customer buys commodity:
Step 2
Customer independently searches for buyer.
Step 3
Customer sells commodity:
Example
Deferred Purchase Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
Application
2. Tawarruq Munazzam (Organised Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of IFI
Important Sharī‘ah Clarification
❌ IFI should not repurchase commodity for itself.
Why?
Thus:
✅ resale must involve third party.
Agency
Receipt of Cash
Flow of Transaction
Step 1
IFI purchases commodity.
Step 2
IFI sells commodity to customer:
✅ customer owns commodity.
Step 3
Customer appoints IFI:
Step 4
IFI sells commodity:
Step 5
Cash transferred to customer.
Example
Deferred Sale Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
Main Criticism
Critics argue:
Application
3. Tawarruq Maṣrafī (Banking or Inverse Tawarruq)
Definition
Nature of Arrangement
Parties Involved
Usually involves:
Role of IFI
Agency
Receipt of Cash
Flow of Transaction
Step 1
Customer deposits money with IFI.
Step 2
IFI purchases commodity.
Step 3
IFI sells commodity:
Step 4
Commodity resold for spot cash.
Example
Spot Commodity Price
RM200,000.
Deferred Sale Price
RM220,000.
Difference
220{,}000 - 200{,}000 = 20{,}000
220{,}000 - 200{,}000 = 20{,}000
Sharī‘ah Position
Application
Main Differences Between the Types
Tawarruq Fiqhī
Tawarruq Munazzam
Tawarruq Maṣrafī
Main Sharī‘ah Debate
The major issue is:
whether organised tawarruq preserves genuine trade substance or merely replicates conventional cash financing through formal sale contracts.
This remains one of the most debated issues in contemporary Islamic finance.
Introduction
Generally, tawarruq is divided into:
- Tawarruq Fiqhī (Classical Tawarruq);
- Tawarruq Munazzam (Organised Tawarruq);
- Tawarruq Maṣrafī (Banking or Inverse Tawarruq).
- provide liquidity or cash;
- avoid direct ribā-based lending.
- structure;
- level of organisation;
- role of the Islamic financial institution (IFI);
- Sharī‘ah acceptance.
1. Tawarruq Fiqhī (Classical Tawarruq)
Definition
- Classical form discussed in fiqh books.
- Customer buys commodity on deferred payment and independently resells it to third party for spot cash.
Nature of Arrangement
- Free from pre-arrangement.
- Independent transaction.
- Genuine market participation exists.
Parties Involved
Usually involves:
- original seller;
- customer (mutawarriq);
- independent third-party buyer.
Role of Original Seller
- Original seller has:
- no role in resale;
- no connection with final buyer.
Agency
- No agency arrangement.
- Customer personally resells commodity.
Receipt of Cash
- Customer directly receives cash from third-party buyer.
Flow of Transaction
Step 1
Customer buys commodity:
- on deferred payment.
Step 2
Customer independently searches for buyer.
Step 3
Customer sells commodity:
- to third party
for spot cash.
Example
Deferred Purchase Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
- Accepted by majority of classical jurists.
- Less controversial.
- Viewed as closer to genuine trade.
Application
- Traditional marketplace.
- Individual liquidity transactions.
2. Tawarruq Munazzam (Organised Tawarruq)
Definition
- Structured tawarruq organised by Islamic financial institutions.
- Resale process arranged beforehand.
Nature of Arrangement
- Fully organised and pre-arranged.
- Highly structured transaction.
- Often automated in banking operations.
Parties Involved
Usually involves:
- IFI;
- customer;
- brokers;
- commodity traders;
- agents.
- more than three parties usually involved.
Role of IFI
- IFI structures and coordinates transaction.
- IFI may act as agent (wakīl) for customer.
Important Sharī‘ah Clarification
❌ IFI should not repurchase commodity for itself.
Why?
- Because it may become:
Thus:
✅ resale must involve third party.
Agency
- Customer often appoints IFI:
- as agent
to resell commodity.
- as agent
Receipt of Cash
- Customer receives cash through arrangement organised by IFI.
Flow of Transaction
Step 1
IFI purchases commodity.
Step 2
IFI sells commodity to customer:
- on deferred payment.
✅ customer owns commodity.
Step 3
Customer appoints IFI:
- as agent (wakīl)
to resell commodity.
Step 4
IFI sells commodity:
- to third-party buyer
for spot cash.
Step 5
Cash transferred to customer.
Example
Deferred Sale Price
RM120,000.
Spot Cash Resale
RM100,000.
Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Position
- Highly disputed among contemporary scholars.
- Criticised by many international Sharī‘ah councils.
- Permitted in Malaysia subject to strict conditions.
Main Criticism
Critics argue:
- commodity acts merely as intermediary;
- process highly artificial;
- resembles conventional financing;
- lacks genuine trading substance.
Application
- Islamic banking financing;
- deposits;
- liquidity management;
- treasury operations.
3. Tawarruq Maṣrafī (Banking or Inverse Tawarruq)
Definition
- Reverse version of organised tawarruq.
- IFI becomes liquidity seeker (mutawarriq).
- Customer becomes liquidity provider/depositor.
Nature of Arrangement
- Organised banking structure.
- Mainly used for deposits and liquidity mobilisation.
Parties Involved
Usually involves:
- IFI;
- depositor/customer;
- brokers;
- commodity traders.
Role of IFI
- IFI seeks funding from customer.
- IFI manages transaction structure.
Agency
- Agency arrangements commonly used.
Receipt of Cash
- IFI obtains liquidity/funding.
- Customer receives investment return or profit.
Flow of Transaction
Step 1
Customer deposits money with IFI.
Step 2
IFI purchases commodity.
Step 3
IFI sells commodity:
- on deferred basis.
Step 4
Commodity resold for spot cash.
Example
Spot Commodity Price
RM200,000.
Deferred Sale Price
RM220,000.
Difference
220{,}000 - 200{,}000 = 20{,}000
220{,}000 - 200{,}000 = 20{,}000
Sharī‘ah Position
- Used extensively in Islamic banking.
- Still subject to contemporary Sharī‘ah criticism regarding substance.
Application
- Islamic deposit products;
- interbank liquidity management;
- treasury funding.
Main Differences Between the Types
Tawarruq Fiqhī
- Independent resale.
- No pre-arrangement.
- Customer personally sells commodity.
Tawarruq Munazzam
- Fully organised.
- IFI arranges resale.
- Customer often appoints IFI as agent.
Tawarruq Maṣrafī
- Reverse structure.
- IFI seeks liquidity from customer deposits.
Main Sharī‘ah Debate
The major issue is:
whether organised tawarruq preserves genuine trade substance or merely replicates conventional cash financing through formal sale contracts.
This remains one of the most debated issues in contemporary Islamic finance.
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