Islamic Contract -Comparison Type of Tawarruq

Islamic Contract -Comparison of the Types of Tawarruq
Introduction
Generally, tawarruq is divided into:

1. Tawarruq Fiqhī (Classical Tawarruq);
2. Tawarruq Munazzam (Organised Tawarruq);
3. Tawarruq Maṣrafī (Banking or Inverse Tawarruq).

All three types aim to:

• provide liquidity or cash;
• avoid direct ribā-based lending.

However, they differ in:

• 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:

1. original seller;
2. customer (mutawarriq);
3. 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.

Thus:

• 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:

Bay‘ al-‘Īnah.
Thus:
✅ resale must involve third party.


Agency

• Customer often appoints IFI:
  • as agent
    to resell commodity.

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.

Now:
✅ 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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