Islamic Contract -Islamic Finance Institutions’ Views on Organised Tawarruq

Islamic Contract -Islamic Finance Institutions’ Views on Organised Tawarruq
Introduction
Several major Islamic financial institutions and Sharī‘ah boards have discussed:
the permissibility of organised tawarruq in Islamic banking.
Although many institutions permit it:

• their approvals are usually:
  • conditional;
  • restrictive;
  • accompanied by warnings against excessive use.

The major concern remains:
avoiding prohibited Bay‘ al-‘Īnah and fictitious transactions.


1. Dallah Albaraka Symposium (2002)
Position
Dallah Albaraka resolved that:
the current practice of tawarruq in Islamic banking is permissible.


Main Reason for Permissibility
The symposium stated:

• there is:

no clear evidence proving fictitiousness in the tawarruq transaction.
Meaning:

• outwardly:
  • ownership transfer exists;
  • sale contracts exist;
  • commodity transactions occur.

Thus:
✅ tawarruq may remain legally valid.


Important Sharī‘ah Condition
The arrangement must:
❌ not result in prohibited ‘īnah.
Particularly:

• third-party involvement must not merely disguise:

sale and buy-back arrangement.


Critical Analysis
The symposium adopted:
a form-based Sharī‘ah approach.
Meaning:

• unless clear evidence proves:
  • artificiality;
  • collusion;
  • fictitious trading,

the transaction remains:
✅ presumptively valid.


Main Concern
The concern is:
whether intermediary involvement creates hidden Bay‘ al-‘Īnah.


2. Al Rajhi Bank Sharī‘ah Board (2010)
Position
Al Rajhi Bank approved:
organised tawarruq practised through Bursa Suq Al-Sila’ (BSAS).


Reason for Approval
The Sharī‘ah Board stated that:
✅ customer possesses genuine freedom regarding the commodity.
The customer may:

• keep commodity;
• take physical delivery;
• leave commodity on platform;
• appoint bank to sell commodity.

Why This Is Important
According to the Sharī‘ah Board:

• genuine customer choice indicates:
  ✅ real ownership;
  ✅ real rights over commodity.

Thus:

• transaction avoids becoming:

purely fictitious paper trade.


Important Restriction
Despite approving tawarruq,
the Sharī‘ah Board stressed:
tawarruq should only be used when no better Sharī‘ah alternatives exist.


Critical Analysis
This reflects:
cautious permissibility.
Meaning:

• tawarruq accepted because of:
  • commercial necessity;
  • practical banking needs.

But:

• it should not dominate Islamic finance.

Main Sharī‘ah Concern
Even Al Rajhi recognised:

• excessive tawarruq usage may:
  ❌ weaken genuine Islamic finance objectives.

3. Kuwait Finance House (2011)
Position
Kuwait Finance House permitted:
tawarruq structures for banking products.


Important Recommendation
However:

• Kuwait Finance House suggested:

removing agency (wakālah) elements.


Why?
Because:

• agency arrangements may:

create resemblance to ribā or ‘īnah.


Critical Analysis
This demonstrates concern regarding:

• excessive IFI involvement;
• pre-arranged resale;
• artificial transaction flow.

Main Sharī‘ah Concern
The concern is:
when IFI controls too much of transaction process,
the arrangement may become:

• economically circular;
• commercially artificial.

Example of Problematic Structure
Step 1
IFI sells commodity to customer.


Step 2
Customer immediately appoints IFI:

• to resell commodity.

Step 3
IFI arranges instant resale through pre-arranged broker.


Critics’ Concern
Commodity may merely circulate:
❌ symbolically;
❌ temporarily;
❌ without genuine market intention.


4. Dubai Islamic Bank (2005)
Position
Dubai Islamic Bank adopted:
similar position to Kuwait Finance House and Al Rajhi Bank.


Conditions for Permissibility
Dubai Islamic Bank permitted tawarruq provided:
✅ arrangement remains free from prohibited ‘īnah.


Main Concern
The concern particularly arises when:

• intermediary or agent involvement:

effectively recreates sale-and-buy-back arrangement.


Critical Analysis
Dubai Islamic Bank recognised:

• agency structures may blur distinction between:
  • tawarruq;
  • Bay‘ al-‘Īnah.

Thus:

• strong safeguards required.

Overall Comparative Notes
Common Similarities Among IFIs
Most IFIs:
✅ conditionally permit tawarruq;
✅ require genuine ownership transfer;
✅ require customer freedom over commodity;
✅ prohibit direct ‘īnah structures.


Common Concerns
All institutions express concern regarding:
❌ fictitious trading;
❌ artificial resale;
❌ excessive agency involvement;
❌ disguised Bay‘ al-‘Īnah.


Agency (
Wakālah
) as Major Sharī‘ah Issue
The major debate concerns:
whether IFI involvement as agent weakens genuine commercial independence.


Supporters’ View
Supporters argue:
✅ operational necessity requires agency;
✅ modern banking needs efficiency;
✅ ownership and sale still legally occur.


Critics’ View
Critics argue:
❌ excessive agency creates synthetic liquidity structures;
❌ resale becomes pre-arranged and artificial;
❌ commodity merely acts as legal intermediary.


Main Regulatory Trend
Even institutions permitting tawarruq generally:
✅ encourage minimisation of tawarruq use;
✅ prefer alternative Sharī‘ah contracts where possible;
✅ caution against overdependence on debt-based structures.


Overall Conclusion
Major Islamic financial institutions generally:
permit organised tawarruq conditionally,
provided:

• genuine ownership exists;
• customer retains real rights over commodity;
• prohibited Bay‘ al-‘Īnah avoided;
• fictitious transactions absent.

However:

• most institutions also recognise:

organised tawarruq should remain limited and carefully regulated due to continuing Sharī‘ah concerns regarding substance and resemblance to ribā.

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