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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:
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:
Meaning:
✅ tawarruq may remain legally valid.
Important Sharī‘ah Condition
The arrangement must:
❌ not result in prohibited ‘īnah.
Particularly:
Critical Analysis
The symposium adopted:
a form-based Sharī‘ah approach.
Meaning:
✅ 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:
Why This Is Important
According to the Sharī‘ah Board:
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:
Main Sharī‘ah Concern
Even Al Rajhi recognised:
3. Kuwait Finance House (2011)
Position
Kuwait Finance House permitted:
tawarruq structures for banking products.
Important Recommendation
However:
Why?
Because:
Critical Analysis
This demonstrates concern regarding:
Main Sharī‘ah Concern
The concern is:
when IFI controls too much of transaction process,
the arrangement may become:
Example of Problematic Structure
Step 1
IFI sells commodity to customer.
Step 2
Customer immediately appoints IFI:
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:
Critical Analysis
Dubai Islamic Bank recognised:
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:
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.
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:
Meaning:
- outwardly:
- ownership transfer exists;
- sale contracts exist;
- commodity transactions occur.
✅ 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:
Critical Analysis
The symposium adopted:
a form-based Sharī‘ah approach.
Meaning:
- unless clear evidence proves:
- artificiality;
- collusion;
- fictitious trading,
✅ 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.
- transaction avoids becoming:
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.
- 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:
Why?
Because:
- agency arrangements may:
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:
Critical Analysis
Dubai Islamic Bank recognised:
- agency structures may blur distinction between:
- tawarruq;
- Bay‘ al-‘Īnah.
- 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.
- most institutions also recognise:
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