Islamic Contract – Types of Tawarruq (Corrected Explanation)

Islamic Contract – Types of Tawarruq (Corrected Explanation)
Introduction
Generally, tawarruq is divided into:

1. Classical tawarruq (tawarruq fiqhī);
2. Organised tawarruq (tawarruq munaẓẓam);
3. Banking or inverse tawarruq (tawarruq maṣrafī).

The major difference between them concerns:

• who arranges the resale;
• whether the resale is independent;
• the role of the Islamic financial institution.

1. Classical Tawarruq (
Tawarruq Fiqhī
)
Definition
According to:
International Islamic Fiqh Academy (IIFA-OIC),
classical tawarruq refers to:
a person purchasing a commodity on deferred payment and independently selling it to a third party for spot cash in order to obtain liquidity.


Main Features
✅ customer independently resells commodity;
✅ no organised resale arrangement;
✅ no pre-arranged broker structure;
✅ genuine market participation exists.


Case Scenario 1 – Classical Tawarruq
Step 1
Ahmad buys:

• metal commodity
  from trader:
• RM120,000 deferred payment.

Step 2
Ahmad independently searches market and sells commodity:

• to another trader
  for:
• RM100,000 cash.

Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000


Result
Ahmad:
✅ receives liquidity;
✅ personally conducts resale transaction.


Critical Analysis
This form is generally viewed as:
✅ less controversial,
because:

• resale is genuinely independent;
• customer bears ownership and resale responsibility.

2. Organised Tawarruq (
Tawarruq Munazzam
)
Correct Definition
Organised tawarruq does NOT mean:
❌ the bank directly resells its own commodity after sale.
Rather:

1. the bank sells commodity to customer on deferred basis;
2. customer becomes owner of commodity;
3. customer then:
   • either resells independently;
   • or appoints bank as agent (wakīl)
     to resell commodity to third party.

Main Features
✅ structured by Islamic bank;
✅ resale process pre-arranged;
✅ customer often appoints bank as selling agent;
✅ third-party buyer usually already identified.


Correct Organised Tawarruq Case Scenario
Step 1
Islamic bank purchases commodity:

• RM100,000 spot.

Step 2
Bank sells commodity to customer:

• RM120,000 deferred payment.

Now:
✅ customer legally owns commodity.


Step 3
Customer appoints bank:

• as agent (wakīl)
  to sell commodity.

Step 4
Bank, acting as customer’s agent,
sells commodity:

• to third-party broker
  for:
• RM100,000 cash.

Step 5
Cash proceeds:

• transferred to customer.

Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000


Important Clarification
The bank:
❌ should not directly repurchase commodity for itself,
because that would resemble:
bay‘ al-‘īnah.
Instead:
✅ customer owns commodity first;
✅ resale occurs to third party;
✅ bank may only act as agent if appointed.


Critical Analysis
Organised tawarruq remains controversial because:

• resale process is often:
  • pre-arranged;
  • highly automated;
  • commercially artificial.

Critics argue:

• commodity merely acts as:

temporary intermediary for liquidity generation.


Sharī‘ah Concern
The concern is:
despite formal separation of contracts,
the economic substance may resemble:

• conventional financing;
• synthetic cash generation.

3. Banking or Inverse Tawarruq (
Tawarruq Maṣrafī
)
Definition
This is:
the reverse version of organised tawarruq.
Here:

• the bank becomes:

the mutawarriq (liquidity seeker),
while:

• customer/depositor provides funds.

This structure is commonly used for:
✅ Islamic deposit products.


Case Scenario 3 – Inverse Tawarruq Deposit
Step 1
Customer places deposit:

• RM200,000
  with Islamic bank.

Step 2
Bank purchases commodity:

• RM200,000 spot.

Step 3
Commodity sold by bank:

• on deferred basis
  for:
• RM220,000.

Step 4
Commodity resold in market for cash.


Profit Difference
220{,}000 - 200{,}000 = 20{,}000
220{,}000 - 200{,}000 = 20{,}000


Result
Customer:
✅ earns deposit return.
Bank:
✅ obtains liquidity funding.


Comparative Summary
Type
Who Resells Commodity?
Nature

Classical Tawarruq
Customer independently
Less controversial

Organised Tawarruq
Customer or bank as agent
Highly structured

Inverse Tawarruq
Bank as liquidity seeker
Deposit mobilisation


Core Sharī‘ah Debate
The main issue is:
whether organised tawarruq represents:

• genuine commodity trading,
  or
• merely organised liquidity engineering.

Supporters’ View
Supporters argue:
✅ ownership transfers occur;
✅ contracts are independently valid;
✅ third-party resale exists.


Critics’ View
Critics argue:
❌ excessive automation and pre-arrangement remove genuine trading substance.
Thus:

• organised tawarruq may:

economically resemble conventional lending structures.


Overall Conclusion
In organised tawarruq:
✅ the customer must first own the commodity;
✅ resale should be to a third party;
✅ the bank may only resell as agent if appointed by customer.
If:

• the bank directly repurchases the commodity for itself,
  the structure risks becoming:

bay‘ al-‘īnah rather than tawarruq.

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