- Published on
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:
- Published on
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.
- Published on
Islamic Contract – Types of Tawarruq (Corrected Explanation)
Introduction
Generally, tawarruq is divided into:
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:
Step 2
Ahmad independently searches market and sells commodity:
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:
2. Organised Tawarruq (
Tawarruq Munazzam
)
Correct Definition
Organised tawarruq does NOT mean:
❌ the bank directly resells its own commodity after sale.
Rather:
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:
Step 2
Bank sells commodity to customer:
✅ customer legally owns commodity.
Step 3
Customer appoints bank:
Step 4
Bank, acting as customer’s agent,
sells commodity:
Step 5
Cash proceeds:
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:
Sharī‘ah Concern
The concern is:
despite formal separation of contracts,
the economic substance may resemble:
3. Banking or Inverse Tawarruq (
Tawarruq Maṣrafī
)
Definition
This is:
the reverse version of organised tawarruq.
Here:
while:
✅ Islamic deposit products.
Case Scenario 3 – Inverse Tawarruq Deposit
Step 1
Customer places deposit:
Step 2
Bank purchases commodity:
Step 3
Commodity sold by bank:
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:
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:
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:
Introduction
Generally, tawarruq is divided into:
- Classical tawarruq (tawarruq fiqhī);
- Organised tawarruq (tawarruq munaẓẓam);
- Banking or inverse tawarruq (tawarruq maṣrafī).
- 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:
- the bank sells commodity to customer on deferred basis;
- customer becomes owner of commodity;
- 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.
✅ 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.
- commodity merely acts as:
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:
while:
- customer/depositor provides funds.
✅ 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:
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:
- Published on
Islamic Contract – Arguments Against the Use of Tawarruq in the Banking System
Q1: Why do many scholars oppose organised tawarruq in Islamic banking?
Answer
Opponents argue that:
organised tawarruq may formally appear Sharī‘ah-compliant,
but substantively replicates:
conventional interest-based financing.
Their objections focus on:
✅ economic substance;
✅ anti-ribā objectives;
✅ misuse of sale contracts;
✅ artificial trading arrangements.
1. Tawarruq’s Real Objective Is Cash-for-Cash Financing
Argument
Critics argue:
tawarruq should be evaluated according to its true objective,
not merely its contractual form.
According to them:
Case Scenario 1 – Organised Tawarruq Financing
A customer needs:
Step 1
Islamic bank sells commodity:
Step 2
Customer immediately sells commodity:
Financial Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Opponents’ Analysis
Critics argue:
Thus:
Critical Analysis
Opponents adopt:
substance-over-form analysis.
Meaning:
2. Tawarruq Leads to the Same Result as Ribā
Argument
Opponents argue:
even if contractual form differs,
the economic outcome remains substantially similar to ribā.
Case Scenario 2 – Conventional Loan Comparison
Conventional Loan
Borrow:
Organised Tawarruq
Receive:
Critics’ Conclusion
Economically:
Thus:
Critical Analysis
Critics argue:
3. Organised Tawarruq Resembles Bay‘ al-‘Īnah
Argument
Opponents argue:
organised tawarruq effectively resembles ‘īnah.
Why?
Because:
while:
Comparison With ‘Īnah
Bay‘ al-‘Īnah
Seller repurchases same asset directly.
Organised Tawarruq
Third-party broker often inserted,
but:
Case Scenario 3 – Organised Commodity Cycle
Step 1
Bank sells commodity:
Step 2
Customer appoints bank/broker:
Step 3
Commodity circulates back into market system repeatedly.
Critics’ Analysis
Opponents argue:
The effective cause (‘illah) remains:
immediate cash for larger deferred obligation.
Critical Analysis
Many contemporary Sharī‘ah councils:
4. Tawarruq Is Not Genuine Trade-Based Finance
Argument
Critics argue:
tawarruq does not meaningfully contribute to:
Case Scenario 4 – Commodity Certificate Trading
A bank repeatedly uses:
Opponents’ Analysis
Critics argue:
rather than:
genuine trade assets.
Critical Analysis
Opponents claim:
5. Commodities in Tawarruq May Be Artificial or Defective
Argument
Critics argue:
Case Scenario 5 – Recycled Commodity
The same metal inventory:
Opponents’ Analysis
Critics argue:
Thus:
Critical Analysis
This raises concerns regarding:
✅ genuine ownership;
✅ real possession;
✅ commercial authenticity.
Q2: What is the broader criticism against tawarruq-based Islamic banking?
Answer
Critics argue:
excessive tawarruq dominance pushes Islamic banking toward debt replication rather than true Islamic economic transformation.
Concern About Islamic Banking Direction
Islamic finance was intended to promote:
✅ equity participation;
✅ profit-sharing;
✅ productive economic activity;
✅ social justice.
However:
Comparative Critical Analysis
Supporters of Tawarruq
Emphasise:
✅ legal validity;
✅ commercial necessity;
✅ liquidity solutions;
✅ banking competitiveness.
Opponents of Tawarruq
Emphasise:
✅ economic substance;
✅ maqāṣid al-sharī‘ah;
✅ anti-ribā objectives;
✅ authentic trade and production.
Core Sharī‘ah Debate
The fundamental debate is:
Does organised tawarruq represent:
Contemporary Regulatory Trend
Modern Islamic finance regulators increasingly encourage:
✅ diversification of contracts;
✅ stronger real-sector linkage;
✅ reduction of excessive tawarruq dependence;
✅ value-based Islamic finance.
Overall Conclusion
Opponents of organised tawarruq argue that:
conventional ribā-based financing.
Therefore:
Q1: Why do many scholars oppose organised tawarruq in Islamic banking?
Answer
Opponents argue that:
organised tawarruq may formally appear Sharī‘ah-compliant,
but substantively replicates:
conventional interest-based financing.
Their objections focus on:
✅ economic substance;
✅ anti-ribā objectives;
✅ misuse of sale contracts;
✅ artificial trading arrangements.
1. Tawarruq’s Real Objective Is Cash-for-Cash Financing
Argument
Critics argue:
tawarruq should be evaluated according to its true objective,
not merely its contractual form.
According to them:
- the real purpose of organised tawarruq is:
Case Scenario 1 – Organised Tawarruq Financing
A customer needs:
- RM100,000 cash.
Step 1
Islamic bank sells commodity:
- RM120,000 deferred.
Step 2
Customer immediately sells commodity:
- RM100,000 spot cash.
Financial Difference
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Opponents’ Analysis
Critics argue:
- the commodity is not genuinely intended for use or trade;
- the real exchange is:
Thus:
- tawarruq economically functions similarly to:
Critical Analysis
Opponents adopt:
substance-over-form analysis.
Meaning:
- Sharī‘ah should examine:
- economic reality;
- commercial intention;
not merely: - legal documentation.
2. Tawarruq Leads to the Same Result as Ribā
Argument
Opponents argue:
even if contractual form differs,
the economic outcome remains substantially similar to ribā.
Case Scenario 2 – Conventional Loan Comparison
Conventional Loan
Borrow:
- RM100,000.
- RM120,000 later.
Organised Tawarruq
Receive:
- RM100,000 cash.
- RM120,000 deferred.
Critics’ Conclusion
Economically:
- both arrangements produce:
Thus:
- organised tawarruq may merely:
Critical Analysis
Critics argue:
- Sharī‘ah prohibition of ribā concerns:
✅ substance;
✅ exploitation;
✅ monetisation of debt.
- changing contractual labels alone does not necessarily eliminate ribā concerns.
3. Organised Tawarruq Resembles Bay‘ al-‘Īnah
Argument
Opponents argue:
organised tawarruq effectively resembles ‘īnah.
Why?
Because:
- both structures aim at:
while:
- deferred obligation exceeds immediate cash received.
Comparison With ‘Īnah
Bay‘ al-‘Īnah
Seller repurchases same asset directly.
Organised Tawarruq
Third-party broker often inserted,
but:
- overall financing objective remains similar.
Case Scenario 3 – Organised Commodity Cycle
Step 1
Bank sells commodity:
- RM150,000 deferred.
Step 2
Customer appoints bank/broker:
- to resell commodity immediately.
Step 3
Commodity circulates back into market system repeatedly.
Critics’ Analysis
Opponents argue:
- intermediary structure merely:
The effective cause (‘illah) remains:
immediate cash for larger deferred obligation.
Critical Analysis
Many contemporary Sharī‘ah councils:
- prohibit organised tawarruq because:
4. Tawarruq Is Not Genuine Trade-Based Finance
Argument
Critics argue:
tawarruq does not meaningfully contribute to:
- real economic production;
- circulation of useful goods;
- genuine commercial activity.
- it creates:
Case Scenario 4 – Commodity Certificate Trading
A bank repeatedly uses:
- warehouse commodity certificates.
- remain untouched in storage;
- circulate only through documentation.
Opponents’ Analysis
Critics argue:
- the commodities become:
rather than:
genuine trade assets.
Critical Analysis
Opponents claim:
- Islamic finance should promote:
✅ real trade;
✅ productive investment;
✅ risk-sharing;
✅ asset-backed economic activity.
- excessive tawarruq may:
❌ imitate debt-based conventional banking.
5. Commodities in Tawarruq May Be Artificial or Defective
Argument
Critics argue:
- tawarruq commodities are often:
- merely warehouse certificates;
- repeatedly recycled commodities;
- defective goods with little genuine market demand.
Case Scenario 5 – Recycled Commodity
The same metal inventory:
- repeatedly circulates through thousands of tawarruq transactions.
- actually intends to use or possess commodity physically.
Opponents’ Analysis
Critics argue:
- the commodity only exists to:
Thus:
- trade becomes:
❌ artificial and disconnected from real economy.
Critical Analysis
This raises concerns regarding:
✅ genuine ownership;
✅ real possession;
✅ commercial authenticity.
Q2: What is the broader criticism against tawarruq-based Islamic banking?
Answer
Critics argue:
excessive tawarruq dominance pushes Islamic banking toward debt replication rather than true Islamic economic transformation.
Concern About Islamic Banking Direction
Islamic finance was intended to promote:
✅ equity participation;
✅ profit-sharing;
✅ productive economic activity;
✅ social justice.
However:
- excessive reliance on tawarruq may:
❌ mimic conventional debt financing systems.
Comparative Critical Analysis
Supporters of Tawarruq
Emphasise:
✅ legal validity;
✅ commercial necessity;
✅ liquidity solutions;
✅ banking competitiveness.
Opponents of Tawarruq
Emphasise:
✅ economic substance;
✅ maqāṣid al-sharī‘ah;
✅ anti-ribā objectives;
✅ authentic trade and production.
Core Sharī‘ah Debate
The fundamental debate is:
Does organised tawarruq represent:
- genuine Sharī‘ah-compliant trade,
or - a legal mechanism replicating conventional lending?
Contemporary Regulatory Trend
Modern Islamic finance regulators increasingly encourage:
✅ diversification of contracts;
✅ stronger real-sector linkage;
✅ reduction of excessive tawarruq dependence;
✅ value-based Islamic finance.
Overall Conclusion
Opponents of organised tawarruq argue that:
- despite outward contractual compliance,
its:
❌ economic substance;
❌ liquidity objective;
❌ repetitive commodity circulation
conventional ribā-based financing.
Therefore:
- many scholars and international Sharī‘ah bodies continue to:
❌ discourage or prohibit organised tawarruq structures in Islamic banking.
- Published on
Islamic Contract – Arguments Supporting the Use of Tawarruq in the Banking System
Q1: Why do some scholars and Islamic finance practitioners support tawarruq?
Answer
Scholars who permit tawarruq in the banking system argue that:
tawarruq is a lawful trade-based mechanism that provides liquidity without directly engaging in ribā.
They rely on:
✅ Qur’ānic principles;
✅ Prophetic traditions;
✅ general permissibility of trade;
✅ commercial necessity;
✅ practical financial needs.
1. Tawarruq Falls Under the General Permissibility of Trade
Argument
Supporters argue that Allah (SWT) states:
“Allah has permitted trade and prohibited ribā.”
(Qur’ān 2:275)
Thus:
Application to Tawarruq
Tawarruq:
✅ involves sale contracts;
✅ contains identifiable commodities;
✅ fulfils legal contractual requirements.
Therefore:
Case Scenario 1 – Personal Liquidity Financing
A customer requires:
Step 1
Islamic bank sells commodity:
Step 2
Customer sells commodity:
Difference
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Supporters’ Analysis
Supporters argue:
Critical Analysis
Critics respond:
Thus:
2. Hadith of Dates Exchange Supports Restructuring Into Sharī‘ah-Compliant Form
Argument
Supporters rely on the famous hadith narrated by:
Hadith Summary
A man exchanged:
Supporters’ Reasoning
Supporters argue:
an unlawful structure may become permissible if reorganised into Sharī‘ah-compliant sale contracts.
Thus:
Case Scenario 2 – Restructured Financing
Instead of:
❌ borrowing RM100,000 with interest,
the customer:
Supporters’ View
The financing becomes:
✅ trade-based;
✅ contractually Sharī‘ah-compliant.
Critical Analysis
Critics argue:
3. Original Rule in Transactions Is Permissibility
Argument
Supporters invoke the legal maxim:
“The original rule in commercial transactions is permissibility.”
Thus:
Burden of Proof Argument
Supporters argue:
those prohibiting tawarruq bear burden of proof.
Because:
Critical Analysis
Critics counter that:
4. Traders Aim to Increase Wealth Through Commodities
Argument
Supporters argue:
profit-making itself is not prohibited.
In ordinary trade:
Distinction Made by Supporters
Ordinary Trader
Aims:
Mutawarriq
Aims:
Case Scenario 3 – Commodity Intermediary
A business purchases:
Supporters’ Analysis
The commodity:
✅ lawfully intermediates liquidity generation.
Critical Analysis
Critics argue:
5. Necessity and Public Need Support Tawarruq
Argument
Supporters argue:
not everyone can access benevolent loans (qard hasan).
Thus:
Case Scenario 4 – Financial Hardship
A family urgently needs:
Islamic bank offers:
Supporters’ View
Tawarruq:
✅ prevents resort to conventional ribā loans.
Critical Analysis
This argument is based on:
6. Tawarruq Solves Liquidity Problems
Argument
Supporters argue:
tawarruq effectively addresses liquidity shortages.
It benefits:
✅ individuals;
✅ corporations;
✅ banks;
✅ governments.
Practical Applications
Tawarruq is used for:
Case Scenario 5 – Interbank Liquidity
An Islamic bank faces:
Supporters’ Analysis
Tawarruq:
✅ stabilises Islamic financial markets;
✅ enhances operational continuity.
Critical Analysis
Critics worry:
7. Islamic Banks Must Remain Competitive
Argument
Supporters argue:
Islamic banks must remain commercially competitive with conventional banks.
Therefore:
Case Scenario 6 – Banking Competition
Customers require:
Supporters’ View
Tawarruq:
✅ allows Islamic banking growth;
✅ expands financial inclusion;
✅ offers Sharī‘ah-based alternatives.
Critical Analysis
Critics caution:
Thus:
Overall Critical Analysis of Supporters’ Arguments
Main Supporting Themes
Supporters emphasise:
✅ general permissibility of trade;
✅ legal validity of contracts;
✅ public need and necessity;
✅ financial practicality;
✅ banking competitiveness.
Main Counterarguments
Critics emphasise:
❌ substance-over-form concerns;
❌ synthetic liquidity generation;
❌ resemblance to conventional lending;
❌ weakening of genuine trade-based finance.
Core Sharī‘ah Debate
The fundamental issue remains:
Does organised tawarruq represent:
Contemporary Regulatory Trend
Modern regulators increasingly seek:
✅ reduction of excessive tawarruq dependency;
✅ diversification of Sharī‘ah contracts;
✅ stronger real-economy linkage;
✅ value-based Islamic finance development.
Q1: Why do some scholars and Islamic finance practitioners support tawarruq?
Answer
Scholars who permit tawarruq in the banking system argue that:
tawarruq is a lawful trade-based mechanism that provides liquidity without directly engaging in ribā.
They rely on:
✅ Qur’ānic principles;
✅ Prophetic traditions;
✅ general permissibility of trade;
✅ commercial necessity;
✅ practical financial needs.
1. Tawarruq Falls Under the General Permissibility of Trade
Argument
Supporters argue that Allah (SWT) states:
“Allah has permitted trade and prohibited ribā.”
(Qur’ān 2:275)
Thus:
- all forms of trade are generally permissible,
unless:
❌ clear Sharī‘ah evidence specifically prohibits them.
Application to Tawarruq
Tawarruq:
✅ involves sale contracts;
✅ contains identifiable commodities;
✅ fulfils legal contractual requirements.
Therefore:
- supporters argue:
Case Scenario 1 – Personal Liquidity Financing
A customer requires:
- RM50,000 cash.
Step 1
Islamic bank sells commodity:
- RM60,000 deferred.
Step 2
Customer sells commodity:
- RM50,000 cash to third party.
Difference
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Supporters’ Analysis
Supporters argue:
- this arrangement remains:
✅ sale-based;
✅ contractually valid;
✅ distinct from direct interest lending.
Critical Analysis
Critics respond:
- although legally structured as sales,
the economic substance may still resemble:
Thus:
- debate centres on:
2. Hadith of Dates Exchange Supports Restructuring Into Sharī‘ah-Compliant Form
Argument
Supporters rely on the famous hadith narrated by:
- Abu Sa’id al-Khudri
and - Abu Hurairah.
Hadith Summary
A man exchanged:
- lower-quality dates
for: - better-quality dates
unequally.
- it involved ribā.
- sell lower-quality dates for cash;
- use cash to buy better-quality dates.
Supporters’ Reasoning
Supporters argue:
an unlawful structure may become permissible if reorganised into Sharī‘ah-compliant sale contracts.
Thus:
- tawarruq restructures liquidity needs into:
✅ lawful sale arrangements.
Case Scenario 2 – Restructured Financing
Instead of:
❌ borrowing RM100,000 with interest,
the customer:
- buys commodity on deferred basis;
- sells commodity for cash.
Supporters’ View
The financing becomes:
✅ trade-based;
✅ contractually Sharī‘ah-compliant.
Critical Analysis
Critics argue:
- unlike the hadith case,
modern organised tawarruq may:- lack genuine trading intention;
- merely replicate cash financing.
3. Original Rule in Transactions Is Permissibility
Argument
Supporters invoke the legal maxim:
“The original rule in commercial transactions is permissibility.”
Thus:
- unless there is:
❌ clear prohibition,
transactions remain lawful.
Burden of Proof Argument
Supporters argue:
those prohibiting tawarruq bear burden of proof.
Because:
- they seek exception from general permissibility.
Critical Analysis
Critics counter that:
- organised tawarruq may violate:
- anti-ribā objectives;
- maqāṣid al-sharī‘ah;
even if no explicit textual prohibition exists.
4. Traders Aim to Increase Wealth Through Commodities
Argument
Supporters argue:
profit-making itself is not prohibited.
In ordinary trade:
- traders buy and sell commodities to:
- increase wealth.
- tawarruq uses commodities as:
Distinction Made by Supporters
Ordinary Trader
Aims:
- profit through trade.
Mutawarriq
Aims:
- obtain liquidity/cash.
- both use lawful sale contracts.
Case Scenario 3 – Commodity Intermediary
A business purchases:
- metal commodity on deferred basis.
- commodity for spot cash
to finance operations.
Supporters’ Analysis
The commodity:
✅ lawfully intermediates liquidity generation.
Critical Analysis
Critics argue:
- commodity may merely serve symbolic role;
- no real economic trade objective exists.
5. Necessity and Public Need Support Tawarruq
Argument
Supporters argue:
not everyone can access benevolent loans (qard hasan).
Thus:
- tawarruq provides:
✅ lawful liquidity alternative.
Case Scenario 4 – Financial Hardship
A family urgently needs:
- RM30,000 for medical expenses.
Islamic bank offers:
- tawarruq financing.
Supporters’ View
Tawarruq:
✅ prevents resort to conventional ribā loans.
Critical Analysis
This argument is based on:
- necessity (ḥājah);
- public need;
- financial practicality.
6. Tawarruq Solves Liquidity Problems
Argument
Supporters argue:
tawarruq effectively addresses liquidity shortages.
It benefits:
✅ individuals;
✅ corporations;
✅ banks;
✅ governments.
Practical Applications
Tawarruq is used for:
- treasury operations;
- liquidity management;
- trade deficit financing;
- short-term funding.
Case Scenario 5 – Interbank Liquidity
An Islamic bank faces:
- short-term liquidity shortage.
- tawarruq liquidity arrangement
to provide funding.
Supporters’ Analysis
Tawarruq:
✅ stabilises Islamic financial markets;
✅ enhances operational continuity.
Critical Analysis
Critics worry:
- overreliance on tawarruq may:
- excessively financialise Islamic banking;
- weaken real-sector linkage.
7. Islamic Banks Must Remain Competitive
Argument
Supporters argue:
Islamic banks must remain commercially competitive with conventional banks.
Therefore:
- practical financing alternatives are necessary.
Case Scenario 6 – Banking Competition
Customers require:
- immediate liquidity;
- fast financing products.
- Islamic banks may struggle to:
- compete commercially;
- retain customers.
Supporters’ View
Tawarruq:
✅ allows Islamic banking growth;
✅ expands financial inclusion;
✅ offers Sharī‘ah-based alternatives.
Critical Analysis
Critics caution:
- excessive focus on competitiveness may:
Thus:
- balance between:
- practicality;
- maqāṣid al-sharī‘ah
remains crucial.
Overall Critical Analysis of Supporters’ Arguments
Main Supporting Themes
Supporters emphasise:
✅ general permissibility of trade;
✅ legal validity of contracts;
✅ public need and necessity;
✅ financial practicality;
✅ banking competitiveness.
Main Counterarguments
Critics emphasise:
❌ substance-over-form concerns;
❌ synthetic liquidity generation;
❌ resemblance to conventional lending;
❌ weakening of genuine trade-based finance.
Core Sharī‘ah Debate
The fundamental issue remains:
Does organised tawarruq represent:
- genuine Sharī‘ah-compliant trade,
or - merely a legal mechanism replicating interest financing?
Contemporary Regulatory Trend
Modern regulators increasingly seek:
✅ reduction of excessive tawarruq dependency;
✅ diversification of Sharī‘ah contracts;
✅ stronger real-economy linkage;
✅ value-based Islamic finance development.
- Published on
Islamic Contract – Basic Rules and Conditions of Tawarruq
Q1: What is the first basic rule of tawarruq?
1. Requirements of a Valid Sale Contract
Rule
Tawarruq consists of:
multiple sale and purchase contracts executed successively.
Therefore:
✅ every individual contract must independently satisfy all Sharī‘ah requirements of a valid sale.
Both:
Case Scenario 1 – Valid Tawarruq Structure
Step 1
Islamic bank purchases commodity:
Step 2
Bank sells commodity to customer:
Step 3
Customer sells commodity to third party:
Profit
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Requirement
Each contract must independently fulfil:
✅ offer and acceptance;
✅ ownership;
✅ possession;
✅ certainty of price;
✅ lawful subject matter.
Critical Analysis
If any contract is defective:
❌ the entire tawarruq arrangement may become invalid.
Thus:
Q2: What are the rules regarding the underlying commodity?
2. The Underlying Commodity of Tawarruq
Rule
The commodity used in tawarruq must:
✅ be recognised as valuable by Sharī‘ah;
✅ be identifiable;
✅ be deliverable;
✅ already exist;
✅ be owned by seller during each sale.
AAOIFI Requirement
If the commodity:
✅ detailed description or sample must be provided.
This includes:
BNM Restriction
BNM further states that:
❌ gold;
❌ silver;
❌ currencies;
❌ debts;
❌ assets under construction
cannot be used as tawarruq commodities.
Case Scenario 2 – Invalid Commodity
An Islamic bank structures tawarruq using:
Problem
Currencies are:
❌ not permissible underlying commodities for tawarruq under BNM standards.
Why?
Because:
Valid Scenario
The bank uses:
✅ crude palm oil;
✅ metal commodities;
✅ identifiable tradable assets.
Critical Analysis
The commodity requirement exists to ensure:
tawarruq remains connected to genuine trade activity,
rather than:
Q3: What is the rule regarding the right of delivery?
3. Right of Taking Delivery
Rule
The purchaser in each tawarruq transaction must:
✅ genuinely possess the right to take delivery of the asset.
Neither:
❌ prevent delivery;
❌ force resale of asset.
Case Scenario 3 – Invalid Restriction
The bank contract states:
“Customer is prohibited from taking possession and must immediately resell through bank.”
Problem
The customer:
❌ lacks genuine ownership rights.
This weakens:
Valid Scenario
The customer:
✅ may take physical delivery;
✅ may retain commodity;
✅ may independently decide whether to resell.
Critical Analysis
This condition prevents:
fictitious or paper-only ownership.
Islamic law requires:
✅ genuine ownership consequences;
✅ real rights over asset;
✅ actual transfer of risk and control.
Q4: What is the purpose limitation of tawarruq according to AAOIFI and BNM?
4. Purpose and Application of Tawarruq
AAOIFI Position
AAOIFI takes a:
restrictive approach.
AAOIFI states:
tawarruq should only be used as a last resort.
Mainly when:
AAOIFI Concern
AAOIFI discourages tawarruq becoming:
❌ dominant financing tool;
❌ routine investment mechanism.
BNM Position
In contrast:
Bank Negara Malaysia adopts:
a broader commercial approach.
BNM permits tawarruq for:
✅ deposits;
✅ financing;
✅ investments;
✅ ṣukūk issuance;
✅ liquidity management.
Case Scenario 4 – Malaysian Banking Practice
An Islamic bank offers:
Analysis
Under:
Critical Analysis
This demonstrates:
divergence between global Sharī‘ah approaches.
Main Debate
AAOIFI
Emphasises:
✅ minimising synthetic financing;
✅ preserving genuine trade substance.
BNM
Emphasises:
✅ commercial practicality;
✅ financial market needs;
✅ operational flexibility.
Q5: What is the issue regarding agency (
wakālah
) in tawarruq?
5. Inclusion of Agency
AAOIFI Position
AAOIFI generally:
❌ discourages customers appointing the same IFI as agent to resell commodity.
Unless:
Why AAOIFI Restricts Agency
Because:
BNM Position
BNM allows:
✅ agency arrangements;
✅ including dual agency structures.
What Is Dual Agency?
The Islamic bank may act:
Case Scenario 5 – Dual Agency Tawarruq
Step 1
Bank sells commodity to customer:
Step 2
Customer appoints bank:
Step 3
Bank sells commodity to third party:
Profit Difference
150{,}000 - 130{,}000 = 20{,}000
150{,}000 - 130{,}000 = 20{,}000
Critical Analysis
Critics argue:
Comparative Analysis Between AAOIFI and BNM
AAOIFI Approach
✅ restrictive;
✅ substance-focused;
✅ discourages overuse.
BNM Approach
✅ commercially flexible;
✅ operationally pragmatic;
✅ broader application.
Overall Critical Analysis of Tawarruq
The major Sharī‘ah concern in tawarruq is:
whether transactions represent genuine trade or merely synthetic liquidity generation.
Main Contemporary Debate
Supporters
Argue:
✅ contracts independently valid;
✅ commercial necessity exists.
Critics
Argue:
Modern Regulatory Trend
Contemporary regulators increasingly seek:
✅ stronger commercial substance;
✅ contract diversification;
✅ reduced overreliance on tawarruq structures.
Q1: What is the first basic rule of tawarruq?
1. Requirements of a Valid Sale Contract
Rule
Tawarruq consists of:
multiple sale and purchase contracts executed successively.
Therefore:
✅ every individual contract must independently satisfy all Sharī‘ah requirements of a valid sale.
Both:
- AAOIFI
and - Bank Negara Malaysia
Case Scenario 1 – Valid Tawarruq Structure
Step 1
Islamic bank purchases commodity:
- RM100,000.
Step 2
Bank sells commodity to customer:
- RM120,000 deferred.
Step 3
Customer sells commodity to third party:
- RM100,000 cash.
Profit
120{,}000 - 100{,}000 = 20{,}000
120{,}000 - 100{,}000 = 20{,}000
Sharī‘ah Requirement
Each contract must independently fulfil:
✅ offer and acceptance;
✅ ownership;
✅ possession;
✅ certainty of price;
✅ lawful subject matter.
Critical Analysis
If any contract is defective:
❌ the entire tawarruq arrangement may become invalid.
Thus:
- Islamic finance regulators insist:
Q2: What are the rules regarding the underlying commodity?
2. The Underlying Commodity of Tawarruq
Rule
The commodity used in tawarruq must:
✅ be recognised as valuable by Sharī‘ah;
✅ be identifiable;
✅ be deliverable;
✅ already exist;
✅ be owned by seller during each sale.
AAOIFI Requirement
If the commodity:
- is not physically present during contract signing,
✅ detailed description or sample must be provided.
This includes:
- quantity;
- storage location;
- characteristics.
BNM Restriction
BNM further states that:
❌ gold;
❌ silver;
❌ currencies;
❌ debts;
❌ assets under construction
cannot be used as tawarruq commodities.
Case Scenario 2 – Invalid Commodity
An Islamic bank structures tawarruq using:
- currency exchange itself as commodity.
Problem
Currencies are:
❌ not permissible underlying commodities for tawarruq under BNM standards.
Why?
Because:
- it may create:
- ribā issues;
- artificial monetary exchanges.
Valid Scenario
The bank uses:
✅ crude palm oil;
✅ metal commodities;
✅ identifiable tradable assets.
Critical Analysis
The commodity requirement exists to ensure:
tawarruq remains connected to genuine trade activity,
rather than:
- purely synthetic monetary exchange.
Q3: What is the rule regarding the right of delivery?
3. Right of Taking Delivery
Rule
The purchaser in each tawarruq transaction must:
✅ genuinely possess the right to take delivery of the asset.
Neither:
- AAOIFI;
nor - BNM
❌ prevent delivery;
❌ force resale of asset.
Case Scenario 3 – Invalid Restriction
The bank contract states:
“Customer is prohibited from taking possession and must immediately resell through bank.”
Problem
The customer:
❌ lacks genuine ownership rights.
This weakens:
- real transfer of ownership;
- commercial substance.
Valid Scenario
The customer:
✅ may take physical delivery;
✅ may retain commodity;
✅ may independently decide whether to resell.
Critical Analysis
This condition prevents:
fictitious or paper-only ownership.
Islamic law requires:
✅ genuine ownership consequences;
✅ real rights over asset;
✅ actual transfer of risk and control.
Q4: What is the purpose limitation of tawarruq according to AAOIFI and BNM?
4. Purpose and Application of Tawarruq
AAOIFI Position
AAOIFI takes a:
restrictive approach.
AAOIFI states:
tawarruq should only be used as a last resort.
Mainly when:
- Islamic financial institutions face:
- liquidity difficulties;
- operational survival concerns.
AAOIFI Concern
AAOIFI discourages tawarruq becoming:
❌ dominant financing tool;
❌ routine investment mechanism.
BNM Position
In contrast:
Bank Negara Malaysia adopts:
a broader commercial approach.
BNM permits tawarruq for:
✅ deposits;
✅ financing;
✅ investments;
✅ ṣukūk issuance;
✅ liquidity management.
Case Scenario 4 – Malaysian Banking Practice
An Islamic bank offers:
- tawarruq personal financing;
- tawarruq deposit products;
- tawarruq treasury facilities.
Analysis
Under:
- Malaysian Sharī‘ah framework,
this is:
✅ permissible.
Critical Analysis
This demonstrates:
divergence between global Sharī‘ah approaches.
Main Debate
AAOIFI
Emphasises:
✅ minimising synthetic financing;
✅ preserving genuine trade substance.
BNM
Emphasises:
✅ commercial practicality;
✅ financial market needs;
✅ operational flexibility.
Q5: What is the issue regarding agency (
wakālah
) in tawarruq?
5. Inclusion of Agency
AAOIFI Position
AAOIFI generally:
❌ discourages customers appointing the same IFI as agent to resell commodity.
Unless:
- market intermediation becomes commercially unavoidable.
Why AAOIFI Restricts Agency
Because:
- excessive agency involvement may:
BNM Position
BNM allows:
✅ agency arrangements;
✅ including dual agency structures.
What Is Dual Agency?
The Islamic bank may act:
- as seller’s agent;
and - buyer’s agent
Case Scenario 5 – Dual Agency Tawarruq
Step 1
Bank sells commodity to customer:
- RM150,000 deferred.
Step 2
Customer appoints bank:
- as agent to resell commodity.
Step 3
Bank sells commodity to third party:
- RM130,000 cash.
Profit Difference
150{,}000 - 130{,}000 = 20{,}000
150{,}000 - 130{,}000 = 20{,}000
Critical Analysis
Critics argue:
- excessive bank involvement may:
- reduce genuine market participation;
- create synthetic trading arrangements.
- agency is commercially necessary for:
- operational efficiency;
- modern banking scalability.
Comparative Analysis Between AAOIFI and BNM
AAOIFI Approach
✅ restrictive;
✅ substance-focused;
✅ discourages overuse.
BNM Approach
✅ commercially flexible;
✅ operationally pragmatic;
✅ broader application.
Overall Critical Analysis of Tawarruq
The major Sharī‘ah concern in tawarruq is:
whether transactions represent genuine trade or merely synthetic liquidity generation.
Main Contemporary Debate
Supporters
Argue:
✅ contracts independently valid;
✅ commercial necessity exists.
Critics
Argue:
- organised tawarruq may:
Modern Regulatory Trend
Contemporary regulators increasingly seek:
✅ stronger commercial substance;
✅ contract diversification;
✅ reduced overreliance on tawarruq structures.
- Published on
Islamic Contract – Application of Tawarruq in Islamic Finance
1. What Is the Application of Tawarruq in Islamic Finance?
Answer
Tawarruq is:
one of the most widely used Sharī‘ah contracts in contemporary Islamic finance.
It is extensively utilised to structure:
✅ deposits;
✅ financing facilities;
✅ liquidity management;
✅ debt restructuring;
✅ ṣukūk;
✅ risk management;
✅ hedging products.
2. Why Is Tawarruq Popular in Islamic Finance?
Main Reason
Tawarruq is popular because:
through:
✅ operational flexibility;
✅ scalability;
✅ standardisation for banking products.
3. Practical Applications of Tawarruq
A. Deposit Products
Islamic banks use tawarruq to structure:
Case Scenario 1 – Tawarruq Deposit
A customer deposits:
Example
Spot Commodity Price
RM100,000
Deferred Sale Price
RM105,000
Profit
105{,}000 - 100{,}000 = 5{,}000
105{,}000 - 100{,}000 = 5{,}000
Result
The customer:
✅ receives investment return.
The bank:
✅ obtains funding liquidity.
B. Personal Financing
Tawarruq is widely used in:
Case Scenario 2 – Personal Financing
A customer needs:
Profit
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Result
The customer:
✅ obtains liquidity.
The bank:
✅ earns financing profit.
C. Liquidity Management
Islamic banks use tawarruq for:
Example
An Islamic bank with excess liquidity:
D. Debt Restructuring
Tawarruq may be used:
Case Scenario 3 – Debt Restructuring
A customer struggles to repay:
E. Ṣukūk Structuring
Tawarruq structures may support:
F. Risk Management and Hedging
Tawarruq may also facilitate:
4. Why Has Tawarruq Become Dominant?
Operational Advantages
Tawarruq provides:
✅ liquidity generation;
✅ predictable cash flow;
✅ ease of implementation;
✅ compatibility with modern banking systems.
Thus:
5. BNM’s Concern Regarding Tawarruq Dominance
Regulatory Concern
Bank Negara Malaysia has expressed concern that:
tawarruq has become excessively dominant in Malaysian Islamic finance.
Financial Sector Blueprint 2022–2026
BNM highlighted:
Islamic financial institutions should diversify Sharī‘ah contracts.
The objective is:
✅ broader economic impact;
✅ value-based finance;
✅ wider social benefit.
Why Does BNM Want Diversification?
Overreliance on tawarruq may:
Critical Analysis
Some critics argue:
Example of Criticism
In many tawarruq transactions:
Thus:
6. Practical Shift Encouraged by BNM
BNM encourages Islamic banks to expand usage of:
✅ mushārakah;
✅ muḍārabah;
✅ ijārah;
✅ salam;
✅ istisnā‘;
✅ wakālah-based financing.
Objective of Diversification
The goal is:
to develop a more authentic and socially impactful Islamic finance ecosystem.
7. Critical Sharī‘ah Debate on Tawarruq
Supporters’ View
Supporters argue:
✅ tawarruq fulfils legal Sharī‘ah requirements;
✅ contracts remain valid individually;
✅ commercial necessity exists.
Critics’ View
Critics argue:
Main Sharī‘ah Concern
The debate centres on:
whether tawarruq represents:
Overall Conclusion
Tawarruq remains:
one of the most important and widely used contracts in Islamic finance.
It is heavily utilised for:
1. What Is the Application of Tawarruq in Islamic Finance?
Answer
Tawarruq is:
one of the most widely used Sharī‘ah contracts in contemporary Islamic finance.
It is extensively utilised to structure:
✅ deposits;
✅ financing facilities;
✅ liquidity management;
✅ debt restructuring;
✅ ṣukūk;
✅ risk management;
✅ hedging products.
2. Why Is Tawarruq Popular in Islamic Finance?
Main Reason
Tawarruq is popular because:
- it provides:
through:
- sale-based structures.
✅ operational flexibility;
✅ scalability;
✅ standardisation for banking products.
3. Practical Applications of Tawarruq
A. Deposit Products
Islamic banks use tawarruq to structure:
- fixed deposits;
- term deposits;
- investment accounts.
Case Scenario 1 – Tawarruq Deposit
A customer deposits:
- RM100,000
with Islamic bank.
- purchases commodity;
- sells commodity to customer on deferred basis;
- customer sells commodity for spot cash.
- bank’s profit.
Example
Spot Commodity Price
RM100,000
Deferred Sale Price
RM105,000
Profit
105{,}000 - 100{,}000 = 5{,}000
105{,}000 - 100{,}000 = 5{,}000
Result
The customer:
✅ receives investment return.
The bank:
✅ obtains funding liquidity.
B. Personal Financing
Tawarruq is widely used in:
- Islamic personal financing;
- home financing;
- business financing.
Case Scenario 2 – Personal Financing
A customer needs:
- RM50,000 cash financing.
- purchases commodity;
- sells commodity to customer:
- RM60,000 deferred;
- customer sells commodity in market:
- RM50,000 spot cash.
Profit
60{,}000 - 50{,}000 = 10{,}000
60{,}000 - 50{,}000 = 10{,}000
Result
The customer:
✅ obtains liquidity.
The bank:
✅ earns financing profit.
C. Liquidity Management
Islamic banks use tawarruq for:
- short-term liquidity placement;
- interbank financing;
- treasury management.
Example
An Islamic bank with excess liquidity:
- enters tawarruq transaction with another bank
to: - place short-term funds.
D. Debt Restructuring
Tawarruq may be used:
- to restructure existing financing obligations.
Case Scenario 3 – Debt Restructuring
A customer struggles to repay:
- existing financing of RM200,000.
- tawarruq arrangement
with: - revised deferred payment schedule.
E. Ṣukūk Structuring
Tawarruq structures may support:
- issuance of Islamic investment certificates (ṣukūk).
F. Risk Management and Hedging
Tawarruq may also facilitate:
- Sharī‘ah-compliant hedging;
- liquidity balancing;
- treasury operations.
4. Why Has Tawarruq Become Dominant?
Operational Advantages
Tawarruq provides:
✅ liquidity generation;
✅ predictable cash flow;
✅ ease of implementation;
✅ compatibility with modern banking systems.
Thus:
- Islamic financial institutions heavily rely on it.
5. BNM’s Concern Regarding Tawarruq Dominance
Regulatory Concern
Bank Negara Malaysia has expressed concern that:
tawarruq has become excessively dominant in Malaysian Islamic finance.
Financial Sector Blueprint 2022–2026
BNM highlighted:
Islamic financial institutions should diversify Sharī‘ah contracts.
The objective is:
✅ broader economic impact;
✅ value-based finance;
✅ wider social benefit.
Why Does BNM Want Diversification?
Overreliance on tawarruq may:
- reduce product innovation;
- narrow Sharī‘ah diversity;
- create excessive dependence on:
Critical Analysis
Some critics argue:
- excessive tawarruq usage may:
- replicate conventional financing outcomes;
- weaken trade-based economic substance.
Example of Criticism
In many tawarruq transactions:
- commodities are merely traded briefly;
- parties primarily seek:
Thus:
- critics argue:
6. Practical Shift Encouraged by BNM
BNM encourages Islamic banks to expand usage of:
✅ mushārakah;
✅ muḍārabah;
✅ ijārah;
✅ salam;
✅ istisnā‘;
✅ wakālah-based financing.
Objective of Diversification
The goal is:
to develop a more authentic and socially impactful Islamic finance ecosystem.
7. Critical Sharī‘ah Debate on Tawarruq
Supporters’ View
Supporters argue:
✅ tawarruq fulfils legal Sharī‘ah requirements;
✅ contracts remain valid individually;
✅ commercial necessity exists.
Critics’ View
Critics argue:
- excessive organised tawarruq may:
Main Sharī‘ah Concern
The debate centres on:
whether tawarruq represents:
- genuine trade,
or - synthetic liquidity generation.
Overall Conclusion
Tawarruq remains:
one of the most important and widely used contracts in Islamic finance.
It is heavily utilised for:
- financing;
- deposits;
- liquidity management;
- treasury operations.
- regulators such as BNM increasingly encourage:
✅ diversification of Sharī‘ah contracts;
✅ stronger value-based finance;
✅ reduced dependency on tawarruq-dominated structures.