FACULTY ECONOMICS AND MUAMALAT A212 SEMESTER II, SESSION

2021/2022

MBA 3013

MONEY AND BANKING

INDIVIDUAL ASSIGNMENT

TITLE OF ASSIGNMENT : TAWARRUQ ISSUES AND ACCEPTANCE

AS A PRODUCT OF ISLAMIC FINANCE

NAME : NURUL HUSNA IDRUS

MATRICS NO : 1200832

LECTURE GROUP : KME 3

LECTURER’S NAME : DR. MOHD FAISOL BIN IBRAHIM

 Tawarruq Issues and Acceptance as A Product of Islamic Finance

Nowadays, Islamic financial market has grown in producing many types of products to provide a
similar-to-like service as conventional banking. The specialty of Islamic finance products is they follow the
Shariah regulations or commonly known as Shariah-compliant that free from prohibited elements like usury
(riba), uncertainty (gharar) and gambling (maysir). However, there are also many issues and challenges that
arise upon developing the products from time to time due to different perspectives and debates.
Tawarruq is one of the disputed instruments in Islamic finance that is assumed to have the elements
of usury and legal trick (hilah) by scholars. Tawarruq involves deposit financing, liquidity financing, and
personal financing that is developed based on Murabahah contracts. The basic term of Tawarruq is used to
describe a transaction in which an Islamic bank sells a commodity to a client on a delayed payment basis at
cost plus profit, and the customer then sells the commodity to a third party at a lower price on spot to obtain
quick cash. It is an alteration from Bai’ Al-Inah sale that is clearly repealed because it has the elements of
usury (riba). In Malaysia, the Shariah Committee (SC) oversees the functioning of Tawarruq, and the Shariah
Advisory Council (SAC), the highest Shariah body established within Bank Negara Malaysia (BNM), can be
consulted for assistance to guarantee uniformity in views and practises (Ismon, 2012).
The Tawarruq has received critics and arguments about its procedure from many parties and
scholars. Some of them approved the application of Tawarruq, while some of them denied, saying it practices
prohibited elements in the contact or sale. Some Malaysian financiers feel Tawarruq transactions are a hoax,
with no legitimate sale and no real risk transfer to the goods buyer. Since the beginning of Islamic law, the
benefit (masalih) and disadvantage (mafasid) calculus has been an important element. Certain scholars
condemn Tawarruq because the disadvantages (mafasid) overwhelmed the amount of benefit (masalih) that
one obtains from the contract. Imam Ahmad also explained his disapproval by claiming that this was a forced
person's sale, since Abu Dawood recounted from Ali that the Prophet Muhammad forbade the sale of a forced
person. Additionally, Tawarruq provides no real income where it is creates more new debts than it collects in
cash. This might have a passive influence on the Islamic banking industry's honesty and security in general
implies that the form is still evolving, and that more Shariah Scholar improvement is required. Aljamos, Y.M.,
Jaish, A.A., & Ibrahim, K. (2018)
However, there are also discussions and statements that approve Tawarruq. The principle of
Tawarruq sale is using three or four parties which are the customer, the bank, and the brokers. The primary
distinction between Tawarruq and Bai’ Al-Inah is the types of sales and number of parties involved. I’nah is
a direct sale that only involves two parties where the product is returned to its original seller. This makes the
contract terminated due to the fundamental commodity being a deceptive trade such that the buyer has no
intention of purchasing it. In Tawarruq transactions, there is no need that the underlying sale object be
returned (resold) to the original owner (first seller). Hence, Tawarruq is permissible as it allows sellers to get
liquidity without resorting to usury. Following that, Tawarruq is also approved as a result of the parties' mutual
consent. Every agreement or transaction between two persons is legally allowed in Islam, provided both sides
agree and have mutual permission. This principle was laid down in Al Qur’an: ‘O you who believe! Do not
squander your wealth among yourselves in vanity, except it be a trade by mutual consent’ (An Nisa’ 4 : 29).
(Ismon 2012) Consequently, there are two conditions in a Tawarruq sale where one of the parties will initially
own the item before selling it to the other for cash. This statement is crucial in order for Tawarruq to be lawful.
It must have legal possession of the commodity, with the buyer having entire ownership of the item before
selling it again, meaning that the second sale should not be the same as the first.
In summary, Tawarruq despite being a product of Islamic finance, also receives many challenges to
function properly within the financial market, following the Shariah guidelines. Even so, it is still accepted and
applied by many Islamic banking institutions in Malaysia and globally. Malaysia follows the Fatwa issued by
the Bank Negara's Shari'ah Advisory Council, which legalized organized and reversed Tawarruq. As a result,
Malaysia has been able to create sophisticated Tawarruq solutions for use in all aspects of banking and
financing. However, despite the fact that there is a regulatory and legal structure in place, Tawarruq's
operation, but monitoring and supervising it must be done. Islamic banks are responsible for ensuring that
Islamic finance products are operated in accordance with Islamic law. Ahmad, E. F., Shihama, M., Mohamad
Tarmizi, N. A., Saidu Mudi, S. M., Djama, S. I., & Muneeza, A. (2017).
Infographic
References
1) Aljamos, Y.M., Jaish, A.A., & Ibrahim, K. (2018). Operationalizing tawarruq by Islamic banks in
Malaysia:issues, challenges, and way forward.
https://www.semanticscholar.org/paper/Operationalizing-tawarruq-by-Islamic-banks-in-and-
Aljamos-Jaish/4c138323c126b33916dac07696ba242404442d30
2) Ahmad, E. F., Shihama, M., Mohamad Tarmizi, N. A., Saidu Mudi, S. M., Djama, S. I., & Muneeza, A. (2017).
Tawarruq as a Product for Financing within the Islamic Banking System: A Case Study of Malaysian Islamic
Banking System. International Journal Of Management and Applied Research, 4(1), 31–43.
https://doi.org/10.18646/2056.41.17-004
3) Ismon, N. Y. (2012). Legality of Tawarruq in Islamic Finance. Tazkia Islamic Finance and Business Review,
7.1(1), 81–105. https://media.neliti.com/media/publications/271276-legality-of-tawarruq-in-islamic-
finance-8da86dfb.pdf