Organized Tawarruq is NOT permissible: OIC Fiqh Academyzulkiflihasan
Resolution 179 (19/5) in relation to Tawarruq: its meaning and types (classical applications and organized tawarruq)
The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19th session which was held in Sharjah, United Arab Emirates, from 1 – 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolve about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.
The following were the resolutions:
First: Types of tawarruq and its juristic rulings:
Technically, according to the Fiqh jurists, tawarruq can be defined as: a person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay).
The contemporary definition on organized tawarruq is: when a person (mustawriq) buys a merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier executes the transactions, usually at a lower spot price. Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as client.
Second: It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba.
The recommendation is as follows:
To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end. To encourage the financial institutions to provide Qard Hasan (benevolent loans) to needy customers in order to discourage them from relying on Tawarruq instead of Qard Hasan. Again these institutions are encouraged to set up special Qard Hasan Fund.
I personally view that the IFIs must be very caution and not to be complacent in developing Islamic financial products by relying on controversial instruments as in the case of Tawarruq. Muhammad Nejatullah Siddiqi has already viewed that Tawaruq is impermissible due to its inherent mafsadah. Although there is no explicit text which denotes the illegality of tawaruq or even analogical reasoning, the element of mafsadah has clearly overwhelmed the maslahah. By offering tawaruq which is appeared to be as much as bay’ al Inah instrument adds another debt financing facilities that generates debt proliferation in the market. If there is no restriction and warning to the excessive utilization of debt based instrument such as further involvement of the IFIs with tawaruq facility, it will clearly undermine the ‘productive economic activity’ discourse in Islamic economics.