An Exploratory Study On The Possibility Of Replacing Tawarruq Based Islamic Banking Products Using Other Alternatives

Abstract

Tawarruq which is also known as commodity Murabahah in Islamic banking is widely practiced in Malaysia to structure different types of Islamic banking products. The widespread use of tawarruq has made Islamic banks to be re-named as “tawarruq banks” and some even call tawarruq as the “magic lamp” of the industry. Shariah scholars have criticised this frequent usage of tawarruq in Islamic banking industry of Malaysia, while the practitioners have replied by saying that if tawarruq is a shariah approved concept, then what is wrong with the usage of it? However, from the shariah perspective, the issue here is not about the shariah compliance of tawarruq transactions per se. It is about the shariah limitations imposed by the scholars on the use of it. This simply means that there is a reservation made by shariah scholars in allowing the usage of tawarruq contract in Islamic finance as tawarruq is a contract allowed to be used when one has to choose between a conventional loan and tawarruq. The purpose of this research is thus to show the alternative Islamic commercial contracts that could be used to structure Islamic banking products that have been structured in the market using tawarruq. It is anticipated that the outcome of this research will assist Islamic banking industry to understand why and how they can move away from tawarruq.

Experts' views on ḥiyal in Malaysian Islamic banks: the case of tawarruq-based deposit products

“…In CBs' deposit products, the profit yields are dependent on ribā transactions. Meanwhile, in IBs, tawarruq -based deposit products are structured using genuine Sharī‘ah-compliant sale and purchase transactions (Ahmad et al. , 2020).…”

“…Besides, the extensive usage of tawarruq contracts has caused the Islamic banking industry to become over-reliant on debt-based contracts (Alkhan and Hassan, 2019) and thus violating the sustainability of Islamic finance objectives (Ahmad et al. , 2020).…”

“…Negative allegations concerning the Sharī‘ah compliance status of tawarruq contracts in Islamic banking operations, as well as criticisms about the impact of excessive use of tawarruq on Islamic banking reputation have stimulated Sharī‘ah scholars to advise IBs to shift away from tawarruq -based products (Asni and Sulong, 2018; Smolo and Musa, 2020; Ahmad et al. , 2020).…”

The substance and form of Islamic Finance instruments: an accounting perspective

“…It is used as a short-term financing instrument that includes monetization in the form of a commodity purchase for a deferred price determined usually through a mark-up sale (Murabaha) and then selling it to a third party for a spot price to obtain cash. It is currently the most common mode of providing cash facility financing in the IF industry as an alternative to conventional interest-based commercial loans (Ahmad et al, 2020;Ali and Hassan, 2020). The Tawarruq instrument is conducted as follows (Alamad, 2019):…”

“…Ahmed (2014) has cited such "Organized Tawarruq" as an example of IF products that are Sharia compliant in form but not in substance. From accounting perspective, the Tawarruq transaction does not reflect any fair market value of the subject commodity but rather set up to facilitate the financing transaction (Bacha and Mirakhor, 2019;Ahmad et al, 2020).…”