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NAME NO. MATRIC

MUHAMMAD ZAKWAN BIN ZAKARIA 231110

MUHAMAD YUSMAN BIN MOHD YUSOF 231618

NUR FARHANA BT KAMARUDIN 231655

NOR HIDAYATUL HASANAH BT ABU BAKAR 231680

WAN MOHAMAD AMIRUL AHZA BIN WAN ZAINUZZAMAN 233637

HUSNUL IKHWAN BIN MUSTPHA @ MUSTAPHA 233685

ISSUES OF TAWARRUQ

PHILOSOPHY OF BUSINESS IN ISLAMIC FINANCE AND BANKINGBWSS2013

TITLE : ISSUES OF TAWARRUQ

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CONTENT…. INTRODUCTION OBJECTIVES ISSUES AND SOLUTION FOR

- COMMODITIES - POSSESSION AND DELIVERY - BAY AL-INAH - AGENCY ISSUES AND SOLUTION FOR

- COMMODITIES - POSSESSION AND DELIVERY - BAY AL-INAH - AGENCY TAWARRUQ APLPLICATION IN BMBB CONCLUSION

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INTRODUCTION

o Tawarruq is a financial instrument in which a buyer purchases a commodity from a seller on a deferred payment basis, and the buyer sells the same commodity to a third party on a spot payment basis (meaning that payment is made on the spot).

o Tawarruq is a somewhat controversial product. Because the intention of the commodity purchases isn’t for the buyer’s use or ownership

o 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 actualisation of the Shari’ah objectives ( maqasid Shari’ah ).

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OBJECTIVE

To find the solution on issue pertaining to commodities, possession and delivery, bay al-inah and agency in the Bursa Malaysia’s Suq Al-Sila.

To find the solution on issue pertaining to commodities, possession and delivery, bay al-inah and agency in the Shariah principle.

To find out the implementation of tawarruq in islamic banking in Malaysia.

To know the concept in property buying and selling through tawarruq concept.

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BURSA MALAYSIA SUQ AL-SILA (COMODITY MARKET)

Commodity trading platform specifically dedicated to facilitate Islamic liquidity management and financing by Islamic banks

National project between many party - Bank Negara Malaysia (BNM), Securities Commission Malaysia (SC), Bursa Malaysia Berhad (Bursa Malaysia) and the industry players

Bursa Malaysia’s Suq Al-Sila were introduced for purposely designed exchanged traded platform to give flexibility of tawarruq transaction .

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ISSUE : COMMODITIES

1. Doubt over the authenticity of the commodity used in organized tawarruq transaction.

2. It is permissible or prohibited commodity? Is it have value or not ?

3. Commodities used for the transaction has little value, obsolete or defective.

SOLUTION :

1. 20 commodities has been offered on Bursa Suq Al-Sila’ . 3 commodities that readily traded - crude palm oil (CPO), plastic resin (PE) and RBD palm olein (OLN).

2. This commodities are permissable and have value to be traded because it was approved by the Shari’ah Advisory Council (SA)

3. The price of commodities remains the same for that day.

4. Contract descriptions will be disclose to all parties that involve in the transaction.

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ISSUE : POSSESSIONS AND DELIVERY

1. The lack of ability to deliver commodities to the customer.

2. An additional delivery processing fee.

SOLUTION :1. The fee should actually

be embedded in the selling price.

2. Sale contract - states all the specification of the sale , including the flow of the transaction , the price , the deliverability of the subject matter.

3. Besides, the buyer also should have knowledge about how the transaction going

DELIVERY PROCEDURE OF COMMODITIES

The buyer needs to

show to the Business Model for

Information Security (BMIS)

directly or through a broker of

this intention to

buy commoditi

es.

Once recognized by BMIS,

the commodity

supplier will then be

notified

Availability and

location of the

commodity - important factors to

be addressed

by the bank to ensure

deliverability

Delivery by the

commodity supplier to

the buyer will take place

within seven days.

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ISSUES : BAY AL-INAH

o The fact that both parties have no intention of using the asset as any consumer does betrays one principle of contract in Islam, namely the objective of contract.

o In the case of banking, the sale and resale contracts initiated by either the bank or the customer saw no event by which either party has assumed risk-taking and value addition in rationalising the profit taken.

o Bay al-inah is just a legal device that using Islamic commercial law to obtain cash without implicating riba, to make forbidden thing permissible.

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SOLUTION : BAY AL-INAH To overcome this issue, Bursa Malaysia Islamic Services

(BMIS) has outlined clearly that the sale to the commodity supplier is done on a random basis.

The suppliers are required to bid for the best price which replicates the real market.

Once ownership goes back to a supplier, all unencumbered commodities may or may not be re-offered into the Bursa Suq al- Sila (BSAS) market for other trades.

This will inevitably reduce the possibility of mirroring the prohibited bay al-inah transaction, which has become a major concern raised by scholars in detesting the modern practice of tawarruq.

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ISSUES : PERTAINING AGENCY

In this case, the appointment of the bank as an agent to act on behalf of the customer to sell the commodity back to the market is deemed unacceptable under the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI) ruling.

However this arrangement is beyond the control of the BSAS, since the decision is exclusively the right of the contracting parties, whereas BSAS is merely serving as a platform to facilitate the transaction.

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SOLUTION : PERTAINING AGENCY Profit Loss Sharing (PLS) contracts are inherently

vulnerable to agency problems as entrepreneurs have disincentives to put in effort and have incentives to report less profit as compared to the self-financing

Through agency and guaranty as financial intermediaries that insulate their investment account holders from the credit risk associated with the banks own debtors.

The only recourse for investment account holders, assuming that the Islamic bank does not engage in negligence or fraudulent activities, is to withdraw their funds from that bank

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PRINCIPLES OF SHARIAH ISSUES : BAY AL-INAHo Good commodities are valuable for their legitimate

uses.

o There is no assurance that the same commodities would not be sold to more than one buyer

o From the observation, many commodities used in the practice of modern organized tawarruq are spoiled or bad commodities

o E.g : For example, Shaykh ‘Ali al-Qara Daghi revealed that he encountered one tawarruq transaction using the international commodity market which the underlying commodity used was actually ‘junk’, defective aluminum from Russia that had been in storage for more than 10 years

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SOLUTION : BAY AL-INAH

Firstly, the customer must be careful in choosing the seller whether he/she is trusted or not. This is to make sure that we order and received the same thing

Then, to avoid the same commodities would not be sold to more than one buyer, They need to do a black and white agreement that said that item must be sold to he/she only and not to anyone else

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ISSUES : POSSESSION AND DELIVERY

The purpose of a sale contract is to transfer ownership of the object of the sale to the buyer and ownership of the price to the seller

The current practice of commodity murabahah raises doubt whether possession and delivery ever take place.

In some cases, the buyer is restricted from taking any delivery, by a standard operating procedure as practiced in the market

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SOLUTION : POSSESSION AND DELIVERY

The buyer must set a condition or set an agreement between buyer and seller that he/she will receive the commodity by themselves.

Even with the standard operating procedure (s.o.p) that said the buyer can’t restricted from taking any deliveries on sale contract

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ISSUES : BAY AL-INAH

Tawarruq cannot be fictitiously transacted with the cosmetic involvement of a third party. It should be real ; that is, the metal or whatever commodity being traded should genuinely move from seller to buyer. If there is any ‘ trick ’ or collusion involved, then the transaction would be deemed as a hilah (trick) to circumvent the prohibited riba,which resembles the characteristics of ‘ inah. Thus, in reality, the community rarely gets physically transferred from seller to buyer as it should under the requirements of the Shari’ah.

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SOLUTIONS : BAY AL-INAH

The contract of deferred sale should be Shariah compliant, either by negotiation or murabahah and make sure that the commodity exists and possessed by the seller before he sells it.

The first seller should not get back the commodity by any condition, collusion or through customary practices. There should not be any link between the contract of purchase at deferred price and the contract of sale at cash price, by a way that forbids the client to hold the commodity, either the link is stated in the contract or due to customary practices or by the nature of the procedures

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ISSUES : PERTAINING TO AGENCY The addition of this tawkil (agency) to the tawarruq contract,

authorizing a party to buy the commodity on behalf of another and then make arrangements to sell the commodity to himself, renders the contract similar to the prohibited ‘ inah. It further accentuates the issue of transferring ownership or taking possession, which is required as one of the pillars of a valid contract. Therefore, this practice again bears resemblance to the practice of bay ‘ al – ‘inah, which is frowned upon by many as a form of legal trick (hilah); as such, it does not represent the true tawarruq (tawarruq haqiqi), which was approved by the majority of classical jurists. Some scholars even go further to argue that the inclusion of tawkil in the tawarruq contract makes it similar to usurious finance because the mustawriq will take the smaller amount from the bank, while the hinger amount will be paid by him when the fixed time lapses. This issue of tawkil (authorization) may make the contract agreement either mahzur (prohibited) makruh [disliked].

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SOLUTION : PERTAINING TO AGENCY

Expanding tawarruq into deposit products. Practitioners have to be even more vigilant in ensuring compliance to the rules of commodity murabahah transaction in a tawarruq arrangement.

1. Customer appoints Bank as its agent to buy commodity. Bank buys the commodity from trader. 2. Customer then sells the commodity to bank at cost and profit on deferred terms.3. Bank sells the commodity to another trader.

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TAWARRUQ APPLICATION IN BMMB

Most of the products are based on BMMB contract bay 'al-'īnah

In an application that is based on the concept of financing bay 'al-tawarru’ in BMMB, it involve or incorporate some other contracts of

I - bay 'al-Murabaha, ii - wa'd mulzim, iii- Waka iv- bay 'Wadi'ah.

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CONCLUSION There is a view from Imam Ahmad Ibn Hanbal that

Tawarruq is prohibited (haram). Another view from Imam Muhammad Hasan al-Shaibani, Imam Malik and of the two opinions narrated on behalf of Imam Ahmad Ibn Hanbal held that Tawarruq is discouraged (makruh). Imam Ibn Taimiyyah has considered Tawarruq as an exceptional dealing which is permitted in the case of necessity ( darura), where the person is really in need of cash

The Shari'ah Advisory Council, Central Bank of Malaysia also resolved in 2006 that the use of ijarah sukuk and Shari’ah-compliant securities as underlying assets in Tawarruq or Murabahah to manage liquidity in the Islamic financial system is permissible

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CONT….

Generally, commodities such as gold, silver, barley, salt, wheat, and dates aren’t allowed in tawarruq.

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THANKS YOU FOR LENDING YOUR

EAR AND MOUTH….