Introduction to the Tawarruq (commodity Murabahah) debate, the distinction between classical and organized Tawarruq, the Islamic Fiqh Academy's 2009 fatwa, and scholarly criticism of the practice.
In-Depth Analysis
Now that the Murabahah structure has been covered in the last few articles from all angles, readers must have realized that this is the best transparent option gifted by Islamic finance to push for global trade. The flexibility of the Murabahah structure allows it to be used by different facets of the commercial landscape for readily available commodities, goods and assets. On the capital market side, although the Murabahah structure can be adopted to issue Sukuk, it will remain a privately placed, non-listed and non-trading instrument in nature. This is because the Murabahah is a debt-based transaction and readers know well that Shariah bars trading in debt. As for Tawarruq, some scholars say that it is not a pure-bred Islamic finance product, such as car Murabahah or goods Murabahah. They proclaim Tawarruq as a mere financial accommodation which impersonates an interest-bearing loan. Some scholars go to the extent of censuring Tawarruq for reducing the global appeal of Islamic finance since it takes away the ingenuity and introduces mimicry to Islamic finance. The Fatwa says that according to Islamic jurists, Tawarruq means purchase by a person (Mustawriq) of goods on a deferred payment basis so as to sell the same on cash mainly at a lower price to a party other than its seller with a purpose to get cash. This type of Tawarruq is acceptable provided that the conditions of sale, as laid down by Shariah, are met. Also, jurists do not want it to be a norm but to be used in exceptional situations. Organized Tawarruq means the purchase of goods by a person from the seller on a deferred payment basis and the seller facilitating the resale of the same goods on a cash basis for the buyer at a lower price either by itself or through an agent. The jurists do not consider this type of Tawarruq to be Shariah compliant. Sadly, the heavy adoption of this type of Tawarruq in some jurisdictions has eclipsed the beauty and effectiveness of the core Islamic financing solutions.
What You Need to Know
- 1Tawarruq (commodity Murabahah) is controversial — some scholars consider it mimicry of interest loans
- 2Classical Tawarruq: permissible but should be exception, not norm
- 3Organized Tawarruq: where seller facilitates resale — NOT considered Shariah compliant by many scholars
- 4Islamic Fiqh Academy 2009 fatwa restricts Tawarruq to exceptional situations
- 5Murabahah Sukuk cannot be traded (debt-based) — must be held to maturity
- 6Heavy Tawarruq adoption has eclipsed genuine Islamic financing solutions
Key Statistics
U.S. Market Relevance
Some US Islamic financial products use Tawarruq-like structures for personal financing. US Muslim consumers should ask their provider whether the structure is classical Tawarruq (generally acceptable) or organized Tawarruq (controversial). This debate directly impacts product evaluation on HalalWallet.
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