You walk into the Islamic bank, sign some papers, "trade" in metal in some corner of the globe, and walk out with cash. Papers are pushed, money changes hands, and the metal just sits there, ready for the next customer to "trade" a few minutes later. Or can the same metal be bought and sold by different customers in the same minute? Who's counting anyway?
Welcome to the world of Tawarruq.
What some Islamic finance scholars begrudgingly allow for in extreme, case-by-case situations, banks often turn into a retail product for ordinary customers to use. Tawarruq, according to Ethica, is one of the main reasons customers question the credibility of Islamic finance. A product that began as the industry's somewhat embarrassing black sheep over a decade ago has now grown into the eight hundred pound darling of many Islamic banks.
Ethica's fatwa raises two important issues for an industry fast on growth but slow on establishing credibility among banking customers: first, what really is Tawarruq? And, second, importantly, if it becomes a regular product, is it still Islamic finance?
"Banks think they attract customers in the short term, but the reality is that they lose them in the long term. Ethica works with bankers and customers across multiple regions and we are seeing the same pattern: when Islamic finance's credibility is compromised, customers leave. And they usually don't come back. Retail Tawarruq is not only Shariah non-compliant most times, it is also quite possibly the worst first impression we can make as an industry," said Ethica's spokesperson.
Ethica explains that the first step to understanding Tawarruq is understanding its definition according to the
To expand on this definition,
The contemporary definition of organized Tawarruq is when a Monetizer (mustawriq) purchases merchandise/commodities on the international commodity market on a deferred price basis either through Musawamah or Murabaha. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier executes the financial transactions, usually at a lower spot price.
According to scholars, Tawarruq should be limited to individual need and necessity and not retailed to the public. The Islamic economy, they say, should be based on profit-sharing instruments like Mudarabah and Musharakah. Interest free loans (Qardh Hasan) are the ideal alternative to Tawarruq. Among the problems with Tawarruq:
1. Tawarruq in currencies are not permissible.
2. The bank cannot sell goods on behalf of the client without the client taking physical or constructive possession of the goods. This does not usually take place. Islamic banks generally sell the warrants representing the metals and not the actual metals. Therefore, the bank does not take possession when purchasing the metals from the broker initially. The Mustawriq (monetizing client) does not take possession in any form of the metals. The bank is merely appointed as an agent to sell the metals on the metal exchange without any actual Shariah realization of the contractual positions required.
3. All the transactions in a Tawarruq transaction should be separated and individualized. The various legs in most transactions are not individualized and separated.
4. Contemporary forms of organized Tawarruq are very similar to
While it remains to be seen whether Tawarruq reform is likely in the industry – much like a few years ago when banks began cleaning up their Sukuks after AAOIFI's chairman, Mufti Taqi Usmani, publicly criticized them – there is no doubt that the industry continues to suffer the long-term consequences of an expedient reading of an already borderline product.
Read the full story at http://www.prweb.com/releases/Is_Tawarruq/Really_Islamic_Finance/prweb11950818.htm
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