Friday, July 3, 2009

TAWARRUQ, COMMODITY MURABAHAH AND MONEY LENDING IN DISGUISE

TAWAARUQ, COMMODITY MURABAHAH AND MONEY-LENDING IN DISGUISE
International commodity murabahah and tawarruq are the two topics that have being raised quite prominently these days especially after the Islamic Fiqh Academy of OIC issued its resolution on tawarruq in April. The use of murabahah concept in transactions involving sales of goods and assets, when used in its correct form is not a controversial topic in itself because murabahah in its classical form is recognised as valid by the majority of Muslim jurists right from the earliest days of Islamic law.
Conceptually in order to have a valid Murabahah there must be two sales involved: the first being between a supplier of goods and a seller in murabahah while the second leg is between the murabahah seller ( who is himself a buyer in the transaction with the supplier) and the murabahah buyer. In order for the second contract of sale to be valid, the murabahah seller must have obtained full title and ownership of the goods sold in the first contract with the supplier in a full Shariah compliant manner: meaning that the goods and its economic/ ownership risk has been fully transferred to the murabahah seller. This will only happens when the goods has been actually or constructively delivered to the possession of the murabahah seller such that if anything should happen to the goods after that possession, loss is to be borne by the murabahan seller as a new owner. When this requirement is fulfilled, there is no question as to the right of the murabahah seller to sell the same goods to the murabahah buyer in the subsequent sale. This is obvious due to the Shariah rule that provides only an owner or his agent can affect a valid sale contract.
The issue as far as the current confusion as to the validity or otherwise of transactions involving either commodity murabahah or tawarruq is not so much of the conceptual aspect of the sales but more of whether the current practices adhere or not to rule as explained. In practice, most financial institutions that utilises both of the above concepts have been dealing with international commodity exchanges that are in fact, more often than not, parties involved in future commodity markets rather than normal physical markets. One such metal exchange that the present writer has access to some published information, states clearly that in practice as far as this metal exchange is concerned, only 1 % of their commodity (future) contracts ends up with physical delivery of the relevant metals. This is not surprising given the fact that such an exchange is known to be one of the many similar exchanges that are involved in commodity future market. So the big issues here is how come the Islamic financial institutions did not realise this fact as many of them are likely to be aware of several earlier resolutions by the OIC Fiqh Council that had disallowed involvement in future markets which was declared as non-shariah compliant in its current format.
The recent resolution by IFA does not mention this point directly but the concern can be understood by implication when the resolution mentions about the absence of genuine sales in tawarruq as currently practiced. Buy right the resolution should have reiterated its earlier resolutions concerning future market to support its present resolution on tawarruq. Perhap it is worth noting also that in the past few years or so there have been calls by concerned parties including Shariah scholars for Islamic financial institutions to use local commodities in their murabahah or tawarruq transactions. The reason given was that in the case of local commodity markets, there should be no difficulty in ensuring the existence of the relevant commodities and the truthfulness of the sales. So in short the major concern that underlines the Fiqh Academy resolution is so directly tied up to the way the relevant transactions are carried out, and not their conceptual acceptance from Shariah perspective. This is understandable considering what the Shariah says about sales as allowed in Islam where they must mean true sales and not money lending in disguise: hence when sale are intended it must be clear that transfer of ownership together with economic risk has taken place as between the parties in the first transaction before the second sale can take place. After all, in Shariah it is sale and only true sale that can be taken as justification for profit. So when the existence of true sale is doubtful, then there is no reason for the relevant transaction to be considered valid or Shariah compliant. Hence the biggest question posed indirectly by the resolution is how many of those so-called Islamic finance practitioners are sincerely willing to wear the title of genuine traders in their activities, and not as money-lenders in disguise.

3 comments:

  1. Assalamu Alaikum, Dr Z.A., Abd Rahman,
    It must be the fact that conventional banks are involved that causes them to want to deal with commodities exchanges that trade futures. There is no reason why the underlying commodity in a Tawarruq or a Commodity Murabaha should be WTI or Brent or Platinum of the quality which is delivered into the Platinum futures contract. We should just as easily be able to use Saudi Light or Tin (I don't think there's an active Tin Futures mkt?) or Cotton. If the physical asset is being exchanged, it still involves storage facilities, irrespective of the existence of a futures market or not.

    As I heard from one prominent Shariah scholar, these exchanges are quite a 'cabal' and people have suspected for some time that they were not actually delivering the underlyings, taking ownership on behalf of their clients, etc.

    And, as you say, it makes much more sense for IFIs to trade with institutions that make it a point to actually hold the physical commodities and make it a large part of their business--futures dealers should be out of it.

    Intrinsically, Organized Tawarruq should be no different from classical (and thus if one is allowed, the other should be), but safeguards must be put into place.

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  2. The problem with future contracts is that "goods" are sold before they are owned by the respective party. The basic general Shariah rule regarding sale is that you must own first only afterward you can sell. Even in the case of salam sale, where the forward buyer has paid the purchase price in full, as required, he has to wait until after actual delivery has taken place to have the goods sold to third parties. What happens in futures ( with small margin of course), as we know them for now, there is no valid ownership to talk about. The truth is that more than 99% of those who deal in futures are there to gamble- the act itself has been made legal by regulators the world over. Perhaps concerned citizens may think seriously about taking those regulators to task when market are ruined. It is not fair just to blame those speculators where other parties just washed their hand.

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  3. Dear Dr. Z.A. Abd Rahman:
    Are contingency fees valid under Sharia law? My question is in the context of lawsuits, and whether a lawyer's acceptance of contingency fees would be Sharia compliant. If not, why not? thanks much.

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