Debate over commodity murabahah (tawarruq)

The concept of commodity murabahah (or tawarruq in some jurisdictions) has only recently been widely applied in Islamic finance, along with other syariah contracts such as mudarabah, musharaka and bai murabahah.

The application of this trade-related structure with a pre-determined profit rate (or pre-agreed “margin” or “mark-up”) is possible in syariah-compliant financing and deposit products as well as in liquidity management/treasury instruments and other investment products/securities.

However, resistance still exists on the ground from some critics who say that commodity murabahah-based financial products bear a striking resemblance to interest-based products.

For instance, the Islamic Fiqh Academy of Rabbitah ‘Alam Islami, Makkah ruled in 2003 that any product structure based on the commodity murabahah or tawarruq munazzam concept should be considered as haram, or forbidden by Islamic law.

By and large, it is not unusual for both Islamic finance and its conventional counterpart to mirror each other given the identical nature of their business of receiving funds, usually by way of deposits, which subsequently will be re-directed towards productive use in various economic activities.

Indeed, in undertaking financial intermediation functions, both Islamic and conventional finance serve as a medium to mobilise funds from savings surplus economic units, which will be channelled subsequently to savings deficit economic units.

The commodity murabahah debate entered the fray in Malaysia following Bank Negara’s favourable ruling in 2005 on the permissibility of such a concept.

As a rule of thumb, a financial contract does not contravene syariah rules as long as its application complies with the essential elements/tenets of any syariah contracts such as cost-plus sale (bai murabaha) and agency (wakalah), as practised in a commodity murabahah structure.

To clearly draw the lines between Islamic and conventional finance, the application of the commodity murabahah concept is restricted to a handful of financing products such as working capital, personal financing and credit cards whereby the financing is solely for the purpose of providing cash to customers.

Does the commodity murabahah violate Islamic principles?

The answer is, no. Not only is it permissible in Malaysia based on a ruling by the Syariah Advisory Council (SAC), it is in fact a globally acceptable syariah compliant structure in particular in the Gulf Cooperation Council (GCC) region, being sanctioned by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Still, the AAOIFI is of the view that the commodity murabahah structure is only acceptable if it involves four parties (a buyer, a seller, the buyer’s commodity broker and the seller’s commodity broker) instead of a tripartite transaction.

Is there a better alternative financing structure?

For certain types of financing products such as personal financing and credit cards, commodity murabahah appears as the most ideal structure.

However, for working capital, Islamic banks may consider a profit-sharing structure such as mudarabah and musharaka although the risks associated with this kind of structure could be relatively higher.

Indeed, Islamic banks are encouraged to consider this profit-sharing structure for their financing products, deemed as the most acceptable by the majority of syariah scholars.

Nonetheless, it is of utmost importance that Islamic banks are equipped with appropriate risk mitigation mechanisms, backed by risk officers with the right expertise. — Reuters


*Comment by Dato' Zukri Samat - the managing director of Bank Islam, Malaysia’s second biggest Islamic bank by assets. The views expressed in this article are those of the author