Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector.
Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement.
“I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,” Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia.
“They are trying to do it the way it should be done.”
He did not identify the banks.
The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
“If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,” law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
“After all these discussions, the majority of the scholars say it is forbidden,” said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
“Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.”
Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
“It’s the right of any scholar to say ‘That’s my view, it’s not forbidden’,” Al-Abadi said.
“We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.”
Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools.
What makes this contract popular with the bankers? Tawarruq is not only easy to use, but it is also flexible.
In an industry that is very short on Sharia compliant products that provide cash “today”, the Tawarruq contract was seen as an alternative.
Secondly, it is also possible to roll over the contract, hence providing additional funding.
According to the Fiqh Academy there is a real distinction between “classical” and “contemporary” practice of Tawarruq. The cash obtained in the classical Tawarruq is determined by market forces, whereas, in the contemporary version the contract is “arranged”... that is “simultaneously, the mustawriq and the financier executes the transactions, usually at a lower spot price”.
With this in mind, the Fiqh Academy has thrown its weight behind the classical version of the tawarruq contract, whilst declaring the widely used contemporary version impermissible.
Are there any other alternatives? The Fiqh Academy suggests that the market should embrace Qard Hasan (benevolent or interest free loans) and “institutions are encouraged to set up special Qard Hasan Fund.”
One thing is for certain — the ruling by the Fiqh Academy is certainly brave and the implications of this announcement might be huge. In an industry, where the vast majority of transactions are “arranged” rather than left to market forces, many practitioners will be worried about other products coming under the Fiqh Academy’s radar, including the ubiquitous Murabaha contract.
Link: http://www.arabtimesonline.com/kuwaitnews/pagesdetails.asp?nid=39537&ccid=12
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