By: Abdul Samad
Commodity Murabaha is a product designed to facilitate cash advances to a customer who need cash to pay for various needs. In this transaction banks sell the customer commodities on deferred payment basis. Subsequently the customer sells these commodities on spot basis to receive cash. Here the customer is not interested in utilizing the purchased assets or benefiting from it as a commodity rather he approaches it as a means to facilitate the achievement of liquidity.
In the above structure a very well known transaction of tawarruq is given name of commodity Murabaha. Technically tawarruq involved a series of sale contract whereby a buyer buys an asset from the seller for deferred payment and subsequently sells the asset to a third party for cash at price less than the deferred price with the aim to receive cash.
At present, Islamic bank uses Tawarruq on both side of their balance sheet, for financing and deposit addressing various liquidity needs of the transacting parties. In financing side simply the Islamic bank buy a commodity and sells it to the client on deferred basis the client sells that commodity to another bank to obtain cash. On other side Islamic banks use Commodity Murabaha as a deposit mobilizing instrument, where the client has money and is looking for fixed and good return on it. In this case the client firstly buys a commodity and sells it to the Islamic bank on deferred basis. Effectively the client made a placemat that resemble a fixed income deposit since he will be now receiving a fixed return. This structure in also known in Islamic banking industry as a Reverse Tawarruq.
There are generally two major views on Tawarruq.
- Those who allow Tawarruq
- Those who deem Tawarruq as a prohibited transaction
Those who allow tawarruq are the Hanafi School, the Shafi School and the Hanbali and those who deem tawarruq prohibited include the Maliki School, Umar Ibn Abdul Aziz, from Hanafi School like Muhammad Ibni-al-Hasan Al Shaybani and in later generation of Hanabali School namely Ibn Taymiyyah and Ibn Qayyim.
The issue of tawarruq has also been addressed by contemporary jurists. International Fiqh Academy of the organization of Islamic Conference (OIC Islamic Fiqh Academy) issued three rulings regarding Tawarruq.
In its 15th meeting held in September 1998 they permitted the contract with the condition that the client shall not sell the commodity to its original seller to avoid Inah (buy back). However in 17th meeting held in December, 2003 the academy divided tawarruq into two types:
- Tawarruq Fiqhi
- Tawarruq Masrafi (Organized Tawarruq)
They allowed the first one and disallowed the later form which is widely practiced by Islamic banks today. In its 19th meeting held in April 2009 the academy banned the Organized Tawarruq because these transactions are considered a deception i.e. doubtful transaction in order to get additional quick cash from the contract. Hence the transaction is deemed to contain the element of Riba. The Academy also clearly recommended that Islamic banks shall avoid the instruments as it deviates from the objectives of the Shariah.
Shariah Issues in Organized Tawarruq
This structure is widely criticized by Shariah scholars for taking sufficient credibility as a true trade. The following summarizes the various violations of Shariah principles in the practice of modern Tawarruq.
Subject matter of sale:
Subject matter is one of the most important element of the sale transaction. It must meet all the specification and conditions of good commodities. Goods commodities are valuable because they have legitimate uses. Any sale will be considered invalid if the object of the sale is some thing which has no value or is used for an illegitimate purpose.
- In Commodity Murabaha the banks never bother to do inspection of the commodities because it is bought only for the purpose of making the contract Shariah compliant. Transiting parties don’t show any interest in the commodity which renders this contract to be bank’s lending of money to the customer with interest. That is why the customer does not see the commodity and does not know about it and does not bargain in its sale, because it is not meant for this purpose.Therefore both parties don’t bother to confirm where the subject matter is valuable and can be used or not.
- There is no assurance that the same commodity would not be sold to other buyers. This inevitably raises Shariah issues about the extent of genuineness of the contract
Possession / delivery
Another very important condition of a sale is that the subject matter must exist and be owned by the seller at the time of contract. It is very basic requirement of sale transaction as the purpose of the sale contract is to transfer ownership of the object of the sale to the buyer. According to Shariah principles the seller shall hand over the goods to the buyer or atleast grant access to the goods with out any restrictions. According to the Hadith of Hakeem Ibn Hizaam - may Allah mercy upon him - which he reported that, “O my brother, if you buy something, do not sell it until you take it”. Receiving a copy of certificate of ownership is not enough to get the legal receipt until one get the right of use, moving and inspection.
- However current Commodity Murabaha arises doubts whether permission and delivery ever take place. These issues become more apparent where legal documents and law of the land indicates that there shall be no intention by the buyer to take delivery. In some cases the buyer is restricted from taking any delivery by a standard operating procedure.
- In such cases the customer does not take anything from the bank. So, the role of the customer will only be to sign on papers claiming that he is the owner of the goods, and it will be sold for his benefit. Then, the price is credited into his account. The above contract is considered as Riba, because other than cash, the customer does not take anything from the bank.
According to AAOIFI Shariah Stranded no. 30, article 4/5 stated that “commodity (object of Tawarruq) must be sold to a party other than the one from whom it was purchased on a deferred payment basis (a third party) so as to avoid Inah”
This standard makes it very clear that Tawarruq cannot be fictitiously transacted with the cosmetic involvement of a third party. It should be ensured that the goods being traded are genuinely moved from seller to buyer. If there is any trick (hilah) involved, then the transaction would be deemed as a hilah to avoid the prohibited Riba, which resemble the character of Inah.
- In commodity Murabaha the transacting parties operate a netting facility between their different storage felicities and in reality the commodity rarely gets physical transferred from seller to the buyer as it should under the requirement of the Shariah. For example in the local goods like a car, the bank buys the car from the exhibition centre. The bank then sells it to the customer on credit. Then, the customer appoints the exhibition centre to sell the car. The car will then be sold by the exhibition centre to the bank. Then, the bank will resell it to another customer. This is how papers of the cars rotate various times among the bank, the customer and the exhibition centre, while the car remains in its place, without moving a single inch. To confirm this transaction is the exchange of money for money. The goods only entered it by deception.
Regarding Tawarruq transaction AAOIFI further stresses as under:
- The bank or its agent should not sell the commodity on the customers behalf if the customer initially bought that commodity from the bank neither should the bank arrange a proxy third party sell this commodity.
- Instead the client should sell the commodity either himself or through his own agent.
These standards are clearly in conflict with the current practice of organized Tawarruq. In present practice the bank is not paying the price to the original seller, but paying it to the AL-Mutawarriq as he is an agent for them in buying and selling. For example if one of the bankers requests for the financing on the basis of At-Tawarruq. As it is clear that the bank don’t keep commodities hence he will only be required to buy it from the market. In most cases, the bank will not buy it themselves. It will authorize the agent who is himself Al-Mutawarriq to buy it from the market on behalf of the bank. Then, the Al-Mutawarriq will buy it from the bank at a delayed price peyment. He will later sell it to a third party. As per custom adopted by the banks, payment will be made to the Al-Mutawarriq as he is an agent for them in buying and selling the commodity. Because of this agency arrangement the procedure becomes something similar to usurious financing, because the Al-Mutawarriq will take the smaller amount from the bank, while the higher amount will be paid to him when the fixed time lapses. If he takes it for a lesser amount, then that only occurs as a result of his being an agent for the purchase, and not as loan seeker. But this minor difference cannot distance the procedure from the similitude of usurious finance.
If the bank appoints the Al-Mutawarriq as their agent to purchase the commodity on their behalf, he then buy it for himself, such transaction is invalid, because the agent cannot manage the two sides of the sale.
Dealing with Conventional Banks
Normally Islamic banks deal with conventional banks through Commodity Murabaha. Conventional banks are always dealing with Riba, as they do not care the manner in which the get cash that is eventually deposited in their accounts through buying, selling and the agency. They do not pay attention to what they buy, its quality and how the contract should be executed in the first place. Furthermore it is support of conventional system also which is prohibited under Shariah.
There are valid reasons to disallow Commodity Murabaha.
- Because these Commodity Exchange in Commodity Market are the shortest way for processing the fast sales, as thousands of sales happen in a few minutes, i.e. through the use of computers. And their sales are not realistic, as the commodities are not delivered to the buyer, but rather many sales are consecutively circulated on computer.
- Commodity Murabaha are normally created for goods which are difficult for the customer to take or to have its disposal. Furthermore, if the customer chooses to take the commodity, he will find many problems confronting him; the least of these problems is that he will lose the commodity.
- In commodity market most of the sale take place with the exchange of paper in which proper specification of sold item and distinguishing it from unsold items and like when the sold item is being under the possession of the seller are impossible particularly where thousands of tonnes of the same commodity is kept in one warehouse.
- The placement of commodity in these transactions is only for the purpose of making the contract Shariah-compliant. The real contract is that the bank lends money to the customer with interest.
- The quantity represented in these papers is not distinguished from other quantities. So, the purchased quantity will not fall under the security guaranteed by the buyer, while the buyer can sell it to another person before it is separated and ear-marked to the buyer. Therefore, the prohibition of profiting from what is not owned will occur.
- Banking Tawarruq is really a big reputation risk Islamic banking.
- If we allow Tawarruq, it will nearly stop Islamic banks form developing banking activities in contract which is directly related to the development of productive activity for the society, such as speculation, participation, production, salam and leasing.
- The responsibility of Islamic banks, as defended by jurists and economists is not merely to achieve the highest employment rates for the available financial resources and maximize profits, but to achieve the highest rates of employment of financial resources by means of its legitimacy for serving the real economic goals of the Islamic ummah. And Murabaha to buy something is to sell based on credit and indebtedness of the customers. This is still criticized transaction by many as the objectives of Islamic banking. Where the volume of Murabaha is supposed to be reduced, in order to develop processes to employ resources with other contracts, based on the principles of participation in the profit and loss.
Even if the Tawarruq transition is properly executed and Shariah requirement are fulfilled, still its overall impact from macro perspective, apparently is harmful to the entire society and particularly to the Islamic banking industry. It has been an accepted principle in Islamic jurisprudence that the priority is to be given to public interest (muslahah ammah) over individual interest (muslahah khassah). It is the time to apply the principle of Sadd-al-Dharai to close the potential avenues for circumventing Shariah and more so its objectives and spirit. It is not the permissibility of Murabaha contract, but its indiscreet use which is fueling the perception that Islamic banks are providing cover to the taking of interest from the back door which is harming the credibility and integrity of Islamic banking industry.
In view of the foregoing, i am of the opinion that Commodity Murabaha should not be allowed for Islamic banking in Pakistan it present.