TAWARRUQ/COMMODITY MURABAHAH

Definition

From the root word wariq meaning silver or minted. Has been used to mean ‘seeking silver’ in the same way as ta’llum or seeking knowledge. Today it can be said it is the means of seeking money in any form to attain required levels of liquidity. First referred to by the students of Ahmad Ibn Hanbal where many contracts were utilized to obtain cash.

Islamic Fiqh Academy defines it as ‘the purchase of a commodity that is in the ownership and possession of the seller against a deferred price, and its subsequent sale by the purchaser to a party other than the seller on cash, for the purpose of obtaining cash’.

3 forms described by jurists

a)A person who needs cash buys a commodity on credit and sells it to another for cash, without any party being aware of his intention/need
b)A person needs a loan so a trader sells a commodity on credit at cash price. The person then sells the commodity at whatever price he can achieve
These 2 are agreed by all scholars
c)Similar to b) but the seller charges a higher price than the market value
Has a difference of opinions

Conditions

For the permissibility of tawarruq, if deemed to be for necessity, a person embarking on it should also have a case of genuine necessity and some even say if there is no other method available

Item is in existence at the time of sale and the seller must have ownership
Actual transfer of ownership so that the one who requires liquidity has the right to sell also
Sale to a different entity than the originator

Organized or regulated Tawarruq

Practice today can be for a bank to simply sign pieces of paper and collect the cash. Could be close to riba or still considered trading activity?

Example of general practice,
-Bank purchases a commodity from an international market in cash
-Bank sells the commodity to the client on a murabahah basis
-Bank undertakes to sell the commodity on behalf of the client to a third party
-Proceeds are forwarded to the client who will repay with profit in deferment
-Brokers are also usually involved to purchase the commodity (brokerage fees)

Each bank can practice this differently than one another

Points to note

Each client has the freedom to choose the bank as the agent or undertake the selling himself
Agency fee cannot be based on a percentage relative to the facility but rather the price of similar activity
Some argue that the bank cannot make advances to the customer until the proceeds of the sale have been acquired
Promise is a critical part of tawarruq similar to murabahah. Al Rajhi Bank maintains stocks of regular items such as cars to eliminate this controversial issue

Application
Example of Personal Financing-i,
Includes a binding promise, three sale contracts and at least one agency contract