Fatwa: Is Tawarruq/Commodity Murabaha halal?

This is iA the most comprehensive resource for this question on the internet.

We present views from IslamQA, Seekersguidance, and Islamweb, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.

View One: Islamqa

Tawarruq may be permissible or haraam. The permissible kind is that which involves buying an item from a trader by instalments, and selling it for cash to someone else. We have discussed the permissibility of this kind of tawarruq and its conditions in the answers to questions no. 45042 and 36410.

As for the haraam kinds of tawarruq, there are two kinds:

1 – Where you buy an item by instalments and sell it to the one from whom you bought it. This is what is called bay’ al-‘eenah, and it is called al-‘eenah because the exact product (‘ayn al-sal’ah) that he sold goes back to him. This is haraam, because it is a trick that is used to get a loan with interest, and it is haraam for that reason according to the majority of scholars.

2 – Tawarruq through the banks or organized tawarruq, which means that you buy an item from the bank by instalments – and in most cases it is muraabahah (profit sharing), then you delegate the bank to sell it for cash, and this transaction is also haraam.

A statement issued by the Islamic Fiqh Council held from 19-23/10/1424 AH (13-17/12/2003 CE) states that this transaction is haraam, and warns banks not to exploit this transaction in ways that are not Islamically acceptable. In it, it says:

After listening to the research presented on this topic and the discussions concerning it, it is clear to the council that the tawarruq done by some banks at present means:

That the bank, in a regular procedure, buys an item (that is not gold or silver) from the global market or otherwise for the mustawriq (the person who is engaging in this transaction of tawarruq to obtain cash) and sells it to him for a price to be paid later on, on the basis that the bank will commit – either as a condition of a contract or according to custom – to sell it on his behalf to another purchaser for a price to be paid immediately, and it will hand over that price to the mustawriq.

After examining and studying the matter, the council has determined the following:

Firstly: Tawarruq in the form discussed above is not permissible for the following reasons:

1.The seller’s (i.e., the bank’s) commitment in the tawarruq contract to act as the deputy in selling the item to another purchaser or arranging for someone to buy it makes it akin to the ‘eenah transaction that is forbidden in sharee’ah, whether this commitment is stipulated clearly or is assumed on the basis of what is customary.

2.This transaction frequently leads to a failure to fulfil the condition of taking possession of goods, which is essential according to sharee’ah in order for the transaction to be valid.

3.This transaction is in fact based on providing finance with interest from the bank to the customer, and the process of buying and selling is illusionary in most cases.

This transaction is not the genuine tawarruq that is known to the fuqaha’. In its fifteenth session the Fiqh Council stated that it is permissible with regard to genuine transactions and subject to specific conditions which they described. That is because there are many differences that were discussed in previous statements.

Genuine tawarruq is based on the real purchase of an item for a price to be paid at a later date, which enters into the possession of the purchaser, and he acquires it in a real sense, and he becomes responsible for it, then he sells it for cash because he needs the money, and he may or may not be able to get it. The difference between the price of purchase that is deferred and the sale price does not come into the bank’s possession, and the bank is only introduced into this tawarruq transaction in order to justify getting more for the loan that it gave to that individual by means of transactions that are illusionary in most cases.

Secondly: The Fiqh Council advises all banks to avoid haraam transactions, in obedience to the command of Allaah.

Whilst the Council appreciates the efforts of the Islamic banks to save the Muslim ummah from the calamity of riba, it also urges them to make use of the genuine transactions that are based on the rulings of sharee’ah, without resorting to illusionary transactions that are essentially pure financing in return for extras that benefit the financing party. End quote.

Shaykh ‘Abd al-Rahmaan ibn Ibraaheem al-‘Uthmaan (may Allaah bless him) said:

The reasons why we say that organized tawarruq as done by the banks is not permissible are as follows:

1.Riba – as stated above – in the report of Sa’eed ibn al-Musayyab (may Allaah have mercy on him).

2.(Which is similar to what we have mentioned above) the mustawriq is not interested in the product per se, rather he is interested in the money, and the sale in question is an illusionary sale. The whole issue boils down to obtaining cash immediately, to be paid for later on with a greater amount.

What indicates that this sale is something illusionary is the following:

The bank does not take possession of the product purchased from the global market in any real sense, and it does not receive any original receipts from the warehouses where this product is kept; the product is traded on the stock market and moves from one purchaser to another until it ends up with the final consumer, who is able to take possession of what he has bought.

In the case of the mustawriq it is even worse: he does not take possession of the product in a real sense or even on paper. Hence he is selling something that he has never acquired and that is not even specified, because what the bank sells to its customer is something that is owned by the bank, which is defined by a number used to identify the product, and this number does not refer to small quantities of the product, but it is a number that is used for the big unit that the bank divides among those who seek tawarruq.

3.Appointing the bank to act on behalf of the customer in the case of bank-type tawarruq is contrary to what is expected of the agent, because what the bank is doing in its role as agent is contrary to the interests of the mustawriq, which is selling the product for a lower price than that for which the mustawriq bought it. (If there is any aim to be achieved from a contract in the true sense of the word, and there is a condition stipulated that contradicts this aim, then this contract is self-contradictory in that it both affirms and denies the aim of the contract, so nothing can be achieved and this kind of condition is invalid.) Appointing the bank as one’s agent in this tawarruq is one such condition, even though it is not stipulated. If there was no such appointment, the mustawriq would not have bought from the bank in the first place.

4.Giving guarantees to the last purchaser. The bank makes a deal with an independent party that commits to buying the product that is being used in this transaction. This commitment ensures that the selling price will not go beyond a certain limit as a protection against fluctuation in prices. In return for this assurance, the bank is committed to selling it for him, in the sense that the bank is not entitled to sell the product in the open market even if the price rises above the price agreed upon with the second purchaser. Thus these assurances come from both parties: from the bank which commits to sell to the second purchaser, and from the purchaser who agrees to buy it at a certain price.

5.Organized tawarruq differs from the kind of tawarruq which is permitted by the majority of fuqaha’ in several ways, such as the following:

(a)The bank is in charge of selling the product that was bought from it, to whomever it wants, whereas when the mustawriq is the one who is in charge of selling when he enters into a tawarruq transaction by himself, and the first seller has nothing to do with the sale of the product to the final purchaser.

(b)There is prior agreement between the bank and the final purchaser which guarantees that he will purchase whatever the bank offers at the price for which the bank bought it, as stated above, whereas in individual tawarruq, the mustawriq is the one who sells the item for the price that he paid for it, or more or less.

6.Organized tawarruq comes under the heading of bay’ al-‘eenah which is haraam, because the bank is the source of cash for the mustawriq in both cases. Cash is acquired via the bank and through its mediation; if the purchaser did not know that the bank would give him cash later on, he would not have embarked on this transaction in the first place.

7.Organized tawarruq through the bank is not the same as bay’ al-‘eenah which is permitted by al-Shaafa’i, because he stipulated that there should be no connection between the two sales, and that one should not show any intention of acquiring cash; neither condition is met in this case.

8.It nullifies the aims of Islamic banking in many ways:

(a)It imitates the riba-based banks in offering financing and insurance.

(b)It limits itself to this and no other forms of investments. Tawarruq now represents 60% of the bank’s financing services.

©It creates confusion between Islamic and riba-based banks.

(d)It negates the efforts to encourage Islamic banks to offer financing in the form of investments via mushaarakah (partnerships), mudaarabah (profit sharing), and so on.

9.It causes Muslim money to leave the country, because tawarruq transactions take place in the global market, so Muslim money leaves the country in order for others to benefit from it.

From the Muslim.com website.

Secondly:

With regard to the questioner’s comment that this transaction is permitted by senior scholars, that is not correct. Those who said it is permitted are the sharee’ah committees in Islamic banks, or the Islamic departments in riba-based banks! It should also be noted that not all of them regard this transaction as permissible.

Many of them have refuted the view of these sharee’ah committees that it is permissible. Shaykh Khaalid al-Mushayqih has undertaken comprehensive research on the prohibition of this transaction. See Majallat al-Buhooth al-Islamiyyah (73/234-237). There are also refutations by Dr. ‘Ali al-Saloos, Dr. Saami Suwaylim and Dr. ‘Abd-Allaah ibn Hasan al-Sa’eedi – who have all presented research on this issue to the Fiqh Council – as well as Shaykh ‘Abd al-Rahmaan al-‘Uthmaan and Dr. Muhammad ibn ‘Abd-Allaah al-Shabaani. Please see Muslim.com website.

See also the answer to question no. 60185.

With regard to your own situation: so long as you trusted those committees and followed their opinion, and you did not know that their view is weak, then we hope that there is no blame on you, but you should resolve not to do it again in the future.

We ask Allaah to guide you to all that is good and help you to pay off the debts that you have.

And Allaah knows best.

Taken from: https://islamqa.info/en/answers/98124/tawarruq-via-the-bank-and-differences-in-fatwas-concerning-it-from-fiqh-councils-and-banks-scholars

View Two: Seekersguidance

There are two possible scenarios here: the first is known as bay’ al-’inah and the second is known as tawarruq.

Bay’ al-’Inah

This is composed of two sale transactions. In the first transaction, a seller sells an item for a particular price to be paid in deferred installments. In the second transaction, after taking possession of the item, the buyer sells the item back to the seller for immediate payment of a lower price, to be paid before the installments of the first sale are due.

While technically each contract is valid, this arrangement can be used/abused by lenders who want to charge interest on loans. For example, a bank wants to loan $700 to a borrower and take back $1000 in installments over time. This is categorically haram, as it is usury (riba). So instead, the bank will sell an item to the borrower for $1000 to be paid in installments. Then the bank will immediately buy back that item for $700, to be paid up front. While technically these are two valid sales, the arrangement is used to produce the same outcome of the unlawful loan, namely, $700 up front in exchange for $1000 deferred.

Its Ruling

The overwhelming majority of scholars — including Imams Abu Hanifa, Malik and Ahmad ibn Hanbal — deemed this type of transaction unlawful, due to its close resemblance to usury and the potential abuse of it by lenders.

Also, what is prohibited according to the majority is if the second sale is for a lower price than that of the first sale. If the price of the second sale is equal or higher, then there is agreement that it is valid, as it then would not resemble usury nor be a means to it.

[Ibn Qudama, Mughni; Kuwaiti Fiqh Encyclopedia]

Tawarruq and Its Ruling

This is similar to bay’ al-’inah, except that instead of selling the item back to the original seller, the original buyer sells it to a third party that is completely independent of the original seller.

This sale is mentioned explicitly with the name ‘tawarruq’ only by the Hanbali jurists, the majority of whom deem it permissible. With respect to the other three schools, although the name of the sale is not explicitly mentioned in their legal texts, it can be deduced from inference that it is permissible. Some jurists such as Ibn Humam of the Hanafi school still viewed lending money without interest as more preferable.

As Mufti Taqi Usmani explains in his treatise on tawarruq, it can be concluded that the preferred view in all four schools of Islamic law is that tawarruq is permissible, while interest-free lending is more advisable. Having said that, the ruling of permissibility may change if the actual transaction is infiltrated by other elements that are problematic.

Agency

For example, if the original buyer of the commodity, after purchasing the commodity, appoints the bank as his agent to sell it in the market, then:

(a) If that agency had been stipulated in the original contract of sale as a condition, then the transaction is not valid;

(b) If, however, the agency was not stipulated in the original sale contract but rather independently carried out after the original sale, then the transaction is valid yet not advisable.

Not the Ideal Transaction

Moreover, if the tawarruq transaction is carried out through the international commodity exchanges, it is vulnerable to many potential violations of Islamic Law. There are many transactions in the international market that are not actual sales, such as futures, or are sales yet lack basic conditions of validity, such as transactions that entail gaining profit without having ever been liable, etc. This is one reason why scholars mention that the tawarruq transaction is limited to cases of genuine need.

If the conditions of a valid sale are met however, the tawarruq transaction would be valid, yet its extensive use is still not advised. This is because in essence, tawarruq is a transaction legislated as a loophole or “way out” for people in need of cash and are unable to get it otherwise, with interest-free loans being more preferable.

Despite being permitted though, such loopholes are legislated only for cases of genuine need, whether of individuals or sometimes companies. This is because they are not ideal transactions to serve as the foundation of large corporations, nor to form the basis of a healthy Islamic economy. Rather, according to the Sacred Law, the ideal financing mechanisms to form such a basis are transactions predicated upon profit and loss sharing, such as joint partnership (sharika/musharaka) and silent partnership [of capital and labor] (mudaraba).

[Mufti Taqi Usmani, “The Rulings of Tawarruq and Its Application in Banking”]

Cases of Genuine Need

With respect to what constitutes genuine need, this would have to be assessed on a case-by-case basis by a qualified scholar, to ascertain if it could be allowed for a particular individual or company.

And Allah knows best.
wassalam
Faraz Khan

Taken from: https://islamqa.org/hanafi/seekersguidance-hanafi/32778

View Three: Islamweb

Question: What is the ruling regarding an investment in the following way: I buy call recharge cards from a shop for 1000 riyals and sell it to my friend for 1140 riyal (14% profit) with a condition that he should return the money to me after 3 months. He sells the cards back to the same shop for a little less and takes the cash. He then goes abroad and buys cellphones and then sells them in his shop and gives me my cash after a period of about 3 months. This is for the purpose of having a safe investment. Is this halal or does it take the ruling on interest? If this situation is not permissible, then what is the permissible way for doing such an investment? May Allah reward you!If there was neither agreement nor conspiration between the first card vendor and the one to whom you are selling them to, providing that he will give them back to him (i.e. to the first seller), then there is nothing wrong in that transaction, and this is permissible tawarruq.

Ar-Rawdh al-Murbi’ reads, “Whoever needed cash and bought what is worth one hundred with a higher price in order to fulfil his need with the price, then this is acceptable; this is called tawarruq. This is mentioned in Al-Insaaf [a Hanbali book], and he said that this is the predominant opinion and the view of the scholars of the School (i.e. the Hanbali School).”

Nonetheless, it is more appropriate for your friend to sell the cards to other than the first vendor in order to avoid the suspicion of al-'eenah. (Sale with immediate repurchase: this is when a seller sells an asset to a buyer on a deferred basis and later buys it back on a cash basis at a price which is lower than the deferred price.)

Taken from: https://www.islamweb.net/en/fatwa/309067/tawarruq-transactions-are-permissible

Mufti Faraz view

To follow.

The IFG view

We share the general reluctance in the above fatawa that tawarruq is not an ideal islamic financial structure - especially when used systematically to synthetically create the equivalent of an interest-bearing loan. We have shared our thoughts on murabaha and tawarruq here.

While we understand that tawarruq (also known as commodity murabaha) is commonplace in the market, we would strongly prefer companies to shift away from this model as quickly as practicable. We adopt this methodology when grading the halal investments we list on our halal investment comparison engine.

Many thanks for providing very useful and practical resources. I would appreciate it if you could help me to clarify one question. One islamic bank in my country offers housing mortgages based on tawarruq principle. As I understand the scholars did not approve using organized tawarruq by banks as a financing option. However this bank has a fatwa “certificate” available on their website. In this case, will it be still haram to obtain a housing mortgage from this islamic bank based on tawarruq?

I wouldn’t go that far. Many scholars view it as permissible.

However I would personally prefer a non-tawarruq option as an alternative if there is one.