4 FINAL PROJECT OF ISLAMIC FINANCETOPIC: AL-TAWARRUQSUBMITTED TO: SIR SHAKEEL IQBAL AWANSUBMITTED BY: GROUP MEMBERSNAWAZ AMIN 20160ZUHAIB ALAM 20256ALI NASIR 20244 TABLE OF CONTENTSABSTRACTCHAPTER # 1 INTRODUCTION OF TAWARRUQ1. INTRODUCTION................................................................................................................................. 42. DEFINITION AND TYPES OF TAWARRUQ........................................................................................... 5 2.1 DEFINITION AND TYPES OF TAWARRUQ................................................................................... 5 2.1.1 LITERAL MEANING OF TAWARRUQ...................................................................................... 5 2.1.2 TECHNICAL MEANING OF TAWARRUQ.................................................................................. 6 2.1.3 TYPES OF TAWARRUQ 8CHAPTER # 2 FORMS AND AGUREMENTS OF TAWARRUQ3. FORMS OF TAWARRUQ...................................................................................................................... 94. THE PROPONENTS AGUREMENTS ON TAWARRUQ.13 CHAPTER # 3 CONTROLS,RISK MANAGEMENT AND CONCLUSION5. CONTROLS OF VALID TAWARRUQ....................................................................................................... 157. TAWARRUQ FOR LIQUITY RISK MANAGEMENT.................................................................................. 178. Conclusion 18References ABSTRACTIslamic banking product has gained popularity since the last two decades and stole the attention all banking and finance sector industry around the world due to its uniqueness compare to conventional bank and trusted as a solution for the current crisis. However the issue of liquidity risk management is very sensitive in the banking system to satisfy the need of asset and liability. Since Islamic bank is free interest-based system which cannot use conventional product as their liquidity risk management where Islamic bank trusted as one of institutions that become solution for crisis, we need Islamic product that can overcome this issue. One of aqd that we can offer is tawarruq concept where by the Islamic bank A for instance needs liquidity to satisfy the demand of depositors; he can borrow from Islamic bank B who has surplus in liquidity by using tawarruq concept. The main objective of this paper is to introduce the real tawarruq concept for Islamic bank to manage its liquidity which also can be used for conventional banks if they want to offer Islamic windows. In this paper we provide the structure how the tawarruq can be work in banking system and forms of Tawarruq that are actually practiced by Islamic banks. INTRODUCTIONTawarruq is the most popular product in Islamic banking and finance sector especially in GCC countries which is disputed among the Muslims scholars. The idea of tawarruq came from the classical view of jurists that want to assist the development of Islamic economic, banking and finance and replacing the old concept which is clearly prohibited in Islam. Islam has always coming up with an alternative product and contract to replace the position of the Haram transactions that will lead into the serious economic problem to the society. Such as, Allah has prohibited Riba and at the other hand, Allah allowed sale as long as the terms and conditions of sale are followed by counterparty. However, the ideal concept brought my classical scholars about the contracts has already contaminated by the current banking and finance sector who try to get advantages from the classical concept without following the original structure that mentioned by the classical jurists. At the other hand, we face many issues to implemented the real Islamic finance in banking sector which loaded by non-Muslims players whose their mind-set is originated by capitalism point of view. In this coming discussion will discuss how Islamic banking product play its role in the real economic whereby there is real transfer of ownership between counterparty compare to conventional product that only play money with money and consider money as commodity. Where in Islam it is not allowed, Islam considers money as a medium of exchange and money cannot be exchanged with money unless has same value. However, to raise value of money we have to change money with commodity and sell it to another party so that we can take advantage differentiation of price between purchase and sale. Since the concept of tawarruq is widely used and accepted by middle east country (GCC), Bank Negara Malaysia (BNM) has revised the concept of tawarruq by introducing new concept of using tawarruq, the concept introduce by them is Bursa Suq Al-Sila . This concept organizes between the counterparty how to manage liquidity between the banks and will further discuss in this paper. Therefore, the objectives of this paper are; first, to provide the definition and forms of tawarruq, second, to discuss the differences between tawarruq and bay al-inah, third, to provide the real Tawarruq concept for Liquidity risk management, fourth, to provide liquidity risk management structure for Islamic bank and discuss the scheme of Bursa Suq Al-Sila that basically implementation of real tawarruq concept has been implemented by Bursa Malaysia. DEFINITION AND FORMS OF TAWARRUQ Definition of Tawarruq Atawarruqis an Islamic financial product which allows clients to raise money quickly and easily, in theory without breaking Muslim bans on interest. A customer buys an easily saleable asset from an Islamic bank at a marked up price, to be paid at a later date, and quickly sells the asset to raise cash. Literal Meaning of TawarruqThe term Tawarruq is derived from the word al-warq or al-waraqa, which means minted dirham or any silver that issued to serve as a medium of exchange, in this concept; it is designated to someone who has an abundance of silver coins. In another term tawarruq comes from masdarthe verb tawarruqa is said Tawarruq al-hywan which it means the animal at the leaves (Bouheraoua, 2009). The term of basically tawarruq comes from the word wariq(Khayat, 2006) as it mentions in surah Al-Kahfi: 9 So send one of you with this silvery coin of yours to the town. Which it means Dirhams made of silver. However, there are two different accents in the Arabic language (wariq-warq).Furthermore, Tawarruq and the verb derived from al-warraq are not directly traceable in the Arabic language; linguists mention only variable nouns, as an al-Iraq (which applied to become rich) and al-istiraq (which applied to a man who is seeking Dirham or money). So the scholars invent the term of tawarruq for the one who may be pressure himself on how to obtain al-wariq or cash money. Technical Meaning of TawarruqTawarruq technically is the purchasing of a commodity on credit by the mutawarriq (seeker of cash) and selling it to a person other than the initial seller (3rd party) for a lower price on cash (Dusuki, 2008). Actually, tawarruq is a sale contract, whereby a buyer buys an asset from a seller on deferred payment and subsequently sells the assets to the third party for cash, with a price lesser than the deferred price. This transaction is called tawarruq, mainly because when the buyer purchases the asset on deferred terms, it is not the buyers intention to utilize the benefit from the purchased asset, rather to facilitate him to attain liquidity (waraqh maliah). Parties to a tawarruq transaction1. Seller (mutwarriq) or creditor;2. Buyer (mustawriq or mutawarriq), i.e. the one who is looking for liquidity; and 3. Subject matter:Commodity.Figure 2.14According to Malikis tawarruq means selling something on deferred basis and then buying it back in cash, at a lower price than the deferred price. For example, someone sells his commodity at a price that is already known to be paid by the deferred payment. He then buys it at a lesser price than the deferred price. It is known because of obtaining the money for sahib al-inah.This is because al-ain is the present property from the money. This is one of the practices of the Hanafis (Khayat, 2006). According to the Shafiis, tawarruq means selling something on deferred payment, and then buy it back in cash, albeit at a lower price than the deferred price. Furthermore, the Hanbalis said in kitab Syarh Muntaha Al-Iradat,known as Daqaiq Awla An-Nahyu Li syarhi Al-Muntaha that bai al-inah by the name of tawarruq is the need for cash, buying the equivalent of thousands and more to expand its price and there is nothing wrong with that and it is known as tawarruq.In Muntaha Al-Iradat Fi Jami Al-Muqni Maa At-Tanqih Wa ziadat,If someone bought something on credit or he did not pay the price, it then becomes forbidden and the sale is invalid to its buyer by cash purchase less than the first price, and it is a tool to the second, except change its feature and it is known as the problem of inah, because the commodity of the buyer in deferred is taken instead of it.The difference between tawarruq and tawriiqMany researchers have mixed up the term tawarruq and tawriiq. The definition of tawarruq has been mentioned above. However, tawriiq means documentation (taskiik).This means transferring existing commodities into sukuk, which are subject to circulation.This type of arrangement needs to be guarded by certain restrictions and procedures, in order to attain the Shariah criteria that are based on investors ownership on the assets that yield income. The acceptable deeds (sukuk) are the likes of sukuk of ijarah (leasing), sukuk of salam (advance payment) and sukuk of mudharabah (profit sharing). The rulings for all these sukuk are based on certain Shariah criteria. The process of issuing sukuk can be divided into different parts, with the view of protecting the sukuk bearers and the integrity of their circulation, with the reference to that sukuk ijarah can be of long-term application, via the different amounts that is in agreement with the Shariah criteria, which can create different returns for the sukuk bearer.The difference between inah and tawarruqAccording to the Hanafi School of Thought, inah is when someone buys something at a known price (on deferred basis), and then resells it to the original seller for cash, in which the second sale price is less than the deferred sale price.According to the Maliki School of Thought, inah happens when someone sells a commodity of ten Dinar in cash to another person. He then buys it from him (the same person) at twenty Dinars, i.e. on deferred basis or vice versa. Types of TawarruqGenerally, there are two types of Tawarruq namely individual Tawarruq (Tawarruq al-Fardi) and organized Tawarruq (Tawarruq al-Munazzam).Individual Tawarruq (Tawarruq al-Fardi) Individual Tawarruq is a pure Tawarruq whereby a buyer buys a commodity from a seller on deferred term and later sells it to other person for immediate cash. When the buyer sells it, the commodity is in his hand and he has the choice in either to keep it or to sell it in the future. If the buyer has the intention to sell it, the sale contract is considered valid by the majority of jurists even the buyer sells the commodity to other person (independent from original seller) since the intention of all parties is not to engage in riba (Haneef, 2009). Therefore, Tawarruq is allowed though some jurist considered it is reprehensible provided that third party is present as an intermediary (El-Gamal, 2006; Kuwait Finance House, 2011a).Organized Tawarruq (Tawarruq al- Munazzam)Tawarruq al-Munazzam is organized in a way that the buyer has the options in either keeps the commodity or appoint the seller to be an agent to sell it or appoint a third party which is related to the bank to sell the commodity. This type of Tawarruq is common in banking practice for the purpose of consumer financing (Adel, 2010). The buyer practically has no options as the purchased commodity is not intended to be purchased (Dabu, 2007). Rather, it is a facility to allow the buyer to get cash. Hence, he appoints the bank as his agent to sell the purchased commodity to any third party and the proceed will then be delivered to him. Forms of Tawarruq We can detect six forms of Tawarruq that are actually practiced by Islamic banks that deal in it. These are as follows: 1. Buy deferred and sells cash with the intermediation of the Islamic bank 2. Buy cash by the Islamic bank with lease/sale to the same seller 3. Buy commodities cash and selling them for a deferred price in the international market for the bank itself 4. Sell commodities cash and buying exact equivalent deferred in the commodity market with the intermediation of the bank 5. Sukuk of leased assets 6. Sukuk of services (service bonds).It is worth noticing that in the forms 1, 2 and 4, the bank provides cash to its customers while in the form 3 the bank provides cash to international companies and traders in the international market. In the form 5 the Islamic banks gets the cash or it the Sukuk are issued by a government it also gets the cash. The form 6 is not practiced by Islamic banks but certain companies practice it and the most common form of it is the phone and gift cards that are issued for a future service or purchased that will be made by the card purchasers. Buy deferred and sells cash with the intermediation of the Islamic bank There are Islamic banks that announce and advertise its service of Tawarruq financing. Very often, and for obvious reasons new cars are used as a commodity-medium in consumer Tawarruq. The car does not leave its lot in the dealership and all transactions are made on the keys! Several cars may be contracted if the amount of financing happens to be larger. The corporate version of it is normally done on large inventory at an associate company to either the Islamic bank or customer crop.From a financial and economic point of view, the direct cost to the customer and the social cost of this transaction is certainly much higher than the cost of interest-based lending. The reason is the complexity of the transaction and its several steps and contracts in addition to the potentiality or legal or economic changes during its period. It takes much more than Murabahah that is already more costly than interest-based lending. Besides, since the only way to reduce its cost is to apply it in a formal not real way so that it becomes exactly like a Riba-based loan but with more paper work, it gives the attraction to fake the transaction instead of implementing its details required by its Fiqhi description. Finally it has all the drawbacks that are associated with interest-based lending while it does not bring any social, economic or equity advantage. Buy cash by the Islamic bank with lease/sale to the same seller. In this form of Tawarruq, the Islamic bank buys from its customer a real long-lasting asset, often real estates, for a cash payment, then it sells/lease the same back to the customer on installment basis for either fixed or variable installments. The Price is normally the same original price of the purchase from the customer and the Islamic bank earns the rent of the part that is not sold. Once the customer fulfills all its obligations the ownership of the property is returned to it. Some Islamic banks restrict the use of this type of financing for cased or replacing interest-based loan the customer had with another party. Buy commodities cash and sell them for a deferred price in the international market for the bank itself.Almost all Islamic banks practice this kind of Tawarruq, or rather Tawriq, under the name of international Murabahah as a means for using their excess liquidity. This transaction consists of parallel contracts each pair of them consists of cash purchase and deferred sale. Sell commodities cash and buy exact equivalent deferred in the commodity market with the intermediation of the bank This is used by Islamic banks as a vehicle to provide cash to their customers. The transaction consists of a series of agency contracts between the bank, its international correspondent, international broker, and the customer. The customer normally only sign a bunch of papers that it does not know their content and get cash from the bank and pays for it a higher amount in the future. The only basic difference from interest lending is that the amount of of increment above the advanced cash is not determined by a general rule announced to everybody but rather by the price differential of the commodity at the time of the transaction in addition to the commissions of all intermediaries. Sukuk of leased assets The creation and sale of the Sukuk of leased assets is essentially a real life investment transaction although some of its versions may be used as a tool of tawarruq. If a government wants to build a new airport or connecting two cities with a railroad for a construction cost of 200 million Dinar, and the government desires to keep the management in its hands while finance the project from the public, it can issue, say, 2 million title deeds, each one of them represents the ownership of only 1/2,000,000 of the project and sell these Sukuk for 100 Dinar for each Sukuk (in fact for each share of the project), and the government pledges to rent these assets for a given known rent and a given long term period. The proceeds of sale will be used to construct the project and put it on its feet ready for delivery to the lessee. It is obvious that these Sukuk are negotiable for a market price because they represent a part of a real estate. And it is obvious too that they provide the owners with a pre-determined earning fixed and known in advance. It is obvious too that the same can be done by an Islamic bank instead of a government. The same also can be applied to already existing projects or real estates owned by the government or the Islamic bank if the government or the bank decides to sell them and lease them from the new owner. The proceeds of the sale may be needed to establish another developmental project. These Sukuk can be used as a vehicle for Tawarruq when the government or the Islamic bank offers already existing long-lasting assets, represented by Sukuk, for sale with the condition of not only leasing them from the new owners but also to buy them back too through installment payments along with the lease payments so that by the end of the lease period ownership goes back to the government or the Islamic bank. Under this, added condition, the apparent objective of the government is to acquire the cash now and return it with a surplus or increment over a period of time. Sukuk of services (service bonds) Some universities in the West actually started offering for sale future credit hours that parents can buy for their childrens education. With all prices going up over time, the cost of future education can be guaranteed at affordable prices today. The university can use the funds for its developmental projects. These well-defined service bonds are also negotiable and can be issued by an Islamic bank that can buy these services in bulk from the service provider, thus financing its projects, and sell the service Sukuk to the public. The Proponents Arguments on Tawarruq Tawarruq is a type of sales Tawarruq defined as buying commodity with deferred payment and selling it to other than the seller in order to obtain cash. It is generally acceptable by referring to verses in Al Quran when Allah says; Allah Has allowed trade and has prohibited Riba (Al Baqarah 2:275 ).In addition, Islam Does not prohibit any trade except those which involve injustice, cheating, making exorbitant profits, or the promotion of something which is Haram (AlQaradawi,No year) .It Denotes that the word trade is the generality of all types of trade and permits every sale, where Tawarruq is like any other sale. Mutual Consent between the parties Every agreement made between the parties is legally permissible in Islam. When if both parties agreed and have mutual consent toward their agreement or transaction. This Principle was laid down in Al Quran:O You who believes! Do Not squander your wealth among your selves in vanity, except it be a trade by mutual consent (AnNisa4:29). Thus, The free agreement is one of the conditions which render the transaction valid in Islamic Point of view especially in debt transaction. Tawarruq Is based on mutual consent between the customer and Islamic banks. No Harmful effect It was narrated that Ibn Mas udruled that there was no harm in declared lump sum or percentage profit margins. In this regard, the cost in Tawarruq Is determined and thus permitted. No Element of RibaAllah said, O Ye who believe! Squander Not your wealth among yourselves in vanity, except it be a trade by mutual consent (An Nisa4:29). This Verse shows that it is prohibited to eat the property of others by using the incorrect ways, which are not in line with the Shariah , Such as Riba, Qimar, Ghisyh .Murabahah Transaction is not based on Riba Because the profit margin agreed by both partiesAnd ther is no other hidden payment charged by the seller to the purchaser. Nevertheless, some argues that what are the differences between profit margin in Murabahah And interest charged by conventional bank through the loan given. The Argument is that the profit margin offered in Murabahah Transaction determined by negotiation by both parties i.e. between the bank and the customer until they mutually agreed into the transaction. While In conventional bank, the interest determined by keeping up with interest rate developed in financial market (Khalid, No year) . In Case of default payment occurred, the client of credit loan will be penalties, in contrary the client of Murabahah Financing disallowed to be penalties. The Price in the beginning of Murabahah Contract is the final price fixed until the end of installment payment finished. Thus, There is no other penalty in the case of default of payment It Same goes to Tawarruq Where the trade is like selling the commodity to the purchaser at a high price through debt, and the buyer sell the commodity at a lower price to the third party at the same price, in order to make the profit differ from the other price. This Type of sale is permissible i.e. Tawarruq, because there is no Riba. Tawarruq as to avoid usury without Hilah The Scholars who permit Tawarruq Based on the Hadith Of Bukhari Muslim 27 , Who has been proven to support the Tawarruq transaction, on theoccasion when a farmer from Khaybar Came to the Prophet Muhammad, Bearing dates of the highest quality. The Prophet Asked him,Are allthe dates from Khaybar of good quality And the farmer answered, No, I Have exchanged two kilograms of low quality dates for one kilograms of superior quality. On Hearing the farmer S answer, the Prophet Muhammad Forbid this, and recommended he sell all his low quality dates for cash, to obtain money, then to buy dates of a superior quality (Hosen And Narawi, 2009) . This Hadith Indicates the legal trading method to avoid usury, without the existence of Hilah or anything of that nature, because trading conditions had been fulfilled and there was no usury in this trade transaction. Ibn Baaz said with regard to the issue of Tawarruq, it is not Riba And the correct view is that it is permissible, because of the general meaning of the evidence and because it facilitates relief and enables people to meet their current needs. As for the one who sells it to the one from whom he bought it, this is not permissible rather this is a Riba based transaction, which is called Innah . This Is Haram Because it is a trick aimed at getting around the prohibition on Riba (Yusri And Abdurrahman, no year). Thus This matter indicates the legality of trading transactions, wherein the intent and differing goals using a medium is acceptable and may be carried out, or put into practice, As well as being free from usury explicitly or implicitly. In Other words, the Tawarruq Transaction is permitted and is made legal when it is indeed required. Controls of valid tawarruq1.The contract of deferred sale should be Shariah-compliant, either by negotiation or murabahahtaking into account the eighth standard ,which concerns murabahah and murabahah to the purchase orderer-and make sure that the commodity exists and possessed by the seller before he sells it. In case of a binding promise, the promise should only be from one party. Moreover, the subject matter should not be gold, silver or currencies;2.The commodity must be precisely determined, either by possessing or by serial number of its documentation, such as the serials numbers of warehouse certificates.3.If at the time of concluding the contract, the commodity does not exist, then the seller must provide full information regarding the description, quantity and the place the commodity is stored to the client, in order to ensure that the sale is genuine not nominal. Preferably, the transaction should use local commodities.4.There should be real possession of the commodity, and there should not be any obstacle that prevents the client to hold the commodity;5. The commodity should be sold to a third party, and not to the first seller, so that sale of inah is avoided. Additionally, the first seller should not get back the commodity by any condition, collusion or through customary practices;6.There should not be any link between the contract of purchase at deferred price and the contract of sale at cash price, by a way that forbids the client to hold the commodity, either the link is stated in the contact or due to customary practices or by the nature of the procedures;7.The client should not appoint the company (which deals with the international markets of commodities) or its agent to sell the commodity that the client has bought. Moreover, the company should not appoint itself as the agent for the client. However, if the system in the market does not allow the client to sell the commodity by himself, the client can assign the company as his agent to sell the commodity, on condition that the sale should be done after the client has held the commodity;8. The company should not appoint another agent to sell the commodity (which was sold by the company -first seller) on behalf of the client;9.By taking other provisions into account, the client should sell the commodity himself or through another agent (not the company); and10. The company should provide full information, in order to enable the client to sell the commodity, either by himself or through his agent. . TAWARRUQ FOR LIQUIDITY RISK MANAGEMENT Liquidity risk is the potential loss to banks arising from their inability either to meet their Obligation or to fund increases in asset as the fall due without incurring unacceptable costs or Losses (Dusuki, 2010). Where the bank will incur systemic risk at this moment either bank runs or financial instability. Liquidity risk management is play important role in banking sector. Since the bank play with other peoples money, managing the liquidity to satisfy the demand of asset and liability is the key of survive of the bank and ensure that the bank always has liquidity to pay the depositors money. Otherwise, the depositors will rush to the bank to take their money back namely bank run. If let say one bank collapse it will lead other banks will collapse (systemic risk) as happened in Asian crisis 1997-1998. Therefore, the role of treasury department in the banking like heart, if they cannot manage in appropriate way, automatically the bank will collapse. Conclusion It is concluded that Tawarruq Transaction practice by Islamic Banks is according to Shariah guidelines. Even Though there are different views and stands towards the legality of Murabahah and Tawarruq But the Fatwas from AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) conformed that the products are permited to be used in current practice. However, The requirement outlined by AAOIFI shall be fulfilled by Islamic Banks to ensure that product is permissible to be used i.e. no elements of Riba, GharaR and Maysir.References1-http://www.islamic-banking.com/glossary_t.aspx2-http://www.dummies.com/how-to/content/reverse-murabaha-tawarruq-in-islamic-finance.html3-http://cif.ciitlahore.edu.pk/Documents/Tawarruq-Concept.pdf4-http://www.iefpedia.com/english/wp-content/uploads/2011/11/Tawarruq-in-Islamic.pdf5-http://lexicon.ft.com/Term? 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