Tawarruq Research Paper

Tawarruq is the types of transaction where a person buys a commodity with a deferred payment then sells it to a third party other than the original seller for an immediate cash price. It is generally used to describe a transaction in which a Islamic bank sells a commodity to a customer on deferred payment at cost plus profit, and the customer then sells the commodity on a spot basis to a third party for cash26. The purpose of this contract is to obtain cash immediately from another party (Zuhaily, 2007). There are some criticism of Tawarruq which is said by the scholar that tawarruq is prohibited in Islam. Firstly, According to Ibn Taymiyyah (Zuhaili, 2006), his student Ibn Al Qayyim (Alhadad, 2003), Maliki (Khayat, 2006) and Hanafi School of Thought(Uthmani, 2003) the concept of tawarruq is like inah, where tawarruq contains all the prohibited pretexts, such as the narrowed meaning of inah, explicit usury, loan, sale of debt, transfer of debt, debt scheduling, buy or sell of nasi’ah (deferred payment of ribawi items),

Therefore, it creates a debt that is more than the cash received and it encourages debt-based financing. This debt creation or debt finance is inefficient and inequitable due to; finance provided goes to the most credit worthy client and it redistributes wealth in favor of suppliers of finance (bank), irrespective of actual productivity of the finance supplied. It is also fundamentally unfair as the concept of exchanging money with money with the underlying concept of buying and selling commodity is also accompanied by the uncertainty of the value that may involve in the long run. As such, by allowing tawarruq, it leads to a debt market where the underlying mechanisms are no longer linked to the real market and naturally, speculation plays a role in debt