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CONTROVERSIAL DEBTBASED FINANCING PRODUCTS  

  . Tawarruq (Monetization. Tripartite Sale)   Tawarruq is a combination of two separate sale transactions whereby an individual in need of funds purchases a commodity from a seller on a deferred payment basis and then sells the same on spot basis in order to realize cash to a party other than the original seller.I. or legal tricks. but has been permitted by mainstream scholars under certain conditions.   Tawarruq is a financing product that is cited as a classical case of hiyal.

then sells it to the customer on credit.   . the bank usually performs all the transactions needed as it first buys the commodity under its own name.In modern Islamic banking practice. and finally sells it on behalf of the customer to a third party for its cash value.

4. Bank sells X to Client on a deferred basis for P+I. The three transactions occur within a short time period between each other 6. In practice. Bank purchases commodity X of value equivalent to the Client’s need. Client approaches Bank with a specific need for cash. 2.The procedures of tawarruq as a financing product involves the following steps: 1. the bank often acts as an agent on behalf of the customer (in the customer’s transaction with the commodities broker)   . (say P) from a Seller. 3. Bank as Agent of Client sells X in the open market or back to Seller for P* on cash basis 5.

  . all care should be taken to ensure that it does not involve riba.General rules to legitimate the tawarruq transaction:   Scholars have permitted tawarruq since it fulfills a genuine for funds. Hence. It is permitted as long as it does not violate the norms of Sharia’a.

. 2.The buyer should fully possess the goods before selling them for the second time.For the sale transaction to be acceptable. The second sale should be separate from the first sale to avoid complexity and not to fall in gharar. The client must sell the commodity in the market place to a third party. The good should not be sold to the same person it was originally bought from. Otherwise.   . it would be a case of bay'-aleinah. 3. in order to expose the buyer to the risk associated with holding the commodity and storing it. 1.

This is in addition to the time gap between the purchase by the bank and its sale to client as in case of all permissible murabaha.4. Another condition of a valid and permissible tawarruq is the absence of any pre-arrangement between the three parties. In tawarruq. There must be a time gap between the first sale by the bank to client and sale by the client in the market. one needs to exercise extra care and subject the product to an additional investigation before accepting it as Shari’a compatible . therefore. 5.

Repurchase)   A very popular mechanism used by Islamic banks in South East Asian countries is based on repurchase or bay'-al-einah. The rate of profit in this case is indistinguishable from prohibited riba on a conventional loan.II.   . at a price lowerthan the purchase price. Bay’ Al-Einah represents the purchase of a commodity on deferred basisand the commodity is then sold for cash on a spot basis. Bay'-al-Einah (Buy-back sale. A murabaha can change into bay'-al-einah if the identity of the seller is not different from its client. back to the original seller.

The market price of the commodity.   .You may note that bay’ al-einah involves a mere debt creation exercise. as the commodity does not move fromthe client to the bank or vice versa. under bay'-al-einah. There is a consensus among Muslim scholars that bay’ al-einah is not permissible. The deferred repurchase may be for the loan amount plus interest. and the cash sale in bay'-aleinah may be for the amount that the client needs to borrow. There is no genuine trade and exchange in bay'-al-einah.there is no sale in the real sense. need not bear any relationship with the amount effectively borrowed.

III. Businesses that sell commodities on credit tie up their financial resources in the form of IOUs. “Bill Factoring”)   Islamic Shari’a allows selling on credit as in murabaha on deferred payment terms. Thus. liquidity may become a business concern   . Bay'-al-Dayn (Sale of Debt “Bill Discounting”. The ongoing debate is whether Shari’a allows the selling of debt!   Much of today’s business is conducted on credit.

  1.   2. He may go to the market (such as a commercial bank) and sell the instrument at a discount to the maturity value.   . When the buyer “accepts” the bill of exchange. In this case the   seller   finances   the   working   capital   requirement   of   the   buyer. The seller now has two options. it becomes a valid financial instrument that can be traded in the market. He may wait until maturity and realize the full maturity value -value of his sale plus interest for the maturity period. The seller draws a bill of exchange asking the buyer to pay a certain amount (value of purchase plus interest) after a certain time period called maturity. The discount is determined by the rate of interest and the time between date ofpurchase of the instrument by the bank and the maturity date.A bill of exchange originates with a sale or purchase.

 They  essen=ally  treat  debt  as  any  other  physical  asset   that  can  be  traded  at  a  nego=ated  price.   . when the bank buys the instrument of debt from the original buyer. * Riba is avoided by disallowing any difference between what it pays (purchase price of the instrument) and what it receives on maturity (its maturity value). This means in the above case. it effectively engages in lending at interest. *   Notwithstanding   the   clear   verdict   against   such   transac=on. * Mainstream Islamic scholars have put a plug on the possibility of earning interest by insisting that any sale of debt (bay'-al-dayn) or transfer of debt (hawalat-al-dayn) must be at par.   some   Islamic   banks   have   been   offering   Islamic   bill   discoun=ng   products. it is not entitled to any discount.* When the bank buys the instrument.

Against these receivables. The bank is now assigned the accounts receivables and entrusted with the task of collecting the receivables. While an Islamic bank may legitimately charge a fee for its collection activities.Another similar financial product that involves bay'-al-dayn is factoring in which a company transfers its selected accounts receivables to a bank (factor). it cannot accept interest on the loan extended. the bank provides financing.   .