GROUP ASSIGNMENT

COURSE CODE : ISB548

COURSE NAME : ADVANCE FIQH MUAMALAT
PROGRAMME : BACHELOR OF BUSINESS
ADMINISTRATION (HONS) ISLAMIC
BANKING
CODE PROGRAMME : BA249
GROUP : D2BA2494A

GROUP MEMBERS NUMBER MATRICS

1. NURIN INSYIRAH BINTI ZAMRY 2021809364

2. NURULAIN HUSNINA BINTI TAIB 2021823434

3. NUR FARAH LYDIA BINTI OMAR 2021468128

Group Leader : NUR FARAH LYDIA BINTI OMAR

Number Telephone : 019-4056989
Date of Submission : 18 MAY 2023

PREPARED FOR:
USTAZAH SITI HAJAR BINTI MOHD ZAID

SESSION 2 2022/2023

MARKING RUBRICS

Abstract Introduction Research Objectives Literature Review Research Methodology Findings

MARKING RUBRICS
Marks :
Analysis and Discussion Conclusion / Suggestion References / Citation Writing Ethics

1
TABLE OF CONTENT

STUDENT DECLARATION............................................................................3

ABSTRACT.......................................................................................................4

1.0 INTRODUCTION.......................................................................................4

2.0 RESEARCH OBJECTIVE..........................................................................5

3.0 LITERATURE REVIEW.........................................................................5-6

4.0 METHODOLOGY......................................................................................7

5.0 FINDINGS AND DISCUSSION................................................................7

6.0 SUMMARY AND CONCLUSION.......................................................8-13

7.0 REFERENCES.....................................................................................14-16

TURNITIN REPORT......................................................................................16

2
 DECLARATION OF STUDENTS

“We hereby certify that at all times, this assignment is submitted based on our own work without
imitating and plagiarizing from any source or attempt to impersonate any party without
justification. We are aware that any violation or suspected violation of this declaration may
result this to be referred to ACIS Disciplinary Committee”

………………………………
NURIN INSYIRAH BINTI ZAMRY
(2021809364)

ain
………….……………………
NURULAIN HUSNINA BINTI TAIB
(2021823434)

farahlydia
………………………………
NUR FARAH LYDIA BINTI OMAR
(2021468128)

DATE: 18/05/2023

3
 BAY AT-TAWARRUQ AND IT’S
APPLICATION IN BANKING SYSTEM
Nurin Insyirah Binti Zamry, Nurulain Husnina Binti Taib, Nur
Farah Lydia Binti Omar

Faculty of Business and Management, University Teknologi MARA

Cawangan Kelantan Kampus Kota Bharu

Abstract
Bay At-Tawarruq is a financing concept that has been increasingly used in Islamic banking.
This report explores the concept of bay at-tawarruq and its application in the banking system.
The report highlights the key features of bay at-tawarruq, and how it is practiced in modern
Islamic banking. The report also discusses the…

Keywords: Bay At-Tawarruq, Islamic banking

1.0 Introduction

Islamic banking has been growing rapidly in recent years due to the increasing
demand for Shariah-compliant financial products. One of the financing concepts that
have been gaining popularity in Islamic banking is bay at-tawarruq. Bay at-tawarruq
is a form of commodity murabahah that involves the sale of a commodity to a
customer on deferred payment terms. The customer then sells the commodity in the
market to obtain cash. This report aims to explore the concept of bay at-tawarruq and
its application in the banking system. The report will provide an overview of the key
features of bay at-tawarruq and how it is practiced in modern Islamic banking. The
report will then discuss the application of bay at-tawarruq in modern Islamic
banking, highlighting the various types of tawarruq transactions, and how they are
structured. Finally, the report will conclude by summarizing the key findings of this
topic.

4
2.0 Research Objectives
The main research objectives against bay' al-tawarruq is that it encourages the
creation of debt in the economy, which does not raise the net wealth of society but
rather redistributes it to the benefit of creditors. Islamic banks are not very different
from goods that are based on bay' al-inah. When both contracts are used to make
Islamic financial products, they don't create economic value, which is what the
founders of the riba-free economy wanted. Hence, Shari'ah scholars who advise
Islamic financial companies, on the other hand, continue to believe that using bay' al-
tawwaruq to make financial products is in line with Shari'ah principles. Even though
it has been criticized, Islamic bankers think that the contract of bay' al-tawwaruq is
the best way to come up with alternatives to interest-free financial goods. In other
words, given the current banking regulations and settings, the bay' al-tawwaruq
contract is the best way for Muslim buyers to meet their financial needs.

Another point of view is that making Islamic financial goods helps the real
economy. For example, if Muslim customers can get Shari'ah-compliant home or
property financing, they will be able to take part in the making of homes and
buildings. Because of these two different points of view or ways of looking at things,
the discussion about whether or not bay' la-tawarruq meets Shari'ah's goals is likely
to continue. Since there isn't a good option to the bay' al-tawarruq contract for
meeting Muslims' financial needs without interest (riba), academics and business
people will continue to work together.

3.0 Literature Reviews

Muslim classical jurists from the four schools of law, namely the Hanafis,
Malikis, Shafi'is, and Hanbalis, researched the Bay' al-tawarruq contract in depth.
They had meticulously crafted the contract in their efforts. However, a few research
are looking into the use of bay' al-tawarruq in present Islamic banking practises. For
example, found that Bank Muamalat Malaysia has switched to bay al-tawarruq
instead of bay al-inah contract after being told by Bank Negara Malaysia to stop
using bay al-inah contract. The goal of this assignment is to add to what has already
been written by giving an evaluation of how well bay' al-tawarruq can meet the goals
of Shariah.

5
 The infinitive (masdar) form of the word tawaraqa is tawarruq. When you say
tawarraqa al-hayawan in Arabic, you are saying that the animal ate the leaves. The
word "wariq," on the other hand, comes from the verb "wa-ra-qa," which means "to
mint or not to mint silver coins".

This meaning is used in Surah 18:19:

"So send one of you to the city with this silver coin (wariq) and tell him to look
for the best food..."
When the teenagers of Ashab al-Kahfi woke up from their long sleep, one of them
went to the market to buy food. The teenager used wariq, which were silver coins
from about 309 years ago when the Roman emperor Decious ruled the city. The
seller was surprised to see that the silver coins were not the ones that were in use
during Theodosius II's rule. The silver coins shown became proof that the youth of
Ashab al- Kahfi had woken up again. Most Muslim experts, including Fakhruddin al-
Razi (who died in 1209), say that the verse makes it clear that the word "wariq"
meant silver coins. The Prophet Muhammad (pbuh) also used the same term (wariq)
to mean a silver coin or dirham. The Prophet Muhammad said, "And (the nisab) of
silver is 2.5%." This is the smallest amount of silver that is subject to zakah.

To be conclude, Bay' al-tawarruq usually involves three parties: (1) muwarriq, a

creditor who supplies commodity on credit, (2) mustawriq, a cash-strapped person,
and (3) buyer, who buys the commodity from mustawriq in an open market. The
classical form of bay’ al-tawarruq demands tripartite transactions in an open market.
When mustawriq buys from muwarriq, he risks finding purchasers in an open
market. If the commodity sells, the mustawriq will get the cash. The mustawriq may
trade hot- demand items to assess market conditions to reduce risk. Bay' al-tawarruq
contract finances real-sector projects with this in mind. Mustawriq and buyer trade
mostly. Pre- arranged transactions have been criticized for their use of bay' al-
tawarruq in Islamic banks, as we will see.

6
4.0 METHODOLOGY
To get the most objective research findings possible, this study employed a
qualitative methodology. These investigations needed precise data and information
assistance in order to get reliable results. In light of this, the research's methodology
was as follows:
Types of Research
This form of study is a subset of library research; it is research that is exclusively
based on written materials, encompassing both under-publicized research findings.
The research paper is the result of research that was done by examining through brief
data, such as archive material, official data from governmental agencies, and
published data (such as court decisions and jurisprudence). In the interim, a
document in the form of "Shariah Journal, Vol. 18, No. 2 (2010) 333-360" is used to
get information on the study's subject. whereby there exist tawarruq-related
provisions. While the relevant literature on the issue will be used to find the
supporting data.

5.0 FINDING AND DISCUSSION

5.1 DEFINITION
Among the jurists previously, the term al-tawarruq was only pioneered by
Ḥanbali jurists. Although jurists of other Ḥanbali schools do not use the term al-
tawarruq in their writing, but they also mention the form of buying and selling which
is equivalent to al-tawarruq according to Hanbali jurists' terms when discussing bay'
al-'īnah and bay' al-ajal. For example, the Ḥanafi school considers buying and selling
in the form of bay' al tawarruq on the side of the Hanbali school to be one of the
parts of bay'al- 'īnah. This means, the difference between jumhur fuqaha' (Hanafi,
Maliki and Syafi`i) with Hanbali only in terms of terms and not the concept of
tawarruq itself.
In terms of language, al-tawarruq comes from the Arabic word al wariq which is
silver money or dírham. Ibn Faris stated that the word al-tawarruq comes from the
word (‫( ورق‬which gives two meanings. First, pointing to goodness and wealth, this
meaning is taken from (‫ )ورق الشجر‬which is a tree leaf. The second meaning, means
color.
“send one of you with this silver coin of yours to the city and let him look to which is
the best of food and bring you provision from it and let him be cautious”

7
While the word al-tawarruq means (‫)تل الورق‬, that is asking for money. Then
the meaning of tawarruq changed to be more general is same as asking for money,
that is,( ‫) سمائة تلب‬some are made of silver or gold or paper money.

8
 5.2 DALILS
a) Al-Quran
Firman Allah SWT

“As for those who devour interest, they behave as the one whom Satan has
confounded with his touch”

This verse explains that Allah S.W.T permits all forms buying and selling, except
for forms of buying and selling where there is an argument that prohibits it. In this
verse also the word (‫ )البيع‬includes all types of buying and selling including bay' al-
tawarruq

“O you who have believed, when you contract a debt for a specified term, write it
down. And let a scribe write [it] between you in justice”
Bay' al-tawarruq is one of the buying and selling transactions and one of the form of
debt receivable that is included in the general meaning of the sentence above.

b) Al-Sunnah
Sabda Rasullah SAW

9
 Narrated from Abi Hurairah r.a, that the Messenger of Allah S.A.W appointed a
friend as an officer in Khaibar. Friend it carries dates called (janib). Messenger of
Allah S.A.W asked the friend: "Are all dates? Khaibar like this?" The friend replied:
"For God's sake, no, O Messenger of Allah. We bought these dates together. The
reward for these dates is two sa' and if we buy dates this is two sa` in return for these
dates are three sa`”. Messenger of Allah
S.A.W said: "Don't do that. But sell everything the dates with dirhams, then buy
them with dirhams that's dates janib"

This hadith explains how to avoid the nature of usury. Therefore, we can use a
valid sales contract without the intention to make the sale and purchase as a trick to
usury. This transaction is also considered valid because of the exchange between
assets and currencies. Thus, transactions such as al-tawarruq cannot be considered a
trick plunged into riba.

c) Fiqh Method

"All types of muamalat are required, unless there is evidence

which prohibits it.”

"All agreements and conditions are mandatory, unless there is evidence

which prohibits it.”

Bay' al-tawarruq is included in the contract that is required based on the method
jurisprudence above.

d) Reasonable argument.
The purpose of trading is to earn money more than a little money. Buying and

1
selling is an intermediary between profit and capital. None of the traders or scholars
who see this goal as a bad goal. Likewise with bay' al-tawarruq, the purpose is to
acquire money and goods as an object of contract and an intermediary between profit
and capital.
The need that urges the community to use this transaction to meet daily needs. This
view is a view ulama' Rabitah al-'Alam al-Islāmī namely:

"The need to pay off debts, overcome problems wedding expenses and others."

They also argue that the meaning and purpose of usury is not clear on the form of al-
tawarruq transaction. This view is expressed by 'Abd God b. Sulayman al-Mani' in
Majallah al-Buhūth al-Islamiyah. He said:

5.3 APPLICATION IN ISLAMIC FINANCE

i) RHB Islamic, Malaysia

We will look at the use of bay' al-tawarruq in RHB Islamic bank in this
part. For two key reasons, the bank has been chosen as a case study. The first
'Islamic window' to be promoted to an Islamic bank subsidiary is RHB
Islamic. The bank is given more freedom to manage its own operations by
becoming a subsidiary by its parent bank (RHB Group). It is intriguing to
consider how the bank may fully utilise the possibilities of Islamic banking.
Second, RHB Islamic is distinctive in that since its founding in 2005, the
bank has not used the Bay' Al-Inah contract. Shari’ah committees of the bank
disallowed the contract to be used in creating financial products to its
customers. Alternatively, the commodity murabahah which is similar to bay’
al-tawarruq is used widely in the bank.

1
ii) BIMB Bank
Financing services for individuals are one of the services supplied by the
bank that are based on Islamic shariah in the course of Islamic banking
business and operations in Malaysia, for instance at BIMB. These services
are founded on the idea of bay' al-tawarruq. This idea has taken the role of
bay' al- 'nah and has been put into practise since the end of 2008. Based on
the amount of demand that is growing annually for financial services, the
necessity for this idea cannot be denied any longer.
A method of financing called bay' al-tawarruq is based on the ideas of al-
murbahah and al-waklah. The vast majority of Islamic financial products
likewise employ this idea. Along with al-murbah ah and al-waklah contracts,
bay' al-tawarruq is used in personal finance as an alternative to interest-based
loans.
Bay' al-tawarruq is not used alone in Malaysian Islamic banking to apply
personal financing; instead, bay' al-tawarruq is combined with other
contracts, such as al-waklah and bay' contracts al-murbah ah, to produce
personal finance.
Bay' al-murbah ah is the sale of anything at a capital price plus a number
of predetermined profit margins. When this theory is put into practise at
BIMB, it implies that BIMB behaves as a merchant by first purchasing
products from manufacturers before reselling them to customers at a higher
price.
When the term "al-waklah" is used in a sales agreement, it signifies that
Islamic banks represent their clients and parties for whom they will be paid in
exchange for their services when it comes to purchasing decisions or the sale
of particular goods.
The modus operandi of Personal Financing uses the principle of al-tawarruq
illustrated in Figure

1
 Based on Figure, the stages of personal financing application based on the
principle of bay' al-tawarruq is as follows:
1. The customer will apply for personal financing from the bank and submit
the application form to the bank.
2. The bank will buy commodities from broker 1.
3. By using a new contract based on bay' al murābah ̣ah contract (price +
profit) the bank will sell commodities that purchased from broker 1 to the
customer.
4. By using the concept of al-wakālah the customer will appoint the bank as
his representative to resell commodities which was purchased.
5. The bank will act as a representative / sales agent for the customer, and sell
the commodity to broker 2.
6. The bank will credit the proceeds/sale price of commodities to customer.
7. The customer will pay the price of the commodity purchased at stage 3 in
installments according to the set period.

iii) Bank Muamalat Malaysia

A product based on the tawarruq contract was developed by Bank
Muamalat Malaysia Berhad (BMMB) in 2006. The BMMB Syariah
Committee authorised this product based on tawarruq during its 11th meeting
for the year 2006 on December 6, 2006. The majority of BMMB's goods
were based on bay' al-'nah contracts prior to the introduction and application
of this contract. The establishment of this tawarruq contract is an initiative

1
or first

1
move done by BMMB to keep away from using the controversial bay' al-'nah
contract.
This modification is also consistent with how Malaysia's Islamic financial
system is currently evolving, which calls for the adoption of new, less
contentious contracts. When we look back at the history of the
implementation of bay' al-'nah in Malaysia's Islamic financial system, we can
see that the authorities held numerous discussions and made a number of
decisions to make sure that bay' al-'nah was implemented in a way that
complied with syar'a. The rigorous requirements put in place make it obvious
that the Bay' al-'nah contract cannot be implemented indiscriminately. This is
so that the bay' al- 'nah contract won't be void under syariah law if one of the
criteria mentioned in it is broken.
The decisions made by the Shariah Advisory Council (MPS) of BNM, an
authoritative body in regulating the course of the Islamic financial system in
Malaysia specifically in aspects of Sharia compliance, can be seen as one of
the strict conditions that have been outlined in the implementation of this bay'
al-'nah contract. At its 16th meeting on November 11, 2000, and its 82nd
meeting on February 17, 2009, MPS determined that the following legal
requirements must be met by Akad Bay' Al-Nah:
 Have two clear and separate sales contracts, namely the purchase
contract and the sales contract.
 There is no asset repurchase condition in the contract.
 The time for signing each contract is different.
 The order of signing each contract is correct, i.e. the first sale and
purchase contract must be completed first before the second sale and
purchase contract is signed.
 There is a transfer of ownership of assets, and there is control over
assets (qabd) that is valid based on syar'a and current business
practices ('urf tijāri)

1
6.0 SUMMARY AND DISCUSSION
It was clear from the debate above that modern academics accepted the
traditional Tawarruq. The issue is caused by the widespread practise of organised
Tawarruq. Tawarruq is used in nearly all facets of Islamic banking in Malaysia,
including deposits, loans, investments, and capital markets. Malaysia abides with
the Fatwa issued by the Shari'ah Advisory Council of the Bank Negara, which
approved the practise of structured and reversed Tawarruq. Malaysia has
therefore been able to create sophisticated Tawarruq solutions for use in many
areas of banking and financing. However, Tawarruq applications are few in other
nations. Most nations restrict its use to personal funding alone. It is clear from
the study that contemporary academics do not outright reject Tawarruq's
application; rather, they reject it because of the numerous ways in which
Tawarruq is used today that violate fundamental Shari'ah principles. This claim
actually aligns with AAOIFI's stance, which has never opposed Tawarruq as an
Islamic Good.
It was also made clear that because there are different opinions about how
Tawarruq should be applied around the world, Islamic financial institutions need
to understand that Tawarruq arrangements should be used in accordance with
shariah guidelines while the industry should keep looking for a long-term
solution for liquidity management. Because of its Shari'ah-related problems,
organised Tawarruq may eventually hurt the sector. A few of the problems
include the fact that there was no actual transfer of ownership of the transaction's
highlighted asset and the fact that there were two prices paid—one for the
commodity's delivery and another for its non-delivery. Therefore, Shari’ah Board
needs to strictly monitor all Tawarruq based transaction which includes the
commodity Murābaḥah.
The OIC Fiqh Academy and AAOIFI rulings on the implementation of
Tawarruq should be carefully followed by Islamic financial institutions, who
should also work hard to find better alternatives. Without using Islamic
terminology to cover up riba and get over other Shari'ah prohibitions, IFIs will
appear to be simple copycats of the established system, with functions and
activities that are essentially the same.
A kind of purchasing and selling known as bay' al-tawarruq involves
three participants or more. It serves as an alternative to bay' al-'inah, which is the

1
subject of intense debate among Islamic academics, particularly those from the
Middle East. There are still disagreements among academics over the
requirement, despite

1
 the fact that the al-tawarruq principle is frequently applied in Islamic
instruments. In Malaysia, Islamic banking products including those offered by
BIMB for personal financing have been developed under the bay' al-tawarruq
concept. It has been widely argued by foreigners, particularly experts from the
Middle East, that the application of the al-tawarruq principle to personal BIMB
finance has given Islamic financing in Malaysia a new perspective.

7.0 REFERENCES
Nasrun Mohamad and Asmak Ab Rahman. (2014). Tawarruq Application in
Islamic Banking: A Review of the Literature, International Journal of Islamic and
Middle Eastern Finance and Management, 7(4), 485-501.

Is bay’ al-tawarruq a better alternative in fulfilling Islamic finance objectives?

IslamicMarkets.com. (n.d.). https://islamicmarkets.com/publications/is-bay-al-
tawarruq-a-better-alternative-in-fulfilling-islamic-finance

Habeebah Simisola Fa-Yusuf1&Ndeye Djiba Ndiaye. (2017). Journal of Islamic

Banking and Finance December 2017, Vol. 5, No. 2, pp. 30-36 ISSN 2374-2666
(Print) 2374-2658 (Online),
https://jibfnet.com/journals/jibf/Vol_5_No_2_December_2017/5.pdf

Luqman Nurhisama, (2016) Journal of Emerging Economies and Islamic

Research. Bai ‘Al-Tawarruq: Concept Of Islamic Financing?
https://ir.uitm.edu.my/32800/1/32800.pdf

Amir Shaharuddin, (2019). BAY AL-TAWARRUQ APPLICATION IN

MALAYSIAN ISLAMIC BANK: A CRITICAL ASSESSMENT.
https://jurcon.ums.edu.my/ojums/index.php/LJMS/issue/view/235

1
TURNITIN REPORT