Fatwa of the Supreme Council of Islamic Jurisprudence on Regulated Tawarruq

The Supreme Council of Islamic Jurisprudence Fatwa of the Supreme Council of Islamic Jurisprudence on Regulated Tawarruq (and its transactions in Islamic Jurisprudence)

History of Tawarruq and the Views of Jurists on its Permissibility:

History of Tawarruq: Tawarruq is derived from the word 'turuq' (paths), meaning methods and means. It is stated in "Taj al-Arus": "Tawarruq: the means of obtaining money." Originally, it meant a method or way, whether it was a method or a means. Then the understanding shifted to the word 'qabd' (possession), whether it was for obtaining money or obtaining goods. The term 'qabd' is used in two senses: the original linguistic sense, and the extended sense of acquiring goods or money without the need for possession. It became common among jurists to use 'tawarruq' to mean acquiring goods through a transaction, as it is the least of the two meanings that necessitates possession. Then it was extended to mean: "Acquiring goods from the people, and obtaining money from them." (Al-Inaf 19/11, Al-Zubda 44/4, Kifayat al-Qawa'id 3/175, Sharh Muntaha al-Iradat 2/58).

Tawarruq is based on two contracts: The first is the purchase of a commodity (the tawarruq commodity) from a seller for a deferred price or a spot price, with the intention of selling it to someone else. The second contract is a spot sale of the purchased commodity to another person who agreed to it, for a spot price.

Distinction between Bai' al-'Inah and Tawarruq: Bai' al-'Inah (sale with repurchase) differs from tawarruq in that it occurs through two transactions: a spot sale, and a deferred sale to the first seller, with the intention of repurchasing the commodity. Whereas tawarruq involves two separate contracts, making it three stages: a deferred sale and a spot sale in one transaction (Al-Qawaid al-Fiqhiyyah al-Musattarah fi al-Fiqh al-Islami, www.net.alukah). Ibn Qudamah said in Al-Mughni: "If he returns the commodity to its seller, it is Bai' al-'Inah; if he sells it to someone else, it is Tawarruq" (3/128). Al-Harawi said in Hashiyat Ibn Qudamah: "If you say: Then what is the ruling if there is no repurchase? I say: This is the issue of tawarruq; because the original tawarruq is [selling to someone else]."

Jurists agreed on the permissibility of Bai' al-'Inah because it is a means to repayment, and they agreed on its permissibility. Al-Turtushi said in Rawdat al-Nazir: "It is stated: There is no harm in selling the commodity of Bai' al-'Inah... which is that someone sells a commodity to another for a deferred price, and the buyer sells it to a third party for a spot price less than the deferred price, because the intention is for him, and it is permissible." (9/261). And in Al-Mughni according to Al-Shafi'i: "We do not consider the contract void, nor do we say the two parties are liars; and it is permissible to sell it." (Bai' al-'Inah).

Evidence for Tawarruq in Islamic Jurisprudence:

First: The majority of jurists, including the Hanafis, Shafi'is, Malikis, and Hanbalis, permitted tawarruq, provided there is no prior agreement or condition. Mu'awiyah reported that he allowed tawarruq, and Abu Dawud al-Azdi reported that it is permissible according to the consensus of jurists. Then he said: "It was reported from Aisha (may Allah be pleased with her) that she used to buy goods from Mu'awiyah for a thousand dirhams on credit, and buy the 'Harnqa' (a type of cloth) with that, which is the 'Hawi' sale," according to Al-Azdi (p. 216).

Al-Qassani (in Bada'i al-Sana'i 5/199) and others said: "If a man sells a commodity to another for a deferred price less than its spot price, and the buyer sells it to someone else for less than what he paid, it is permissible; because the difference in the price of the commodity is like the difference in the commodity itself." (Al-Qudamat al-Mubiniyya by Ibn Rushd 2/39).

And from the Hanbalis: "If a man buys a commodity from another for a deferred price of one hundred dirhams, and sells it to someone else for a spot price of eighty dirhams, or sells it for a spot price of one hundred dirhams to someone else, and the seller is not aware of the spot price, it is permissible; because the spot price is unknown to the first seller." (Al-Inaf by Al-Shirazi 11/195).

And it is stated in Al-Wajiz: "And from the Hanbalis: If a man buys a commodity for one hundred dirhams, and sells it for one hundred and twenty dirhams, there is no harm in it; because it is permissible to increase the price, and this is the issue of tawarruq."

Second: Ibn Hazm (the Zahiri) differed in this matter. He considered tawarruq impermissible. He said in Al-Muhalla (4/49): "And Ibn Qudamah considered it impermissible, and this is a report from Abu Hanifa, and Al-Zubda states that he chose its prohibition, and this is a report from Abu Hanifa." (3/182, I'lam al-Muwaqqi'in).

Third: The contemporary Islamic jurists and scholars of the Islamic world permitted tawarruq in their resolution No. 5 of the fifteenth session, held in Mecca on 11 Rajab 1419 AH (October 31, 1998 AD). They stated: "Regulated tawarruq is a permissible Sharia transaction, as stated by the majority of scholars; because the original ruling in transactions is permissibility, based on His saying: ﴿وَأَحَلَّ اللَّهُ الْبَيْعَ﴾ (And Allah has permitted trade). There is no evidence prohibiting it, and because there is a pressing need for it; such as paying debts, or other needs.

And its permissibility was conditioned on the absence of deception and fraud in the Sharia-compliant transaction (Resolution No. 19297): "The issue of tawarruq is that you buy a commodity for a deferred price, and then sell it to someone else who did not participate in it for a spot price less than the deferred price; so that you obtain money. This is permissible according to the majority of jurists."

And it is stated in "Al-Mawsu'ah al-Fiqhiyyah al-Kuwaytiyya": "The scholars agreed on its permissibility, whether it is called tawarruq or not, and whether it is called 'the opposite'; because of His saying: ﴿وَأَحَلَّ اللَّهُ الْبَيْعَ﴾, and His saying: ﴿يَا أَيُّهَا الَّذِينَ آمَنُوا أَوْفُوا بِالْعُقُودِ﴾ (O you who believe, fulfill your contracts), and because there is no evidence prohibiting it.

Fourth: The Sharia Supervisory Board of Al-Rajhi Bank (Resolution No. 30) issued a fatwa on the permissibility and conditions of tawarruq, and established guidelines for Sharia-compliant tawarruq in the resolution of the fifteenth session of the Sharia Board of Al-Rajhi Bank, held on 19 Dhu al-Hijjah 1424 AH (December 13, 2003 AD). They stipulated that the Islamic banking institutions must not violate the Sharia principles and standards, specifically: Prohibiting the deception of the buyer by informing him of the intention to sell the commodity to another party, because this deception leads to the greatest harm, and it is considered 'Tawarruq al-Fadli' (deceptive tawarruq). This occurs when the commodity is found and its price is known, and the buyer is deceived through the usual methods, such as selling a commodity (for cash or credit) from the market or elsewhere, on a deferred price, with the condition that the buyer - either by agreement in the contract or by custom and practice - must repurchase it from another party for a spot price, and the price is reduced for the tawarruq. And the Sharia Board prohibited the permissibility of this deceptive tawarruq for reasons including: The deception of the seller (the buyer) in the tawarruq contract, which gives him the right to sell the commodity to another party, or to repurchase it from the first party, whether the deception is explicit and clear, or customary and traditional. And because this is considered among the means to violating the Sharia principle necessary for the validity of the transaction. And the reality of these transactions is that they are based on a pre-arranged buy-back scheme, which is not tawarruq, but rather a sale and repurchase that the buyer engages in, which is a condition in most of its cases. This involves the seller being deceived into repurchasing what he has sold, and these transactions are not the traditional tawarruq agreed upon by jurists, which the Sharia Board in its fifteenth session prohibited, as it stated in its resolution, because they are transactions with hidden defects and ambiguous conditions, which are not among the minor defects that do not affect the validity of the transaction. Therefore, traditional tawarruq is based on a genuine sale of a commodity for a deferred price, which does not involve a buy-back in all cases, and then its sale is for a spot price to obtain money, before the buyer repurchases it, and it is not a pre-arranged buy-back from the tawarruq party. The difference between the deferred sale and the spot sale does not involve a buy-back in all cases, which is not a condition in these transactions, which are conditional in most of their cases, and these are not disputed in the Sharia-compliant transactions that are established by the public.

This is what made the Sharia Supervisory Board (Resolution No. 30) of the fifteenth session of the Sharia Board of Al-Rajhi Bank lean towards prohibiting deceptive tawarruq, and this is because the deception of the buyer and the subsequent repurchase makes it one of the means to 'Tawarruq al-Fadli' (deceptive tawarruq), and this led the jurists to the conclusion that the conditions of tawarruq are: "The absence of deception in the sale or repurchase of the commodity, or repurchasing it from the buyer for a spot price, so that the seller is not deceived without informing the buyer."

And in the general principles (Principle 54) of the Practical Legal Principles, there is something in tawarruq that is not forgivable in other matters (So the buyer's intention to sell the commodity is not a condition, but if he has another intention to repurchase it for a spot price, then this intention is for the seller).

And based on this, the Sharia Board of Al-Balad Bank leaned towards the permissibility of tawarruq and stipulated the following:

First: The permissibility of Sharia-compliant tawarruq in the following cases:

1. The dominance of foreign currencies over the Islamic currency, with the depreciation of the Islamic currency relative to foreign currencies, to avoid the loss of the purchasing power of the currency.
2. The dominance of foreign currencies over real estate and properties in times of inflation and the lack of effective tools to combat inflation.
3. The need to pay salaries and wages and settle debts.
4. The need for treatment and education if it is outside the state's budget and the availability of tawarruq facilities.
5. The dominance of foreign currencies for students who need to obtain foreign university certificates.
6. The need for marriage expenses.

And the conditions for the permissibility of Sharia-compliant tawarruq in these transactions are: First:

1. The Sharia-compliant tawarruq must be in accordance with the Sharia Supervisory Board's Resolution No. 30 issued on the fatwa of the fifteenth session of the Sharia Board of Al-Balad Bank.
2. The establishment of the necessary Sharia compliance department for the tawarruq transactions, which includes (recruitment and training of staff, establishing policies and procedures for transactions and contracts, awareness and programs, training courses for staff).
3. The transactions of tawarruq must be based on the aforementioned cases, and any deviation from this requires the approval of the Sharia Board of Al-Balad Bank.