Islam allows organised tawarruq asset sales - scholar

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ISLAMIC FINANCE: Malaysia's stock exchange will launch a tawarruq-based platform in June. (Getty Images)

The Islamic financing structure of organised tawarruq should be allowed, a top Malaysian religious scholar said on Thursday, weighing in on an issue that has divided the $1 trillion industry.

Tawarruq is widely used as a financing and liquidity management tool but sharia jurists differ on its permissibility.

Most scholars sanction its use although some prominent jurists from the Hanbali school of thought have said it is legal trickery similar to another controversial contract which has been likened to interest-based financing.

In its basic form, tawarruq is an asset sale to a purchaser on deferred payment terms. The purchaser then sells the asset to a third party to get cash. Organised tawarruq is similar although the transactions are executed through banks.

The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, recently declared organised tawarruq impermissible, reasoning that it contains elements of interest-based lending.

But Mohammad Akram Laldin, a respected religious scholar, disagreed, saying organised tawarruq does not violate Islamic law principles.

"From the point of view of Islamic law, there is nothing wrong with the transaction itself," Akram, who is executive director of the International Sharia Research Academy for Islamic Finance, said in a telephone interview.

However, organised tawarruq focuses on the creation of debt rather than economic activity, which is a key tenet of Islamic finance, he said.

"That might be an issue when debt creation is very much emphasised rather than the real economic activity," said Akram who also sits on the Malaysian central bank's sharia advisory board.

"That might be a point which may need further discussion and Islamic finance must try to strike a balance between debt instruments and equity based instruments."

Malaysia's stock exchange will launch a tawarruq-based platform in June to enable Islamic institutions to execute commodity murabaha transactions which are commonly used to structure sharia bonds and derivatives.(Reuters)

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