Presumably, being a hiyal (ruse) to circumvent the ban on riba', the niyah of all participants was in contradiction with the aims of the Shariah.
Tawarruq is similar to Bay' al Inah in that it involves sale and buy-back (on deferred basis) where the aim is to lend cash to one party, financed by a second with payment increased and deferred. The difference with bay' al inah is that to prevent bans on sale and subsequent resale between two parties, a similarly morally contemptuous third party is involved to transfer the assets between the other two, a sort of triangle of cashflows and asset-movement. The asset matters little to the arrangement.
Is it only a matter of time before all similar ruses are similarly declared morally bankrupt?
Note that accidental tawarruq is still ok!
HT to Md Obaidullah on IBFNet
This is very good news. For a recognised body to actually look at the niyah of the parties and look at the substance behind the form is very welcome. If applied across the board to Islamic products, I expect several more to get similar treatment. In the short term this will trigger the development of other products that have slightly more developed form but of course the same substance. In the longer term I hope this continues the momentum across the industry to go to the root of the issue and find real asset alternatives to these products.
ReplyDeleteYour comments are quite telling. I think we should categorized products by their Shariah-risk, with hiyal clearly the most risky.
ReplyDeleteNow that Tawarruq is finished, Bay al Inah and Bay al Dayn discredited outside Malaysia, BBA being questioned, Sukuk al ijara with no actual transfer of ownership being seriously damaged, it sounds like Commodity Murabaha is bound to be next!
I do agree with Dr Nikan. I think CM is next to go. If we think about it, CM is actually tawwarruq in effect except the 2nd leg (where the buyer sells to another party) is not expressively stated.
ReplyDeleteThis morning I had an interesting discussion on a seemingly non-controversial contract called istina, for financing of uncompleted houses.
The normal mode is for the bank to become a seller and signs istisna contract with the house buyer. The bank in turn, arranges for a parallel istisna with a developer for the house to be constructed. The risk is now at the bank's end in the event the construction of the house gets delayed etc.
To overcome this, bankers are now structuring the istisna differently. Instead of becoming the seller, the bank becomes the buyer. Thus the potential house owner now undertakes to build the house for the bank, and he also signs a forward ijarah to give his committment that he will lease back the house the he "sells" the bank. the bank, in turn, undertakes to pass the ownership of the house to the housebuyer subject that he settles all payments.
While under this arrangment, the risk faced by the bank is now totally pushed to the customer, from a maqasid point of view, is this justifiable? Can the bank earn its profit when it does not face any risk (except credit risk) and pushes everything back to the customer?
Perhaps, you can give your thought on this..
Jamil
Jamil,
ReplyDeleteapologies for the late reply.
I am wondering whether ijara in this case is permissible. Yes, forward ijara is common enough, but I am under the impression that the object to be leased must be in existence at the time of contract? Certainly it must exist at the forward starting lease date. Does the bank bear a risk that construction is not complete as of the start date of the lease?
One thing that is common of course is to have the contractor pay penalties if delays are significant. If parallel istisnaa is used, it would be unfair to hold the bank to a stricter regimen than the contractor. Also typically the penalties should be owed to the home owner, not the bank. If the bank pockets penalties then Istisnaa is not as just to the customer as conventional construction finance. If the bank bears a greater burden of risk of delay than the contractor in istisnaa, then again,it is unfair to penalize the bank for something entirely beyond their control.
The important thing is to make sure nobody is burdened by undue penalties for eventualities beyond their control. The customer must not be unduly burdened by delays and the bank must not either--the contractor must be negatively incentivized not to delay and the penalty must flow through to the customer.
Due to the flexibility of contract finance, the bank, in both istisna'a structures does bear risk of delay. Construction finance has the risk associated with delayed drawdowns. The money is typically paid in installments, and in conventional construction loans, it will be interest only during the construction process and the customer will pay interest and principal upon completion. Financing terms are set at the start. So, if the stages of construction are delayed, the allocated cash is not drawn down. As soon as it is drawn down it earns the original interest rate.
As far as I know installment payments are common in Istisna'a (limiting contractor credit risk), the terms of the Istisn'a are locked in at the start, and the financier does bear risks associated with either early completion of stages (very unlikely!) or late completion.
So sorry I have not put it entirely into Maqasid but hope I have highlighted some of the financial risks that are borne by the bank as some means of justifying their compensation.