COMMODITY MURĀBAHAH And
TAWARRUQ
ASSOC. PROF. DR. AZMAN MOHD
NOOR
(azzmannor@gmail.com)
Intro
• Commodity Murabahah is an
example of product innovation in
Islamic banking and finance, which is
based on Murabahah and Tawarruq
transactions. This presentation will
shed light on the structure of
Commodities Murabaha Transaction
offered by Bursa Malaysia
Definitions
• Murabahah: A sale with a mark up price
• Tawarruq: (Monetization) refers to the process of
purchasing a commodity for a deferred price
determind through Musawamah (bargaining) or
Murabahah (mark-up sale), and selling it to a
third party for a spot price so as to obtain cash.
• ‘Inah: refers to the process of purchasing the
commodity for a deferred price, and selling it
back for a lower price to the same party.
• (See AAOIFI standard no 30, pg.525)
Operation Flow of BURSA SUQ AL-SILA’
1
Bank A
Supplier 1
2
Supplier 2
Supplier 3
Bank B
3
4
Supplier 4
Commodity
Cash Payment
Differed Payment
4
SUPPLIERS
COMMODITY SELLERS
(1)Sells RM10 million worth of Crude Palm Oil (CPO) warrants
“commodity” to the Islamic Bank A on spot basis.
(3)Delivers the commodity on the same day and the
ownership is transferred to the Islamic Bank A.
ISLAMIC BANK A
(2) Buys/Pays RM10 million worth of Crude Palm Oil (CPO) warrants
“commodity” from supplier, on a spot basis.
(4)Sells the commodity to the Client/Islamic Bank B at Rm10 million
plus a profit margin (MurābaÍah) on deferred payment.
ISLAMIC BANK B
BURSA SUQ AL-SILA'
(7) Purchases the commodity from the Islamic Bank B at RM10
million (purchase price) on a spot basis.
(8) BSAS is a trading and Clearing Engine.
(9) Sells the commodity to the Suppliers back randomly for
RM10 million on a spot basis.
(5) Purchases the commodity from the Islamic Bank A at RM10
million plus a profit margin (MurābaÍah) on deferred payment.
(6) Sells the commodity to Bursa Suq Al-Sila' for RM10 million
on a spot basis, on the same day.
Reverse Tawarruq for Deposit Taking
6
5a
ABC sells commodity to
BSAS on spot for cash
5b
3b
4b
Proceeds
delivery
Commodity Murabahah
House (BSAS)
3a
ABC settles amount due to Customer on deferred payment basis
based on terms
ABC
Islamic
Bank
Ownership
delivery on
behalf of
Customer
As an Agent, ABC
buys commodity
from Broker 1
4a
2
1
Customers sells commodities to ABC at profit
on deferred payment basis
Onward delivery of commodity ownership
Customer/
Counter Bank
Customer requests ABC to act as agent
(wakalah) to buy the commodity from the
market
Customer wants to make fixed deposit with ABC, with a fixed
return
DEBT FACTORING MODEL 1
1. Customer has RM100K Immature receivable.
2. ABC gives ordinary financing to the customer. Ex. Receivable is 100k,
the financing is only RM90K, and total sale price is RM100K.
2. Customer assigns (as security) the receivables (RM100K) to ABC.
1
APPLICANT
/Customer
ABC BANK
2
1
2
PAYMASTER
ISLAMIC
BOURSES (Bursa
Suq Al-Sila’)
DEBT FACTORING MODEL 2
1. ABC sells a set of identified commodity (with immediate delivery) worth RM90K
with a mark up price od RM100K against RM100K customer’s receivables.
2. Customer will sell the commodity to Bursa for cash at RM 90K
1
Commodity worth RM90k
APPLICANT
/Customer
ABC BANK
Receivables RM100K
1
2
Customer Sells
commodity for RM90k
PAYMASTER
ISLAMIC
BOURSES (Bursa
Suq Al-Sila’)
Among the common mistakes
1. Tripartite ‘Inah
2. Fourpartite ‘Inah
3. The purchase of the wakil for himself
Three Partite ‘Inah (violation of AAOIFI Standard 30/4/5)
1. ABC buys RM10,000 worth of commodity from Broker A on credit.
2. ABC sells the commodity to Customer with mark up price (RM 15,000)
on deferred payment basis.
3. Customer sells the commodity to Broker A for cash (RM10,000)
1
ABC Islamic
Bank
Broker A
2
3
Customer
Three Partite ‘Inah with Hawalah
(violation of AAOIFI Standard 30/4/5)
1. ABC buys RM10,000 worth of commodity from Broker A on credit.
2. ABC sells the commodity to Customer with mark up price (RM 15,000) on deferred payment bas
3. Customer sells the commodity to Broker A for cash (RM10,000)
4. Broker A transfers (Hawalah) its right of the sale price (RM10,000) from ABC to Customer.
5.ABC pays RM10,000 to Customer.
6. Customer owes ABC RM15,000.
1
ABC Islamic
Bank
Broker A
4
2
5
3
Customer
Four Partite ‘Inah.
(violation of AAOIFI Standard 30/4/5)
ABC Islamic
Bank
Broker A
1
2
3
Customer
Broker B
Four Partite Inah with Hawalah(violation of AAOIFI Standard 30/4/5)
Broker A transfers (hawalah) its rights (sale price) from ABC to Customer.
This cannot be imagined except that Broker B and A are one entity or its proxy
ABC buys commodity from Broker A RM 10K on credit
ABC Islamic Bank
Broker A
1
Hawalah 10k
ABC
pa
Y
ABC sells the commodity
2 to customer ons deferred payment (mark up price), 15K
10k
3
Broker B
Customer
Customer sells
the commodity for cash
to broker B, 10K
AAOFI Standard 30/4/5
• 30/4/5.The commodity (object of
monetization) must be sold to a party other
than the one from whom it was purchased on
deferred payment basis (third party), so as to
avoid ‘inah which is strictly prohibited.
Moreover, the commodity should not return
back to the seller by virtue of prior agreement
or collusion between the two parties, or
according to tradition. AAOIFI standar 30 on Tawaruq, pg.
526
The sale of wakil to himself/a combination between agency to purchase in the first leg and
the purchase contract in the second leg
(with the absence of 4a and 4b).
Violation of AAOIFI Standard 30/4/7
6
5a
ABC sells commodity to
BSAS on spot for cash
5b
3b
4b
Proceeds
delivery
Commodity Murabahah
House (BSAS)
3a
ABC settles amount due to Customer on deferred payment basis
based on terms
ABC
Islamic
Bank
Ownership
delivery on
behalf of
Customer
As an Agent, ABC
buys commodity
from Broker 1
4a
2
1
Customers sells the commodities to ABC at
profit on deferred payment basis
Onward delivery of commodity ownership
certificate
Customer/
Counter Bank
Customer requests ABC to act as agent
(wakalah) to buy the commodity from the
market and subsequently sells the
commodity to the Bank
Customer wants to make fixed deposit with ABC, with a fixed
return
Violation of AAOFI standar 30/4/6
• 4/6. The contract for purchasing the
commodity on deferred payment basis and
the contract for selling it for a spot price
should not be linked together in such a way
that the client looses his right to receive the
commodity. Such linking of the two contracts
is prohibited whether it is made through
stipulation in the documents, acceptance as a
normal tradition, or incorporation in the
procedures. AAOIFI pg. 256
Cont’: Mistakes
4. Unnecessary Delegation (tawkil) to dispose or
to purchase the commodity
5.Concluding both the purchase of commodity
and delegation to dispose contract at once
Violation of AAOFI Standard no 30/4/7
• 4/7: The client should not delegate the
institution or its agent to sell, on his behalf, a
commodity that he purchased from the same
institution and, similarly, the institution
should not accept such delegation. If however,
the regulations do not permit the client to sell
the commodity except through the same
institution, he may delegate the institution to
do so after he, actually or impliedly, receives
the commodity. See AAOFI standards, pg. 526.
Cont’.Among the common mistakes
6. The debt obligation is established via
customer’s undertaking, not sale contract
7. Non existence of the commodity
8. No real transfer of ownership over the
commodity
9. No proper recording, identification and
tagging of the commodity
10. Selling price is not known
Conclusion
• Among the other Sharīah issues are no
identifications of the commodity, no taking
ownership prior to sell, charging expensive fee
for delivery of the commodity and no
observation of the conditions and sequences
of the sale transaction which may make it
being artificial fancy contract to get liquidity,
similar to conventional bank.