What is Tawarruq and Enah?
“Tawarruq is a financial instrument in which a buyer purchases a commodity from a seller on a deferred payment basis, and the buyer sells the same commodity to a third party on a spot payment basis”.
It could be observed in Tawarruq that “Commodity” is not the actual need of buyer, and it is only bought to fulfill the running cash requirements.
Difference Between Tawarruq And Enah:
In Tawarruq, the person who acquires liquidity, sells the commodity to a third party; While in Enah, buyer resells it to the same seller, from whom the commodity was bought, with a difference in the sale and purchase price.
Example Of Tawarruq:
- “Ali” owns a small textile mill, and to complete $20,000 order of 1,000 shirts, he immediately needs $10,000.
- “Ali” needs this amount to buy raw materials; such as cloth, buttons, and yarn. “Ali” is expecting to complete and deliver 1,000 shirts, and get its payment in less than 3 months.
- So, fulfill the cash requirement for the raw material, “Ali” purchases a car of value $11,000 from his friend “Bilal” on deferred payment, and agrees to pay this amount in three months.
- “Ali” sells this car to another friend on a spot payment of $10,000.
- This way, “Ali” gets $10,000 for three months, to complete the order.
- “Ali” completes the order in 80 days, delivers it to the ordering firm, and gets his payment of $20,000.
- “Ali” pays $11,000 to “Bilal” for the car that he bought on deferred payment.
Tawarruq and Enah in the View of Jurisprudence:
- Imam Ahmed Bin Hanbal and Imam Shaafi generally allow Tawarruq.
- Imam Malik, who is very strict about Enah, does not see a major problem in it and consider it a way to avoid Riba.
- Some other scholars do not see it as permissible. However, the preferred view of all four schools of thoughts is that it is permissible.
- In view of AAOIFI, if a commodity is sold back to the original seller on a deferred payment, it is invalid. However, it is acceptable if the commodity is sold to a third party.
Verdicts On Tawarruq:
Its nature is allowed by the Jurists. Here are some views:
- Tawarruq sale is the purchase of a commodity acquired, and possessed by the seller with a time fixed price, which the buyer will later sell to another person.
- Consider the Shariah Ruling: “Allah allows the selling, but forbids Riba”. And, there is no trace of a Riba in type this transaction.
- Tawarruq is permissible, only if the selling price is higher than the buying price. If it is not, then it will eventually fall into the unlawful credit sale.
- Tawarruq is to support cooperation and mercy among Muslim Brothers, to secure them from debt; and to save them from prohibited transactions.
Role of Tawarruq in the Growth of Islamic Economics:
Tawarruq is basically a legal trick and a lawful way out. However, it may impede the natural path for the Islamic economy, on which Islamic Shariah urges. So, it is necessary for the Shariah boards to strictly monitor all Tawarruq based transactions.
Mechanism of Tawarruq:
Tawarruq Agreements:
According to Islamic jurists, it consists of some simple agreements:
First Agreement:
Seller sells a commodity in his possession, to the Buyer, for a fixed particular period of time.
Second Agreement:
The buyer sells this commodity to a third party, that has no connection with the first seller.
Third Agreement:
Banks and institutions add another agreement. Bank authorizes the seller to sell commodity in the market. Islamic banks are practicing Tawarruq in the international stock market, because stock exchanges are the shortest way for processing the fast sales.
Classical Tawarruq:
Let us understand its classic form, through following scenario:
- Islamic Bank purchases commodity from Trader “Ali”, on cash, and ownership is transferred to Islamic bank.
- Islamic bank then sells the commodity to the “Bilal” on deferred payment, and on cost price plus profit margin basis. And the ownership of the commodity is transferred to “Bilal”.
- “Bilal” then sell the commodity to “Zayn” on cash basis, in the commodity market, and its ownership is transferred to “Zayn”.
Mechanism Of Tawarruq Among Financial Institutions:
It may be executed in the following manner:
- Suppose Bank-B is in need of funds, and Bank-A intends to place funds.
- Bank-A selects a commodity or stocks, which are liquid in nature.
- Bank-A approaches Bank-B for Tawarruq, arrangements.
- Bank-A purchases the commodity on cash payment, from the market or broker.
- Bank-B bank purchases it from Bank-A on credit, or on Murabahah basis.
- After taking delivery, Bank-B sells it in the market.
- Bank-B uses this amount to fulfill its financial needs, and pays the amount to Bank-A, over the agreed period of time.
Tawarruq Contract and Enah are discussed in more details during the Islamic banking courses, Islamic finance course, and diploma in Islamic banking programs, offered by AIMS through highly interactive learning contents.
Islamic Banking Practices:
Agency Agreement With Buyer:
Suppose a bank appoints a person to purchase the commodity on its behalf:
- If bank is buying to sell it to the same person, this transaction is “not” valid.
- But if bank sells it to that person through another contract, with offer and acceptance, this transaction becomes valid.
Conditional Agency Agreement:
Suppose that the client, after purchasing the commodity from bank, appoints the bank as his agent to sell it in the market:
- If this agency is stipulated as a condition in the contract of sale, the transaction is “not” valid.
- If the agency was not a condition in the sale contract, and was affected after unconditioned sale, this transaction is valid but not advisable.
Areas Of Application:
- Both Tawarruq and Enah are used to provide short-term working capital financing, and short-term personal finance.
- They both are used in structuring credit cards.
Time Gap Between Transactions:
- There must be a time gap between the sale by the bank to client, and sale by the client in the market.
- This time gap is essential to expose the parties to price risk. And it ensures that gains are a reward for risk borne, and hence they are free from Riba.