By Dr. Mohammed Burhan Arbouna
When one reviews financial statements of Islamic banks in Oman, it is easy to detect the following headings either under the assets or liabilities:
The “organized tawarruq is defined by OIC fiqh Academy as “a purchase by a liquidity seeker (mustawriq) of commodity from a local market, international market or similar markets on a deferred payment basis, where the financier, in view of a prior agreement with the liquidity seeker (mustawriq), would arrange for its reselling, either by itself or by an appointed third party, at a lower price, usually”. A non-organized tawarruq is defined by OIC Fiqh Academy as “a purchase by a person (mustawriq) of a commodity at a deferred price for the PURPOSE of reselling it for CASH at a lower price, usually, to a party other than the party from whom it was initially bought for CASH PURPOSES or bi qasd al-hussul ala al-naqd”. The purpose of seeking liquidity using tawarruq is mentioned in AAOIFI standard no. 44 on liquidity: Its Soliciting and Deployment. The definition of OIC Fiqh Academy of non-organized tawarruq is in line with AAOIFI definition, which makes no any difference between “organized and non-organized”. In the above definitions, the purpose of seeking cash, helping to place extra (excess) money with interest based banks, the money going to London metal exchange, being compassionate or not are not the issue. The main issue is whether or not such a transaction leads or would lead to interest transaction. In the organized tawarruq definition, the OIC Fiqh Academy sees an element of interest transaction due to the nature of the structure in terms of execution process as explained in the definition: purchase-sale-agency-sale combination. This combination in the eyes of OIC Fiqh Academy is leading to getting loan on interest in the name of sale and purchase. In the non-organized tawarruq, the OIC fiqh academy sees that the structure involve not in any interest transaction due to dismantling the combinations, where each arrangement stand alone.
After the above brief, it is good to turn to the main topic, which is whether or not inter-bank placements on wakala between Islamic financial institutions in any jurisdiction and their local and international counter-parties, including jurisdictions that prohibit tawarruq or CM may directly or indirectly involve in one way or the other in a form tawarruq, be it organized or non-organized, as per the technical and professional definitions above.
Although tawarruq using commodity murabaha structures is said to be allowed under necessity only under the regulatory rules of Oman, I am not able to see any note on commodity murabaha tawarruq in the financial statements of the Omani Islamic banks. It is not even used to convert conventional loans for people who do not have assets to sell and lease back. This gives a good indication that when Islamic banks started in Oman, only those who have property to be purchased and leased back to them have shifted from conventional banks to Islamic banks, if such shift had ever happened. It is therefore easy to conclude that, in the absence of tawarruq or CM, the individuals or corporates who borrowed on clean basis had no choice but to remain with conventional banks to the maturity of their loans. So almost the larger part of the clients of these Islamic banks are fresh clients who were not involved in the banking sector prior to the establishment of Islamic banks in Oman. This means there was no any necessity for the banks to use commodity murabaha tawarruq since the inception of Islamic banks in Oman. Hence, our analysis will concentrate on the wakala terminology and due from or to the banks in the context of treasury business and liquidity management. Liquidity management is a technique to maintain easily disposable liquid assets and manage short-term liabilities which can be received to meet other obligations. Usually in Islamic banks, liquid assets are sukuk, shares and similar instruments. When an Islamic bank solicit liquidity for investment on the basis of wakala, it is assumed that it has liquid assets or investments in which these wakalas can be invested to generate very short term income for the depositors which are the Islamic financial institutions. In addition, the wakala assets should be assets that can be easily liquidated to return the funds on maturity as these wakalas are short-term in nature, some of which are only 3 to 4 days. There are other wakalas on overnight basis which make up to 3% income or profit!
When we use the term investment wakala, inter-bank wakala investment and wakala especially when it is classified as liability, it suggests that the bank requested “financing” on wakala basis to fund businesses that are in the pipe line. The reason being that the bank believes, based on accurate and diligent feasibility studies, it will achieve the anticipated profit and more incentive for it to make money otherwise fee alone will not cover its expenses not alone making profit. Therefore, the logic behind wakala is the assumption that these funds are used to fund investment activities of the receiving bank, hence the investments would not be possible in short term basis which is main task of treasury business for liquidity management purposes. The effective short-term Wakala investment is the asset backed wakala exemplified in the commodity purchase and sale. The assets based Wakala, which means investment by commingling with funds of the wakil to create economic value for the business is another form of Wakala bi al-Istithmar for long term or deposit like investments and not effective fund placements in the context of treasury business. Where a bank wants a short-term income it goes without saying that such an Islamic bank knows, in advance, it will involve ii the asset backed Wakala Investment, which is mentioned in AAOIFI standard on CS using Commodity Murabaha.
In the analysis of the terminologies under discussion, it is noted that there is no expressed notes in the financial stattements of Islamic banks in Oman to suggest the underlying business of wakala especially in the context of the fact that some banks do not include them in their self-financed investments, which suggest that these wakala funds have specific areas of deployment and, in most cases, it will be in the asset backed wakala investment. Having said this, there are two possibilities for deployment of these funds:
Written by Dr. Mohammed Burhan Arbouna