Tawarruq has been extensively used by Islamic financial institutions (IFIs) recently, mainly to address liquidity shortages and to structure risk management tools. The common term used in the market today to denote tawarruq is “commodity murabahah” or sometimes “commodity musawamah”. However, the widespread practice of organized tawarruq has been disapproved by many contemporary scholars. The International Islamic Fiqh Academy of the Organization of Islamic Cooperation, in its 19th session, held in Sharjah in 2009, resolved that the current tawarruq practice is impermissible.
The OIC Fiqh Academy’s decision was prompted by numerous criticisms of the manner in which organized tawarruq is structured and transacted in modern Islamic financial operations. Many Shari'ah scholars have criticized the structure for lacking credibility as a real transaction. The concern over tawarruq among contemporary scholars is not about the essence of the contract but, rather, about several violations in its modern application. There are at least four major Shari'ah issues in the modern application of organized tawarruq: the issue of the commodity, the issue of possession and delivery, the issue of prearrangement (tawarruq), and the issue of agency.
The issue of the commodity arises as many commodities used in the practice of modern organized tawarruq are spoiled commodities that no one would agree to purchase if they actually wanted the commodity for its own sake. Some scholars have also raised concerns about the lack of proper monitoring of the practice by certain segments in the market, which could lead to the same commodity being simultaneously used as the subject of multiple transactions. Furthermore, the issues of possession and delivery arise because the legal documents are embedded with clauses that indicate the buyer’s lack of intention to take delivery. In some cases, the buyer is prevented from taking any delivery, either explicitly or implicitly by the standard operating procedure of the market. This is particularly true in the case of transactions performed on the London Metal Exchange (LME). A ‘netting arrangement’, which has become standard practice in the LME, accentuates the fact that delivery and possession do not actually take place...