Financing : Commodity Murabaha & Tawarruq

For the past few years, controversies have arisen over the use of several working capital products, which aims to provide one party with cash and another with debt. As with all Islamic transactions in the market, an underlying asset is a key requirement to ensure the transaction is valid in the Islamic Banking world. The main challenge for a customer requiring cash for their use but without any collateral or asset to enable the economic transaction to take effect, Banks have obtained alternative structures to provide the customers with the much-needed cash.

The structures of Bai-Inah and Commodity Murabaha are introduced as possible solutions.The word Tawarruq is also greatly been used to reflect transactions involving Commodity Murabaha.

WC Structures

Although the Bai-Inah structure is generally rejected by international scholars except for in Malaysia, the remaining Tawarruq arrangement with Commodity Murabaha are still accepted throughout the Islamic Banking world. Lately however, even this contract is put under pressure by scholars as something nearing its shelf life. The recent pronouncement by some scholars that the Tawarruq arrangement is not permissible only highlights the challenges in Islamic Banking. The main argument against Tawarruq arrangement with Commodity Murabaha is the same one; that the structure is “arranged” and therefore is not a genuine economic transaction. But for proponents of both Tawarruq arrangements (even for Bai Inah), the question is that, unless a structure exists that provides cash while in the absence of valuable assets, should Islamic bankers continue to offer these structures in the meanwhile? Or divert the customer to conventional banking product which is clearly involved in Riba’? There are no easy answers to this as it depends on which side of the fence you are standing.

Commodity Murabaha 4 Parties Transaction

 What is Commodity Murabaha / Tawarruq?

There has been on-going questions on the validity of the contract and the rationale for doing so. The Legal Maxim used is that Tawarruq satisfies people needs and meets their requirements i.e. removing difficulty as well as meeting the Maqasid of Shariah for protection of property. This structure is required in the face of today’s difficulty in addressing liquidity requirements. In order to overcome the option of reverting to a riba’ based facility to meet Customer’s  need, Tawarruq  is provided as a solution for their problems.

Before moving further, is there a difference between Commodity Murabaha and Tawarruq? Not many scholars made this distinction between these two terms, but in the early days, Bai Inah was a transaction done by 2-parties, and Commodity Murabaha transactions was either a transaction among 3-parties (Bank-Customer-Broker) or 4-parties (Bank-Customer-Broker A-Broker B). But over time, most of the 3-parties transactions Commodity Murabaha are enhanced to 4-parties transactions as per request by many scholars, and both 3-parties or 4-parties structures are generally now known as Tawarruq arrangement (which contains 3 Islamic contracts i.e. Wakalah, Murabahah and Musawamah). This is consistent with the Tawarruq Policy Document issued by BNM in 2015

Generally, the Tawarruq terms are commonly used in the Middle-East and Commodity Murabaha more popular in Malaysia. Between scholars and practitioners, these terms are now used interchangeably. But in my humble opinion, I subscribe with BNM view that Tawarruq is the over-arching arrangement where multiple contract work together; Wakalah, Murabahah and Musawamah to complete the Tawarruq arrangement.

A Tawarruq transaction (or arrangement) involves a series of sale contracts whereby:

  1. A Principal (Bank) purchases an Asset or Commodity from a Supplier for the purpose of entering into a Commodity Murabahah transaction
  2. A buyer (Customer) buys an asset from a Seller (Bank) for a deferred payment (either periodic instalments or lump sum settlements).
  3. The buyer (Customer) subsequently sells the asset (via an appointed Agent) to a third party (on-sell as Musawamah) for cash at a price less than the deferred price (usually equivalent to the original purchase price), with the objective of obtaining cash.
  4. The terms of the transaction is agreed up-front by both parties, including the type and price of commodities to be transacted, and the settlement details.
  5. The above transactions must be executed based on the sequence and in a timely manner.


The purpose of the above arrangement is to obtain immediate cash and not for the purpose of acquiring the Asset or benefiting from the commodity. The commodity transaction is a means to facilitate the attainment of cash and liquidity, and while the beneficial commodity ownership must changes hands during the transaction, it is rarely the case that the Customer actually takes physical ownership of the commodity (as this is not the main intention of the Customer). However, the option to take physical delivery of the commodity must always be present to the Customer should they choose to take the physical delivery.

Another key consideration is that the contract must stand-alone and not be conditional on the completion of the other contract. The arrangement of Tawarruq is a combination of 2 separate contracts that are complete and therefore legally binding on its own.

2 Contracts

Based on the above structure, the Tawarruq arrangement must clearly consist of 2 separate standalone contracts. The legal documentation, as far as possible, must also reflect the same.

Why choose Commodity Murabahah?

The preference of using Commodity Murabaha instead of Bai Inah is the issue of interconditionality. Under Bai-Inah, the underlying Asset used is the Bank’s Asset i.e. Bank sells its Asset to Customer to create a debt and “buy-back” the Asset from the Customer for immediate Cash settlement. It puts the structure under extreme criticism as it is argued that this is a pre-arranged transaction of no economic value just for the purpose of creating a debt, without the ability to separate the sale and the buy-back contract. The interconditionality clauses built into the transactional documents to ensure the buy-back makes the contract now “un-preferred” by scholars in general.

Precious Metal CommoditiesUnder a Tawarruq arrangement, it is deemed that the interconditionality aspect of the contracts are immaterial.  This is because the Bank has no use of the commodity being traded, since it is a non-Bank Asset (not used by Bank) being traded by third parties in the open commodities market. The Bank simply has no interest to “buy-back” or even keep the commodities in their books, therefore it enters into an actual economic transaction done between 2 brokers. While the transaction itself doesn’t value-add to the commodity, the trading of the commodity allows for the creation of debt necessary for the customer.

The common criticisms revolves around the issue of ownership (constructive ownership vs physical ownership) as the commodities are usual located off-site and the ability to actually verify the commodities being traded is in existence and as per the description or not. It is because these criticisms that some countries (like Oman) still stay away from these “working-capital” product structures. However, most of the established commodity brokers have started to make available nearby commodities warehouse locations, nearer to many business locations. For example, a commodity broker may set up a warehouse in Singapore to cater for the commodities requirements from Malaysia, Indonesia and Brunei. This helps address Shariah Committee concerns as these commodities become more accessible for inspection, and ownership verification.

Criticisms in the Operationalisation of Commodity Murabahah

  1. Interconditionality in Tawarruq arrangements. As mentioned above, one of the major criticism of Tawarruq’s predecessor i.e. Bai Inah structure is that the interconditionality of the 2 contracts. Under Bai Inah, the legal requirements imposes that the Customer must execute Contract #2 for the compulsory buy-back of the Asset by the Bank, failing which Contract #1 becomes invalid. This issue is however mitigated under Tawarruq as the Bank, using third party commodities, has no interest to impose a buy-back of the commodity from customer thus removing the need to impose controversial interconditionality clauses.
  2. Commodities used for transactions. Another concern is that the commodities used for the transaction has little value, obsolete or defective, requiring scholars to emphasis the evidence, valuation and good order of commodities must be ascertained before a transaction starts. There has also been concerns whether the commodity really exists in its current form in the stated commodities location. Efforts have been made to verify and authenticate the existence of those commodities.
  3. Physical delivery of Commodities. The concern on the inability to deliver commodities to the Customer, should a delivery request be made, will render the arrangement of Tawarruq defective and is not in the right spirit of the contract. It may be construed as an economic trick. The condition, availability and location of the commodity are important factors to be addressed adequately by the Bank to ensure deliverability.
  4. Agency issues, including dual agency arrangements. There are opinions that the arrangement of dual agency (where customer appoints the Bank to conduct all transactions on their behalf by way of multiple agency appointments, thus removing any Customer interaction during the transaction) deems the arrangement as Organised Tawarruq (Tawarruq Masrafi) instead of Real Tawarruq (Tawarruq Haqiqi). Some prominent scholars, including Mufti Taqi Usmani and some countries (such as Oman) had criticized and/or rejected the use of Tawarruq arrangements.
  5. Sequencing and Ownership. Under Tawarruq, I believe the sequencing of the transfer of commodities are so critical that a break of sequencing have a domino effect for transactional defect. Many failed to see how important the sequencing are, because of commodities usually requires quick change in hands and ownership. Many cases we have come across showed breakage in sequencing and therefore rightful ownership to proceed with the transaction. Some cases we can rectify (for example in cases of Bay Fuduli i.e. Purchase made by unauthorised agent due to sequencing breakage), but some may require some drastic ratification, even resulting in loss or charity payments.

There have been efforts to introduce a more acceptable mode for commodity trade such as the introduction of Bursa Malaysi’a Bursa Suq Al Sila to make it more transparent the process for the ownership and transaction of a commodity, but the question still remain on how long will this structure be acceptable to the scholars. At the end of the day, this is still Tawarruq which is pre-arranged Commodity Murabaha; none of the parties intend to purchase or hold commodities. Unfortunately, the reality of it is that there is still a huge portion of the market embedded in debt rather than equity trading. Equity is simply not enough to support some transaction, and for an industry that pushes double-digit growth, Tawarruq arrangement and Commodity Murabaha will remain among the key growth enablers to Islamic funding.

Expanding Tawarruq into Deposit products

Moving forward, Tawarruq arrangement is already playing an even bigger role, as even depository and investment products are developed using these structures. The Malaysian market, for example, now shows heavy reliance on Tawarruq on Fixed Deposit-i which has replaced the previous favourite, Mudharabah Fixed Deposits-i. There are also Banks in Malaysia already offering Current Account and Savings Account based on Tawarruq, and moving forward, a lot more is expected to emerge in 2017-2018. The fore-runner of Tawarruq deposits is Hong Leong Islamic Bank (Malaysia), where a huge majority of its deposit and financing products are offered under the contract of Tawarruq.

Practitioners have to be even more vigilant in ensuring compliance to the rules of Commodity Murabaha transaction in a Tawarruq arrangement.

Commodity Murabahah Deposits

Bai Inah and Tawarruq were never intended to be the solution to Islamic funding. It is merely providing customers with an Islamic alternative while developers figure out a way to meet customer’s liquidity requirements. Or, the processes governing these structures may be further improved to become more acceptable to more scholars. Until then, Islamic Banks will continue to utilise these structure. Wa’ Allahu Alam.

  1. Analysis: Tawarruq declared impermissible by the OIC Fiqh Academy
  2. OIC Fiqh Academy Ruled Organised Tawarruq Impermissible in 2009
  3. Research : Suq Al Sila and Tawarruq Controversy (PDF) 

40 thoughts on “Financing : Commodity Murabaha & Tawarruq

  1. Salaam.

    In regards to islamic banking accounts like CIMB’s ‘Why Wait Fixed Deposit’ or Maybank’s ‘Profit Now Account’, how is it possible to have be offering upfront returns upon depositing and guaranteed principal upon maturity?

  2. Salaam.

    In regards to islamic banking accounts like CIMB’s ‘Why Wait Fixed Deposit’ or Maybank’s ‘Profit Now Account’, how is it possible to be offering upfront returns upon depositing and guaranteed principal upon maturity?

    • Salam Shafiqah,

      As you are aware, these products are based on a sale-based contract (commodity Murabahah) and one of the conditions to Murabahah is the sale price (which includes profit element). While the whole point of Murabahah is the deferred sale element, the so-called “buyer” of the commodity (Banks) have the right to settle the sale price to the “seller” of the commodity (customer) at any time before the settlement date, with or without a rebate on the sale price (rebate is a discretionary right of the seller, not the buyer).

      On day one, all the sale price obligation is materialised.

      In this case, the Bank exercises its right to pay the profit upfront, leaving only the principal amount to be paid on the expiry date.

      The. Murabahah contract remains intact as all the pillars to Murabahah are met (buyer, seller, price, subject matter, offer and acceptance).

      Hope that clears it


      • Salaam Amir.

        Thank you for the speedy reply, I really appreciate it.

        If I’ve understood correctly, a typical structure would work as the following;
        By depositing say, $1M, I’ve appointed the bank as my agent to purchase $1M worth of commodity.
        The bank purchases the commodity and holds the commodity on my behalf.
        I then sell the commodity to the bank (bank sell to itself) at deferred sale price ($1M + x% profit)
        The bank purchases at deferred sale price and owns the commodity.
        The bank sells commodity to company Y.
        Company Y buys commodity from the bank.
        The bank receives cash from company Y.
        At maturity, the bank pays the deferred sale price to me and I will receive $1M + x% profit.

        But if I am able to receive x% profit today, why would I put my $1M in an illiquid position for the contracted tenor period?

      • Hi Shafiqah,

        That RM1.0 million placed with the Bank for 1 year will be the requirement for the taking of the profit up-front. It will have to be illiquid for you as the Bank will be investing that money to earn a return (that ideally be more that what they have paid to you upfront). If you choose to liquidate the deposit earlier than the agreed maturity, the principal returned to you will be the net figure of RM1.0 million less profit up-front (assuming the contract is not tagged to mark-to-market valuation). Technically you will just receive a total of your full principal only, without any profit.

        Hope that clarifies.

      • I’m sorry, I’m struggling to put my thoughts into words. I understand that upfront profit would entice depositors to place bulky deposits, enabling banks to pool and create bigger resources for other investments.

        What I meant to ask is, if the bank is able to secure and credit me the profits from sale on day one, where is my, say $1million deposit going in matters of tawarruq’s flow of business?

      • Hi Shafiqah, apologies for replying late. I actually overlooked my response before I realised I responded to your earlier question and not this one.

        Anyway, I understand your question.

        To articulate a similar concept is the common Structure Deposits.

        In Structured Deposits, the Bank will invest your funds in a fixed return instruments. For example you placed RM100,000 as your investment.

        If the Bank can find an investment that pays 10.00% fixed return p.a. (for example by way of Commodity Murabahah Sale contract), the Bank will be able to offer a rate of return to the customer at 9.09% and pay the profit upfront.

        The calculation is as follows:
        Initial Principal 100,000
        Contracted Rate with customers 9.09% for 365 days (1 year)
        Contracted Full Amount on maturity = 109,090.91

        Profit Portion paid upfront to customers (contracted) 9,090.91
        Balance to be paid in 365 days = 109,090.91 less 9,090.91 = 100,000

        Actual cash the Bank has after they paid the profit upfront = 100,000 less 9,090.91 = 90,909.09
        The return from the available investment = 10.00% p.a.
        Total profit Bank will earn from actual cash after 365 days = 90,909.09 x 10.00% = 9,090.91
        Total Cash the Bank will received on available investment after 365 days = 90,909.09 + 9,090.91 = 100,000

        Therefore, Bank will be able to pay back the customers principal after 365 days, and had paid the profit up-front.

        Now of course, if the Bank can find a fixed return investment of 11.00% p.a. then the Bank will start earning a profit. It is a matter of the Bank finding the best returns for the actual cash on hand i.e. 90,909.09. Anything above 10.00% is money for the Bank.

        10.00% returns is not a reflective returns in the market today, but that’s just for illustration.

        Again the benefits is that the customer perceive that they are going into a good deal, as they get the profit now, and the principal is guaranteed on maturity. Under the fixing features of Commodity Murabaha / Tawarruq, this means the profits are guaranteed and theoretically it is the Bank’s discretion if they want to pay their “debt obligation” earlier to the customer. In actual fact, this arrangement is already a “managed cash flow” scenario.

        This, I believe is a very effective value proposition for the customers.

        Hope that helps

  3. Hi i refinance my house for rm260k,,,, In the letter offer its written something about commodity murabahah…. What does that means… My monthly payment is rm1.6k per month…. What benefits ill receive…. thank you….

    • Hi Sarin,

      That’s probably a Hong Leong Islamic Bank financing!!!

      Commodity Murabahah is a perfectly acceptable contract for any financing facility.

      In a normal home financing structure, the bank can either do the following:
      1) purchase the house from the owner and sell it to you on deferred basis at a profit (Murabahah or BBA)
      2) purchase the house from the owner and rent it to you on monthly basis at agreed rental, and transfer ownership to you on maturity of lease (Ijarah or Diminishing Musyarakah)
      3) construct the house via the developer and sell the completed house to you on deferred basis (Istisna’)

      All the above structure involves the underlying asset of the subject matter itself (the house) to validate the transaction and contract.

      However there are certain structures that, coming from various types of issues (for example ownership, warranties, etc) has decided to use an underlying asset which is not the subject matter to validate the contract. The asset is a different asset altogether i.e. in your case, a commodity.

      The purpose of using commodity is because of certain restrictions in the ownership structure for an existing product.

      There is no difference in terms of impact to you whether the financing is via commodity murabahah or Diminishing Musyarakah.

      The only benefits that I can see (from customer point of view) is that the documentation can be simpler or even cheaper (from stamp duty savings)

      Hope that clarifies

  4. Assalamualaikum…

    I need your advice on which package is good… I would like to refinance my house… Should i take Commodity Murabahah or Musharakah Mutanaqisah? I am so confused which is better in terms of everything especially costs, legal etc.

    Thank you in advance.

    • Waalaikumsalam Johan,

      To be honest, there really is not much difference in terms of package or costing either for tawarruq home or DM home. Perhaps minor differences in stamp duty but that’s probably less than RM100 difference.

      DM generally have more documents to sign because it is more comprehensive. And under DM, you need to see the documents where there’s specific roles that you need to play and be liable on. Under tawarruq, you just need to ensure you pay the debts only, as it is a debt creation mechanism. So for simplicity, it’s Tawarruq. But net impact, both are the same. Hope that helps.

  5. Salam En Amir, my company is involved in the trading of LPG (cooking gas) and my bank recently changed our financing facility form (Accepted Bills) AB-i to Invoice Financing-i because they claim that the product being traded should be classified as commodity rather than goods. Now the profit rate is based on BFR and not AB-i rate, which is higher. Please give us your thoughts on this.

    Jazakallahu khairan.

    • Salam Zainal,

      Apologies for not replying earlier.

      AB-I is slowly becoming a higher risk proposition to Banks, especially AB-I purchases where it is relying on the contract of Murabahah. There are additional operational and risk elements under Murabahah, with the introduction of the Murabahah standards where holding risks are now expected (Murabahah Purchase Orderer). Bank holds ownership risks and this do translate to some worries to the Bank. I noticed since last year (the year the Murabahah standards were issued) that Banks have become very, very selective in offering AB-I purchases under Murabahah, instead opting to Invoice Financing which can be based on the contract of tawarruq. Under the contract of tawarruq, the ownership risks are mitigated almost immediately as there are willing counterparties to transact the Assets with.

      As such, a lot of Banks has started to move their portfolio to tawarruq (commodity murabahah), as the default offering, as well as better pricing can be charged by the Bank. A lot of Banks will look to limit their exposure to the AB-I product and promote Invoice Financing instead. Unfortunately, under Invoice Financing, there are also operational risks (such as double financing of invoices) but this allows the Banks to seek higher pricing to compensate the risks the Bank will take. Otherwise, the Banks are just trying to improve profitability by shifting from AB-I to Tawarruq.

      It is unfortunate that the Banks are re-looking at long time facilities and changing them to improve profitability and liquidity. This allows the Bank to earn more than usual.

      Talk to your banker on how to get back on the AB-I list.
      Good luck

  6. Salaam Mr. Amir,

    I truly want to say, that your blog related to Islamic Banking concepts are very imformative with proper examples. I take this opportunity to thank you for doing this.

    But currently I have a doubt pertaining to Tawarruq, which is, when Bank is appointed as an agent on behalf of the customer to dispose the commodity in the market, there will be an agency agreement signed (Wakala agreement) right?

    Following this, is the bank eligible to charge agency fees to the customer for being and acting as an agent? because the customer is already paying the selling price to the bank which includes profit in it….

    Thanks in advance!!


    • Hi Prashant

      Yes there is an Agency contract in a Tawarruq arrangement. And yes a Wakalah agency entitled to a Wakalah fees. But generally, in Malaysia at least, we recognise 2 types of Wakalah arrangement ie with fees and without fees (where the fees are waived by the agent ie waiver of rights ~ Tanazul Haq). In the middle east this will be a talking point but in Malaysia, that fees is generally waived as you rightly pointed, banks will be earning from the financing itself.

      Hope that clarifies.

      Thanks for your support

    • I believe all Banks in Malaysia have moved to Commodity Murabahah for the Term Deposits, replacing the much complicated General Investment Structures based on Mudharabah. In terms of its application under Commodity Murabahah, you have to remember that the purpose of Term Deposit is for the creation of a financial obligation that leads to profit for the depositor. For this purpose, since profit can also be derived from a sale-based transaction, Commodity Murabahah becomes a suitable structure to use. If all the Shariah requirements for Tawarruq / Commodity Murabahah can be met, there should not be any issues translating that structure for a deposit-based product such as term deposits.

      Hope that helps

  7. Salam Good day i have a question regarding community murabaha:
    what is commodity murabaha and can it be used to mobilize term deposit by islamic banking

    • Can you tell me how to critically evaluate a Tawarruq fixed deposit product whether it is complying with Shariah Principle. Taken Maybank Fixed Deposit-i as example, its profit rate is predetermined and the rates is closely pegged to its conventional fixed deposit, it has make me quite confusing about the real spirit of Tawarruq fixed deposit in meeting Hariah Compliance. Hope you can clear my doubt. Thanks you very much.

      • Hi Alvin,
        Tawarruq fixed deposit do comply with the Shariah requirements where the transaction meets the tenets of a valid sale (offer, acceptance, selling price, value and nature of Asset i.e. commodity), does not contain issues of interconditionality, and to a certain extent remains the most viable solution for the needs. Of course, there are always criticism on its spirit in Islamic Banking where some argued this remains a “hilah” ie legal trick. It depends on the Shariah advisors and their stance on Tawarruq. Many has taken the stance that without a viable alternative, Tawarruq remains acceptable for the public good (Maslahah) but there needs to be strict adhered to the operationalization of the contract, including the Murabahah transaction involving commodities. As for the profit rate under Tawarruq, one of the tenets for concluding the Murabahah is the certainty of the Selling Price, and there is no compulsion towards using “conventional” rates as a benchmark for finalising the Selling Price. As you know, Murabahah requires certainty and this is what makes Tawarruq possible in many deposit and financing structures.

        To critically evaluate it, you should consider the intention of the structure i.e. the creation of a future obligation via a sale that meets all the tenets of Murabahah.

        Hope that helps

  8. Assalamualaikum,

    Your post really detailed yet understandable and it helps me a lot in understanding the concept in one night…

    Thank you very much.


  9. I would like to know if in a Murabaha Finance Agreement for a Trade Facility and off course an Agency Agreement was also signed, what happens if their is no physical or constructive possession or even the sale that takes place – this is due to cybercrime and the account details being hacked, intercepted and altered. What happens if there is a loss

    • Salam,

      I am not a Shariah scholar but this is my opinion based on real market practice.

      Firstly it all depends on what is captured in the legal documents whether there is a recourse clause for such cases. Most of the time, there is none.

      Most of all, in such cases, you have to look at the minimum tenets required to have a Murabahah sale being valid. The Murabahah tenets are 1) Valid contracting parties ie Buyer and Seller 2) Aqad ie offer and acceptance of terms 3) Assets ie in existence with proper ownership 4) Nature of Asset i.e. transferable and deliverable and 5) Agreed Price.

      Any defect of these tenets renders the Murabahah invalid. So in the event of loss, the position is to return to the original condition before the “invalid Murabahah” takes place.

      If the purchase of the Asset has made payment for the goods, but there is no goods, the payment amount must be returned to the purchaser by the seller. But in this case, the “seller” is a fraudulent entity, ie a hacker, and therefore the seller was never the real party to the original transaction (as someone else became the seller). Unless it is proven that the “seller” is really involved in the deal, then how would the purchaser recover the payment which the seller never received in the first place. The loss will be borne by the purchaser, whom has purchased a non-existing goods from a non-existing seller.

      Same scenario also applies when the seller sells the goods to a fraudulent “purchaser”. If the goods was received by someone else fraudulently by the purchaser, the real purchaser was never a party to the transaction. The loss will be borne by the seller.

      It is an unfortunate scenario which will be best discussed in court, based on legal documents. In this case, it is hard to prove a valid Murabahah has taken place as the tenets to such sale is not fulfilled (or fraudulently fulfilled). Such scenario is not Islamic-banking specific, as such scenario may also happen in a conventional bank. It then becomes a criminal case of fraud with the fraudulent party, and it will be injustice to impose the losses into a party that has no knowledge of the transaction in the first place.

      That’s why under Murabahah, the risk of the goods itself is borne by the original owner until a complete transfer of ownership is made. If the transfer has been made to the wrong party, the risks cannot be passed to a party which is not involved in the transaction.

      It is also the onus of the accused party to prove that they are not involved in the transaction and a crime has been committed.


  10. Assalamualaikum,

    Does gold stil consider ribawi goods or it can be treat as commodity for Murabaha Commodity scheme ?

    Scenario :
    Person A – Wakala his gold to – Company X with fee base term (actual gold is kept @ company x deposit)

    Person B need financing, Company X will request Person B to disclose personal information and business financial information
    Company X will inform person A that person B need financing

    If person A willing to help person B, he tell company X to sell his gold at certain rate to person B

    Person B will have to settle commitment to person A

    On above scenarios … i am quite sure Wakala is syar’i

    How about the financing scheme ?

    • Hi Otty,

      Gold is still considered ribawi items and should not be taken as a commodity. In your scenario, you mentioned that Person A instructs Company X to sell the gold to Person B at a certain rate. I presume the certain rate is not “actual market price” but is a price inclusive of profit. I understanding that this remains prohibited as you are buying gold at profit (not at cost) as this remains as exchange of 2 ribawi items.

      However, do take a look at the recent AAIOFI standards on Gold recently issued. I do not have the official English version (official translation in progress) but there are some interesting insights to the new standard. There are specific definitions to what you would consider Gold as ribawi items. I do not remember the ratio but if the percentage of gold is below a certain level or criteria, it may not be classified as gold and therefore tradable as a commodity. Interesting discussions going on, and in the future I hope to have more clarity in this.

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  12. A financial institution is providing funds for commodities on Murabahah basis which are already purchased by institution. Those commodities are in physical possession as well as owned by institution.
    Mr. A has an argument that this type of transactions cannot be termed as Murabahah.
    Can anyone tell me is that true?

    • Hi Naina,

      Not really understanding the context of the question, but will try to explain. Do ask further if this is not what you asked of.

      At the start, the financial institution only have one source of funds, for example RM1 million cash.

      A customer needs financing. Once credit approval has been obtained, the customer makes offer to financial institution to purchase commodities from the financial institution at RM1.2 million payable in 1 year’s time (for example).

      Financial Institution has RM1.0 million cash. Upon request from customer, financial institution uses the RM1.0 million to buy commodities (as principal owner) for their beneficial / physical ownership.

      Now that the Financial Institution have this RM1.0 million worth of commodities, the Financial Institution SELLS the commodities to the customer at RM1.2 million cash to be paid in 1 year’s time. Customer takes ownership of the commodities (physically / constructively) and instructs a Selling Agent to sell the commodities on the customer’s behalf to obtain Cash of RM1.0 million. This usually happens in the same day as quickly as possible to avoid valuation risk or price risks, especially if the commodities are held overnight (and the price moves adversely).

      The end result:
      Financial Institution = Receivable of RM1.2 million to be received in 12 months time.
      Customer = Cash of RM1.0 million received immediately.

      As for Murabahah, the tenets of Murabahah is present when the Financial Institution sell commodities to the Customer i.e. Cost Price (RM1.0 million) Selling Price (RM1.2 million), Asset (Commodities), Nature of Asset (Transferable / Deliverable / In Existence) and Aqad (Offer to buy commodity and Acceptance to sell commodities).

      Not sure in what context it “cannot be termed as Murabahah”. Do feedback

      Hope that helps. Thanks

      • Thank you Amir Alfatakh! for explaining me …
        “cannot be termed as Murabahah” means this scenario is related or not related to Murabahah. simply means is this happened in Murabaha or not ?

  13. Dear Amir,

    I’m humbled to see your passion in enlightening the masses via your blog. You certainly pull me out of ignorance.

    I have pretty much zeroed in on Bank Islam’s Baiti home loan, which works on Tawarruq process flow and Murabaha contract. However, I’m still having some gray areas which I hope you could kindly spare some time to resolve.

    Q1) Assuming that I’m buying a subsale house and applying for Bank Islam loan, as per my understanding the:-
    a) Seller/Broker A = Current house owner
    b) Principal = Bank
    c) Customer = Myself
    My confusion is, who is the Buyer/Broker B/3rd Party?

    Q2) Does the “additional payments to reduce the principal”, which is a feature found in semi & full flexi conventional loans,
    also applicable to Islamic loans, Tawarruq in particular?

    Q3) Can you advise me on the total number of documents which require stamp duty as per Murabaha contract of Bank Islam Baiti
    loan? I read somewhere that Islamic loans incur higher stamp duty due to more number of legal documents. Correct me if
    I’m wrong.

    Thank you in advance.

    Ir. Vijai Ananth

    • Hi Ir Vijai,

      Thanks for the compliments and for your comments. I really appreciate it.

      Ok let me try to answer your query:

      Q1) In the Tawarruq arrangement, the underlying asset used is not the house itself, but is a third party asset ie commodity. It resolves ownership, transferability and right of sale issues usually arising in some Murabaha transactions (where the underlying asset is the house itself). Therefore under Tawarruq, the parties related to the house is not involved in the transaction; the house becomes only a collateral to the arrangement (but not the asset being traded). Usually under Murabaha, there are 3 parties (1-Developer or Current house owner, 2-Bank, and 3-Customer), but under Tawarruq, it is a 4 parties arrangement (1-Commodity supplier or Broker A, 2-Bank, 3-Customer, and 4-Commodity Buyer or Broker B). Therefore under Tawarruq, a debt is created between Bank and Customer, and Cash is derived from the Commodity sale which pays the Current House Owner (as a simple sale transaction). Ownership of house is transferred to Customer immediately, house is put up as collateral from Customer to Bank, and a financing debt (created from the commodity transaction) means installment is to be paid over the agreed period of time.

      Q2) Whether “Additional payments to reduce the principal”, a feature found in semi & full flexi conventional loans, also applicable to Islamic loans, Tawarruq. This I am not sure for the product you are considering (Baiti Home) although there are no restrictions under Tawarruq to behave as such. As long as the Selling Price is maintained for the feature, it is possible. I know a few Banks who offer full/flexi financing products, but it has been traditionally linked to a Diminishing Musharakah product. But Tawarruq, it is possible as it works just like a Tawarruq-based Credit Cards or Tawarruq Cash Line/Overdraft, where additional payments reduces the principal and is redrawable.

      Q3) More expensive stamp duty for Islamic products. I have to agree with this statement simply because we do have separate and individual documents for each of the products or contract. For example, a Tawarruq arrangement usually consist of Commodity Murabahah agreement and Wakalah agreement, so it is an additional document to stamp (Wakalah document). However, these additional documents only incur nominal stamping fees ie RM10 for each additional document. So yes it is slightly more expensive but not significant. More importantly, for this year (until year end 2017), don’t forget to ask Bank Islam if you can get that 20% stamp duty waiver for Home Financing residential purchases. If you qualify, it means your stamp duty is significantly cheaper than a conventional loan.

      Hope that helps. Thnaks Vijai

      • Amir, thank you very much for your time. I’m clear now. Have a good day ahead.


        Ir. Vijai Ananth

  14. Salam Mr Amir,

    Based on my observation, I have found out that there are banks that apply Tawarruq concept for their CASA. However, based on the documents disclosed to the public, I fail to understand how Tawarruq mechanism works for CASA.

    It would be much pleasure for me, if you can explain how it works for CASA.

    Thank you


    • Salam Hafiz,

      Yes there are banks in Malaysia that has already started offering CASA Tawarruq and there is no standard in the market yet. Each bank would have a different design for CASA Tawarruq, with differences to cater for each Bank’s system limitation or abilities.

      I am also having my team design our own Tawarruq CASA, so I cannot divulge much at the moment. But I try to summarise what other banks are doing (in general) with their CASA Tawarruq:
      1) A customer opens a CASA Tawarruq account. The customer also signs a Wakalah (Agency) document which states, whenever the customer puts in funds, he authorises the Bank as his agent to purchase commodities for the purpose of Tawarruq
      2) Customer banks in some funds
      3) At a certain cut-off time, the Bank extracts report to find out if there is a need to purchase commodity.
      4) if yes, Bank will take funds to purchase commodity. This is either done same day, or done T+1 whichever approved.
      5) The Bank proceeds to purchase commodity with a 1 day Aqad or 30 days Aqad.
      6) If bank chose 1 day Aqad, the Bank will buy and trade commodity based on the EOD balance daily
      7) If bank chose 30 days Aqad, he Bank will buy and trade commodity based on EOD on the net deposit amount every month
      8) Each time an Aqad is completed, the profit is accrued and booked at the end of the tenure
      9) On agreed date, the profit from the Tawarruq is paid into account.
      10) The Arrangement includes auto-re renewal of the wakalah and instructions to buy and sell

      InshaAllah I will do a piece just on CASA Tawarruq soon, in the meantime appreciate your comments and constructive feedback

      Wallahualam, Thank you

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