BAI AL-INAH AND TAWARRRUQ

Bai Al-Inah and Tawarrruq

Name of the Writer

Name of the Institution

Table of Contents

Table of Contents2

1. Introduction3

a. Background to Bai Al Inah and Tawarruq Transactions3

2. Discussion4

a. Islamic Law Perspective4

i. Schools of Thought4

ii. Permissibility and Impermissibility5

b. Islamic Jurisprudence6

i. Schools of Thought6

ii. Permissibility and Impermissibility7

c. Alternative Transactions8

3.Conclusion9

Bibliography11

Bai Al-Inah and Tawarrruq

1. Introduction

a. Background to Bai Al Inah and Tawarruq Transactions

Bai Al Inah in conventional term is known as sale and buy back agreement or repurchase. Bai Al Inah is a transaction in which the bank purchase the property, then put up for sale at a higher price to a customer on overdue terms of payment. The purpose is to keep away from the riba allied with a “conventional” advance against the mortgage security.

Tawarruq refers to selling of property based on deferred payment, with a motive of repurchasing back in cash, although at a lower price as compare to the deferred price. For instance, a person sells his article of trade on a deferred basis but the deferred amount is already known. Later on, the seller will buy his commodity on lower price that the deferred price. The payable deferred amount is known because the money is obtained for Sahib Al Inah. Al Inah is the current spot price of that commodity. In this transaction, the interest of buyer is not to benefit or utilize the bought commodity, to a certain extent avail benefit of liquidity.

Bai Al Inah is a financing mode in which the banker sells commodities to its customer on terms of credit with a certain markup, and afterward bought back (repurchase) the same commodity from the customer at the current commodity price in the spot market.

However, Bai Al Inah is not acceptable as a financial instrument in Shariah compliance in the Middle East, but accepted in Malaysia. Such contradicting views create legal fiction, as there is a condition of repurchase of goods and services; thus the transaction of purchasing and selling is just to create a liability compulsion that lead to usury. Usury is forbidden in Islam and against the teaching of Quran.

Those who were engaged in the interest taking and giving activities cannot stand on the Day of Judgment. Allah has forbidden interest but permitted trade. Tawarruq is different from Bai Al Inah as there is no compulsion of repurchase of commodity; rather, the mutawarriq is without charge to organize commodities on the open market. Hence, it is viewed as a true trade and therefore allowed.

The Islamic system in the context of finance revolves around eliminating “Haram” mode of financing and coming up with alternative products, otherwise lead to a serious economic problem for society. That, Allah has and prohibited the sale of Riba but allowed trade as long as aligned with the terms and conditions are chased by counterparty.

2. Discussion

a. Islamic Law Perspective

i. Schools of Thought

In kitab Syarh Muntaha Al-Iradat argued about Bai Al Inah with respect to Tawarruq is the need for money, purchasing the equivalent of thousand and increase its price and there ...