There are two purposes to this study: first, to identify the status of ḥiyal (legal devices) in the offering of deposit products based on the tawarruq contract in the Malaysian Islamic banking industry and second, to identify the reasons for the widespread offering of tawarruq-based deposit products by Malaysian Islamic banks (IBs).
The study uses the qualitative method that involved interviews with Malaysian Sharī‘ah experts and Islamic banking operations experts.
The findings show that Malaysian IBs resolved to use the tawarruq munaẓẓam contract in deposit products due to several constraints in the existing banking system and in view of customer preferences.
This study solely focuses on tawarruq-based deposit products due to its extensive application in the Malaysian Islamic banking industry.
The implication of the study is that more stringent procedures are required in the offering of tawarruq-based deposit products as they are extensively utilised and have sparked controversy among Sharī‘ah scholars. Moreover, to retain Malaysia's Islamic banking reputation and trustworthiness, new and less controversial contracts must be developed.
This paper discusses the extensive usage of ḥiyal-based contracts such as tawarruq in Islamic banking institutions' deposit products, with justifications from Malaysian Islamic banking experts. The widespread use of the tawarruq munaẓẓam contract in deposit-based product offerings is based on a reasonable view considering the constraints that Malaysian Islamic banking is currently facing, with strict operation procedures by Bank Negara Malaysia to ensure real operations and to avoid fictitious elements. This paper reveals the use of tawarruq munaẓẓam in deposit products which allows the Islamic banking industry to operate effectively under Malaysia's dominant conventional banking system.
Syahmi, M.I., Mohamad, M.T. and Ramli, M.A. (2022), "Experts' views on
Emerald Publishing Limited
Copyright © 2022, Muhammad Izzul Syahmi, Mohammad Taqiuddin Mohamad and Mohd Anuar Ramli
Published in ISRA International Journal of Islamic Finance. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http:// creativecommons.org/licences/by/4.0/legalcode
The term ḥiyal has two connotations: one positive and one negative. In its positive connotation, ḥiyal refers to wisdom in finding a solution to achieve a specific goal that is not contrary to the Sharī‘ah (Islamic law). These are known as ḥiyal mashrūʿah (Ibn Nujaym, 1983). The negative connotation of ḥiyal refers to the use of a practice that is allowed in Sharī‘ah, but as a subterfuge for achieving an illegal purpose. This is referred to as ḥiyal ghayr mashrūʿah (Ibn Qudāmah, 1968). Sharī‘ah scholars have differing views on the acceptance of Sharī‘ah contracts that contain ḥiyal (legal devices). Ḥanafī and Shāfiʿī scholars are more open to accepting them, unlike Mālikī and Ḥanbalī scholars (KMAIA, 1989; Khir et al., 2010).
Ḥiyal-based contracts are utilised in the structuring of Islamic banking products. For instance, the tawarruq contract, which consists of two sale and purchase contracts, is executed to obtain liquidity. Sharī‘ah scholars agreed on the fact that the tawarruq contract features the ḥiyal concept since the transaction is not aimed at the underlying asset but, rather, at obtaining cash from the sale and purchase of the asset (Abozaid, 2016).
Opinions about tawarruq munaẓẓam (organised tawarruq) differ amongst Sharī‘ah and Islamic banking operations experts. Some consider it forbidden, while others allow it with restrictions. Despite that, the use of the tawarruq contract is ubiquitous in Islamic banking operations. Accordingly, this study aims at
Examining the status of ḥiyal in the offering of deposit products based on the tawarruq contract in the Malaysian Islamic banking industry;
Identifying the reasons for the widespread offering of tawarruq-based deposit products by Malaysian Islamic banks (IBs).
To achieve the aims of the study, interviews were conducted with experts involved in Malaysian Islamic banking operations to find out the real contextual use of ḥiyal-based contracts, with an emphasis on tawarruq-based deposit products.
The paper is organised into five sections. Following the introduction, the second section provides a literature review on controversies about the tawarruq contract and its usage in Malaysian Islamic banking operations. The research methodology is presented in the third section. The next section highlights the research findings and proceeds to the research discussion in the fifth section. Lastly, the sixth section draws the research conclusion.
Controversies about the tawarruq contract
The classical tawarruq arrangement consists of two unrelated contracts. A person in need of liquidity purchases a commodity on credit and then looks for someone else to buy it from him on spot. He ends up with cash and a debt that is normally larger than the cash amount. The tawarruq contract was recognised by the majority of classical Sharī‘ah scholars as permissible on the basis of the general permissibility of sale and purchase transactions except for what has been excluded by specific evidence (KMAIA, 1989). The majority did not consider the goal of the seeker of liquidity to affect the legality of either of the constituent transactions (KMAIA, 1989; Ahmad et al., 2017). On the other hand, Ibn al-Qayyim and Ibn Taymiyyah did not allow the tawarruq contract since they considered it to be a form of detrimental transaction and a sin committed vis-à-vis Allah (SWT) (KMAIA, 1989; Ahmad et al., 2017).
The form of tawarruq used by IBs today is called tawarruq munaẓẓam (organised tawarruq) since the IB acts as the agent of the original buyer in seeking a buyer for the second sale transaction and due to other elements of pre-arrangement (Hasan, 2011). As a consequence, contemporary Sharī‘ah authorities differ over the permissibility of tawarruq munaẓẓam.
On the level of organisations, the International Islamic Fiqh Academy of the Organization of Islamic Cooperation (IIFA-OIC) in its resolution no. 179 (5/9) confirmed that two types of tawarruq (organised and reverse) are prohibited due to potential fictitious elements that could occur in the transaction (IIFA, 2009; GIFR, 2016). The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), on its part, in its Sharī‘ah Standard No. 30 on Monetization (Tawarruq) allows restricted use of tawarruq munaẓẓam in Islamic financial institutions – that is, only when faced with the risk of liquidity shortages that might interrupt operations and result in customer losses (AAOIFI, 2017). On the other hand, Bank Negara Malaysia (BNM) in its tawarruq document policy permits the use of tawarruq contracts in Malaysian Islamic banking operations without imposing usage restrictions on deposit and financing products (BNM, 2018).
As for individual contemporary Sharī‘ah experts, they too vary in their acceptance of tawarruq munaẓẓam in Islamic banking operations (Mohamad and Ab Rahman, 2014). Būṭī (2009) Ibn Bāz (2001) expressed positive acceptance of the usage of tawarruq munaẓẓam in Islamic banking operations by emphasising the adherence of the tawarruq contract to Sharī‘ah-compliant selling and purchasing principles. In addition, Muhammad and Bakar (2021) in their study suggested that the use of the tawarruq contract be expanded due to its great potential in Islamic banking operations.
However, some Sharī‘ah scholars oppose the usage of tawarruq munaẓẓam in Islamic banking products. According to Uthmānī (2009), Zuḥaily (2009) and Bouheraoua (2009), tawarruq munaẓẓam contracts pose significant Sharī‘ah risks in that the buyers have no productive economic interest in the contract's object of sale. The usage of tawarruq munaẓẓam in Islamic banking products is seen as a form of ribā (interest-based transaction) (Fa-Yusuf and Ndiaye, 2017) and is thus perceived as a reason for customers to doubt the credibility of the Islamic banking industry (Globe Newswire, 2014). Similarly, the claim that the tawarruq contract does not stimulate the economy since it is not intended for commodity transactions has become one of the arguments for forbidding its use in Islamic banking products (Siddiqi, 2007; Umar, 2016). Furthermore, according to Fa-Yusuf and Ndiaye (2017), the utilisation of tawarruq munaẓẓam in deposit products impedes the widespread adoption of true risk-sharing products such as muḍārabah and mushārakah.
Use of the tawarruq contract in Malaysian Islamic banking operations
Tawarruq contracts are widely used in the offering of Malaysian Islamic banking financing and deposit products, as shown in Table 1. According to a BNM (2021), 60% of customer deposits in IBs are channeled into tawarruq-based fixed deposit products. According to these statistics, these deposit products are well received by customers.
It is the flexibility of tawarruq contracts in delivering diverse Islamic banking products that is seen as a “magic lamp” to the Islamic banking industry, enabling its widespread use in both deposit and financing products (Ahmad et al., 2017). According to Khir et al. (2010), tawarruq contracts fall within the scope of flexibility in Islamic finance, but a transition should be sought to less controversial contracts in the future.
This is a qualitative study. To achieve the objectives of the study, researchers conducted in-depth and semi-structured interviews with relevant informants to explore their perspectives on a particular situation. This method is very useful when detailed information is needed regarding the context of a problem in an area (Rowley, 2012). In this study, the experts interviewed were those with experience in Islamic banking operations in Malaysia as well as Sharī‘ah experts.
In this study, nine Islamic banking experts were interviewed, including members of the Shariah Advisory Council (SAC) of BNM, Shariah Committee (SC) members of IBs and IB executives, as detailed in Table 2. The participants of this study were selected on the basis of their direct involvement in Islamic banking operations, their experience and their familiarity with the requirements of Malaysian IBs. Interview data can describe the context of the ḥilah contract application in Malaysia. Thus, the conclusions made are not only based on the theory of ḥiyal (pl. of ḥilah) but also rely on current banking practices in Malaysia.
Research and analysis process
To achieve the research objectives, semi-structured questions were developed to help and encourage the informants to describe problems based on their views and experiences. To ensure the trustworthiness of the interview questions, they went through several processes as proposed by Bogdan and Biklen (2007), including validation of interview protocol by field experts, preliminary study and validation of interview data by research participants.
All informants agreed to be interviewed face-to-face at the place and time agreed upon. The interview process of all informants took about 30 min to an hour with voice recording. The interview process began with a brief description of the study and its purpose.
The interview data were transcribed by the researchers and validated by the research participants. The data were then analysed and summarised to identify similar patterns and themes in informants' answers using thematic analysis as suggested by Braun and Clarke (2006). The process included becoming familiar with the data, generating initial codes, searching for themes, reviewing themes, defining and naming themes and producing the reports. Thus, this study meets the criteria of credibility and integrity. The study found some key themes of the study results.
All the informants agreed that the tawarruq contract relates to the ḥiyal concept and is important in the offering of Malaysian Islamic banking deposit products. The study concluded three important causes for the tawarruq contract usage in Malaysian Islamic banking deposit products, as discussed below.
When it comes to the use of the tawarruq contract, Islamic banking experts prefer the term makhārij (way out of a constraint) over ḥiyal since it is more suitable as a way out for Malaysian deposit products. Informants P1, P2 and P6 said:
P1: For me, tawarruq is equivalent to makhārij.
P2: So, for me when we talk about ḥilah, we are talking about makhārij. The permissible ḥilah is equivalent to makhārij.
P6: Because [ḥiyal] is mujmal [ambiguous term], there is ḥalāl [ḥiyal] and there is ḥarām [ḥiyal]. As for makhārij, the term is lighter.
In addition, the use of the tawarruq contract is seen as a form of makhraj (way out) to the constraints faced by the Islamic banking industry and it goes beyond classical fiqh (Islamic jurisprudence) discussions. This was stated by informant P1:
P1: I prefer to put ḥiyal in a broader context. Because what we read in the turāth [heritage] books happened on a personal level. But today, ḥiyal is already institutionalised. There is no discussion in fiqh books.
Additionally, in describing the use of tawarruq contracts in Islamic banking, informant P5 was of the opinion that there should be no problem with the contract being applied in Islamic banking operations as it was a contract that complied with Sharī‘ah criteria. The statement by informant P5 is as follows:
P5: My opinion, if it [tawarruq operation] is not against Sharīʿah, then it can be used.
In Islamic banking operations, the term ḥiyal, which carries a negative connotation is avoided. Islamic banking institutions discuss the tawarruq contract that features the ḥiyal concept in the form of solutions to Islamic banking product offerings and operations. According to informants P2 and P4:
P2: [Tawarruq] is more a solution to a product.
P4: We are not discussing the thing [contract] ḥilah or not. It’s more of a solution.
Meanwhile, the use of makhraj was described by informant P8 as a solution to Islamic banking product offerings by stating that tawarruq-based deposit products are preferred by customers over qarḍ (benevolent loan) contract-based deposit products. Informant P8 said the following:
P8: As a comparison, our deposit portfolio is about RM4 billion, out of that, qarḍ is RM30 million only. So, what does that tell you when it comes to qarḍ?
Furthermore, the ḥiyal parameters outlined by some researchers do not serve as a guide to Islamic banking operations. IBs instead attach more importance to the products offered in compliance with BNM's tawarruq policy document. Informant P4 confirmed that the bank practices tawarruq as approved by its Sharī‘ah committee.
P4: We cannot relate whether we practice ḥiyal [or not]… at the bank level, whatever the Sharīʿah committee allows, that’s what we operate with now... Since it [tawarruq contract] is approved, if it contains ḥiyal, we consider it to be ḥiyal that is allowed.
According to the informants involved in Islamic banking operations, the tawarruq contract is executed in accordance with BNM guidelines, with strict risk management in its operation. For example, in commodity transactions, IBs allow customers to take ownership of the commodity. The informants noted the following:
P2: Customers can [take delivery of the tawarruq commodity], he is [then] responsible for the cost of delivery.
P4: He [the customer] has to bear all [related] delivery costs. We can say that the thing [commodity] is there, but you have to go get it.
P8: We put [the option to take the delivery of the commodity] in our requirement. If they [customers] want to take delivery, they need to tell us upfront. We have no problem [about customers] taking delivery of the commodity; the option is there.
In addition, informant P3 stated that Islamic banking has a system that can ensure that commodities involved in the sale and purchase transaction under the tawarruq contract are real:
P3: But we lock [the sequence of tawarruq in the system]. Because we have this internal system, when the tawarruq transaction is completed, it will be updated in the database, which [notifies us] it is already completed.
However, Islamic banking expert informants among the Sharī‘ah committees of Malaysian IBs suggested that Islamic banking should shift to ḥiyal-free contracts in offering Islamic banking deposit products. Informants P1, P5 and P6 said:
P1: But it [tawarruq] is not preferable, and such a contract should have a time limit for us to overcome all the constraints that exist. Then we do our best. We cannot depend on products in the form of makhārij or ḥiyal like this forever.
P5: But we must see whether it is something that we can use widely, or periodically… There should be phases where the industry [Islamic banking] has matured, this contract [tawarruq] should not even be required.
P6: Our concept is al-khurūj min al-ikhtilāf mustaḥab [avoidance of areas of juristic disagreement is recommended]. If we can move on to a less controversial [contract] then we move on.
The banking system in Malaysia
The banking system in Malaysia adopts a dual banking mode whereby IBs operate side-by-side with conventional banks (CBs). The Islamic banking system can be categorised into three forms of operations, namely full-fledged Islamic, Islamic subsidiary and Islamic window. In Malaysia's pluralistic society, banking products offered by CBs are gaining more attention among customers. This is due to the longer presence and experience of CBs compared to IBs as well as the availability of competitive products that benefit customers.
In this regard, based on the history of the banking system in Malaysia, the Islamic banking experts interviewed believe that it is difficult for IBs to attract the attention of bank customers who are already familiar with the conventional banking system.
Since IBs have IT systems and operating procedures to execute Sharī‘ah contracts, they have no restrictions on introducing products based on other contracts as long as they comply with Sharī‘ah criteria. This corresponds to the statement of informant P3:
P3: The bank does not have a problem to switch to another contract as long as it does not violate Sharīʿah.
However, considering that the banking system in Malaysia is dominated by CBs, the tawarruq contract has become an Islamic banking option to be widely applied in Islamic banking product offerings. P7 and P8 pointed out:
P7: We are not ready to be there yet [profit-sharing-based deposit]... I mean ideally, we want deposits to be based on muḍārabah. For depositors as investors, we will share the return. Ideally so, yes, we are aware of that. But to get there, we must start slowly. That’s what I mean, my opinion, ḥiyal in today’s context is a necessity.
P8: The main issue is that there is always the notion that Islamic banks want to do this [ḥilah]... But that is not the intention. The intention is that we have to look in the context of how we build Islamic banks.
Furthermore, in the interviews conducted, the Islamic banking experts stated that the use of tawarruq can boost the development of IBs in Malaysia as well as encourage Malaysian bank customers to choose Islamic banking products over those of CBs. According to informants P2 and P6, the objective is:
P2: To remain competitive for the product, yet the product remains Sharīʿah-compliant… if the thing [tawarruq] is controversial, yes, it is true…but at least when doing it this way, it’s like preventing the flow of funds to the conventional [system].
P6: First, tawarruq is used as an avoidance of ribā. Second, to move the economy. Third, to be able to avoid the accusation of ribā al-qarḍ (interest-based loan).
Customers in Malaysia are still unaware of the use of Sharī‘ah contracts in Islamic banking products. Banking customers are sceptical of products based on risk-sharing contracts, according to informants P2, P8 and P9. In their statements, they said:
P2: [Tawarruq usage enables] the offering of a variety of products, and meets the product requirement of the customer. Because the customer is not very comfortable with products that do not guarantee profit.
P8: When we offered muḍārabah before, and we offered qarḍ, then the Muslims themselves had problems. They are the ones who said that it is not right. It is the failure of the customer to understand the Islamic bank.
P9: ...It’s not that the industry does not produce profit-sharing muḍārabah products, but it does not get a [good] response. So that’s why the bank does according to the customer’s wishes. Go for sale-based [products].
Besides that, banking customers are most likely to choose deposit products that are able to guarantee their deposits, cash liquidity and profitability simultaneously. As a result, customers choose tawarruq-based deposit products that meet those criteria over other deposit products. Informant P1 claimed that:
P1: There are three [indicators] that depositors always want, [first] capital guarantee… second, liquidity... third, profit.
This indicates that deposit products based on the tawarruq contract are offered in IBs, giving customers the option to deposit their money while earning fixed profits from Sharī‘ah-compliant products.
In Malaysia, Sharī‘ah experts refer to the usage of the tawarruq contract in Islamic banking products as makhārij. This is due to the fact that the phrase makhārij is more synonymous with the term ḥiyal mashrūʿah, as it indicates a positive connotation, rather than the term ḥiyal, which has two connotations, positive (ḥiyal mashrūʿah) and negative (ḥiyal ghayr mashrūʿah). Besides, makhārij is employed as a means of circumventing the constraints imposed by the current Islamic banking system.
In Islamic banking operations, banks do not focus on the ḥiyal status of a contract. Rather, they concentrate on finding solutions to customers' needs in terms of product offerings and are concerned about customer responses. The solutions proposed must comply with BNM standards and meet the demands of Malaysian customers. Malaysian customers prefer to choose deposit products that are less risky while offering guaranteed deposits, liquidity and profits simultaneously (Muneeza, 2019). Thus, profit-sharing contracts do not meet customer demands since, according to the Islamic Financial Services Act (2013) (IFSA, 2013), they are categorised as investment products that cannot guarantee customer deposits. Meanwhile, the qarḍ contract does not fulfill the demands of the customer since no profit can be guaranteed to the customer.
Based on these competitive characteristics, the tawarruq contract has become a suitable solution for deposit products in IBs as it strongly matches the preferences of the majority of Malaysian customers. Customers benefit from tawarruq-based deposit products in the same way that they benefit from CBs' deposit products. However, the two products operate differently. In CBs' deposit products, the profit yields are dependent on ribā transactions. Meanwhile, in IBs, tawarruq-based deposit products are structured using genuine Sharī‘ah-compliant sale and purchase transactions (Ahmad et al., 2020). As a result, the availability of deposit products based on the tawarruq contract provides Malaysian customers the option of choosing Islamic banking deposit products over conventional banking deposit products (Chowdhury et al., 2020).
Clearly, Malaysian IBs employ makhārij in deposit product operations to fulfill the demands of Malaysian customers as well as react to market constraints and the complicated modern financial environment (Hamour et al., 2019). The use of tawarruq contracts by Malaysian IBs is a form of makhārij that meets ḥiyal parameters (Khir et al., 2010; Syed and Omar, 2017) as well as complying with the BNM tawarruq policy document (BNM, 2018). Furthermore, the tawarruq operation is governed by proper Sharī‘ah risk-control mechanisms. The way that tawarruq is strictly practiced by IBs may help to reduce the prohibited elements that may have otherwise arisen in the operations (Shaharuddin, 2019; Chowdhury et al., 2020).
However, the widespread use of tawarruq contracts in Islamic banking products needs to be reconsidered. This is so because these contracts are controversial and not accepted by Sharī‘ah scholars globally (Alkhan and Hassan, 2019). AAOIFI Sharī‘ah Standard no. 30 on Monetization (Tawarruq), item no. 5/1, states that a tawarruq contract is only to be utilised in situations of necessity (ḍarūrah) and is restricted to financing product offerings. Furthermore, some Sharī‘ah experts are opposed to the tawarruq contract structure as it is not aimed at the commodity (Sharaiyra and Haswa, 2019; Alkhan and Hassan, 2019) and consider it a form of fraud (Hamour et al., 2019) and a trick to circumvent the prohibition of ribā (Sharaiyra and Haswa, 2019; Smolo and Musa, 2020). Moreover, Islamic banking operations are exposed to the risk of Sharī‘ah non-compliance due to tawarruq contracts deviating from the original objectives of commodity sale and purchase contracts (Alkhamees, 2017; Bakar and Mansoor, 2020). In the long term, this may harm the reputation of the Islamic banking industry (Kahf and Habbani, 2016; Ahmad et al., 2017).
Besides, the extensive usage of tawarruq contracts has caused the Islamic banking industry to become over-reliant on debt-based contracts (Alkhan and Hassan, 2019) and thus violating the sustainability of Islamic finance objectives (Ahmad et al., 2020). It is argued that the scenario has resulted in Islamic banking operations and functions being no different from conventional banking operations (Maali et al., 2020), with the exception of the adoption of Islamic terminologies to hide ribā transactions and evade Sharī‘ah restrictions (Ahmad et al., 2017).
Additionally, it is said that the excessive usage of tawarruq contracts contributes to debt proliferation and the occurrence of economic crises (Bouslama and Lahrichi, 2017). As a result, the tawarruq contract is seen as an inefficient mode of accumulating wealth since money does not flow to the most productive projects (Alkhamees, 2017) while at the same time impeding the growth of contracts based on profit and loss (Hidayah et al., 2019).
Negative allegations concerning the Sharī‘ah compliance status of tawarruq contracts in Islamic banking operations, as well as criticisms about the impact of excessive use of tawarruq on Islamic banking reputation have stimulated Sharī‘ah scholars to advise IBs to shift away from tawarruq-based products (Asni and Sulong, 2018; Smolo and Musa, 2020; Ahmad et al., 2020). This is crucial considering the tawarruq contract is not internationally recognised, posing a long-term threat to the global aspirations for Malaysian Islamic banking (Ali and Hassan, 2020). This statement aligns with the views of the Sharī‘ah experts interviewed in this study.
Furthermore, the parameters developed by Khir et al. (2010) related to ḥiyal-based contracts categorise tawarruq as a rukhṣah (facilitation) contract since it incorporates the concept of ḥiyal. This contract is viewed as a necessity for Islamic banking operations seeking to compete in Malaysia's banking landscape. However, IBs should not utilise the tawarruq contract in their product offerings permanently; instead, they should work to overcome the constraints (Ahmad et al., 2017) and shift to more Sharī‘ah and economy-friendly contracts in the future (Khir et al., 2010).
Due to the obvious current banking challenges, some Sharī‘ah experts suggested that BNM along with IBs establish more strict and systematic operational parameters and tawarruq contract procedures (Mahyudin and Seman, 2018; Alkhan and Hassan, 2019). Moreover, IBs should reduce their reliance on tawarruq contracts for their product offerings (Ali and Hassan, 2020). This is critical in order to ensure that Islamic banking operations comply with Sharī‘ah principles, as this contract is subject to major Sharī‘ah risks and has been widely criticised by Sharī‘ah experts (Alkhamees, 2017; Fa-Yusuf and Ndiaye, 2017).
Salam contract as an alternative
Meanwhile, there have been recommendations for the salam contract to replace the tawarruq contract in Islamic banking product offerings (Mahaini, 2016; Dchieche and Aboulaich, 2016; Putri et al., 2019). The salam contract is a sale and purchase contract whereby the asset price is paid in advance for future delivery of a defined asset. Farmers utilise the salam contract to get financing for their agricultural activities (Mahadik, 2013).
The salam contract provides several advantages over the tawarruq contract. To begin with, usage of the salam contract is more in accordance with economically-friendly transactions (Mahadik, 2013) as it is utilised to finance agricultural and manufacturing operations (Saleem et al., 2014; Obaidullah, 2015; Putri et al., 2019; Ahmad et al., 2020). Furthermore, salam contracts benefit both sellers and buyers since the former require advanced payments to finance their production operations while the latter benefit from the salam commodity price which is lower than the spot selling price.
The use of the salam contract in structuring deposit products is known as reverse salam. It involves the bank as the seller (the bank represents the party offering the commodity in the future) and the customer as the buyer (the customer provides the cash deposit). It is different from the salam contract used by banks in financing products.
Reverse salam enables IBs to collect customer deposits at the moment of the salam contract inception (T+0). By the time the deposit salam contract reaches maturity (T+90), the IB has to provide depositors with a specific quantity, quality and value of commodities. IBs are free to utilise accumulated deposits between the starting date of the contract and the maturity date. To reduce market risks, Mahaini (2016) recommended that IBs adopt approved hedging tools to lock in the commodity purchase price on the contract maturity date. When the salam contract reaches maturity, and the depositor owns the commodity, he may delegate the bank to sell it on the market on his behalf and for the bank to credit the amount to the depositor's account. This amount is referred to as the redemption amount (Saleem et al., 2014).
In Malaysia, Bursa Suq Al-Sila's platform offers deposits based on the salam contract. The structure provided by Bursa Malaysia Islamic Services Sdn Bhd (BMIS) has been approved by Bursa Suq Al-Sila's Shariah committee as a Sharī‘ah-compliant product (Bursa Malaysia, 2019). In the meantime, Koperasi Co-opbank Pertama Malaysia Berhad, a cooperative organisation in Malaysia, is one of the Malaysian Islamic financial institutions that uses the salam contract in deposit products (CBP, 2021).
There are, however, constraints in applying the salam contract in Islamic banking deposit products. This is so because Islamic banking operations in Malaysia still do not have the best model and practice of the salam contract. Meanwhile, the salam contract contains risks that need to be managed by IBs, including market risks on fluctuating commodity prices (Saleem et al., 2014) and issues related to hedging against commodity asset prices before contract maturity (Mahaini, 2016). Moreover, due to the reliance of IBs on the tawarruq contract, which is easier to use in deposit products since they do not entail market risks, efforts to employ the salam contract in deposit products have drawn less attention among Malaysian IBs. The salam contract, on the other hand, is more suited to be offered in financing products related to agricultural and industrial operations.
Based on prior discussions, the tawarruq munaẓẓam contract that incorporates the concept of ḥiyal has become a subject of controversy among Sharī‘ah experts, with some allowing it to be used in Islamic banking products in limited situations, while others allowing it with procedures and operations that need to be tightened and still others advising IBs to shift away from tawarruq to other contracts to ensure the Islamic banking sustainability.
The salam contract is one of the recommended contracts that is less controversial. In terms of Malaysian Islamic banking product offerings, the salam contract is more feasible as a solution for financing products involving agricultural and manufacturing activities. This contract, on the other hand, is less viable in deposit products since no sustainable application model has yet been proposed, and its usage exposes banks to market risks.
However, IBs must consider the long-term implications of excessive tawarruq utilisation in product offerings on the Islamic economy and IBs' reputation. IBs must seek to balance their product offerings with the salam contract and other Sharī‘ah-compliant and economy-friendly contracts, and they must develop a clear roadmap for shifting away from tawarruq contracts. Simultaneously, the regulator and IBs must ramp up efforts to raise customer awareness of Sharī‘ah contracts that underlie various products as well as encourage them to choose Sharī‘ah-compliant and economically sustainable products.
Tawarruq-based deposit products in Malaysian Islamic banks
|Bank||Current account and savings account (CASA)||Term deposit|
|Affin Islamic Bank Berhad||✓||✓||✓|
|Alliance Islamic Bank Berhad||✓||✓||✓|
|AmBank Islamic Berhad||✓||✓|
|Bank Islam Malaysia Berhad||✓||✓|
|Bank Muamalat Malaysia Berhad||✓||✓||✓|
|CIMB Islamic Bank Berhad||✓||✓|
|Hong Leong Islamic Bank||✓||✓|
|HSBC Amanah Malaysia Berhad||✓||✓|
|Kuwait Finance House (M) Berhad||✓||✓|
|Maybank Islamic Berhad||✓||✓||✓|
|Public Islamic Bank Berhad||✓||✓|
|RHB Islamic Bank||✓||✓||✓|
|Standard Chartered Saadiq||✓||✓||✓|
Background of informants
|Code||Position in organisation||Category|
|P1||Member of the Shariah Advisory Council||BNM|
|P2||Shariah Risk Management Executive||Islamic Full-fledged Bank|
|P3||Senior Manager Treasury Operation|
|P4||Shariah Review Executive||Islamic Subsidiary|
|P5||Member of the Shariah Committee|
|P6||Member of the Shariah Committee|
|P7||Shariah Advisory and Research Executive||Islamic Window|
|P8||President of Islamic Banking|
|P9||Vice President of Islamic Banking|
Source(s): Authors' own
AAOIFI (2017), “Shari‘ah standard no. (30): monetization (tawarruq)”, available at: http://aaoifi.com/ss-30-monetization-tawarruq/?lang=en (accessed 17 June 2022).
Abozaid, A. (2016), “The internal challenges facing Islamic finance industry”, ISRA International Journal of Islamic Finance, Vol. 9 No. 2, pp. 190-195.
Affin Islamic (2022), “Generic terms and conditions applicable for all Islamic deposit accounts products/services”, available at: https://www.affinalways.com/storage/AffinAlways%20Collaterals/Personal%20Collaterals/Deposit%20Islamic/IslamicDeposit-General-TnC-ENG.pdf (accessed 12 July 2022).
Ahmad, E.F., Shihama, M., Tarmizi, N.A.M., Jibril, S.M., Djama, S.I. and Muneeza, A. (2017), “Tawarruq as a product for financing within the Islamic banking system: a case study of Malaysian Islamic banking system”, International Journal of Management and Applied Research, Vol. 4 No. 1, pp. 31-43.
Ahmad, Z., Zahir, F., Usman, A.M., Muneeza, A. and Mustapha, Z. (2020), “An exploratory study on the possibility of replacing tawarruq based Islamic banking products using other alternatives”, International Journal of Management and Applied Research, Vol. 7 No. 2, pp. 147-164.
AIBB (2021), “Islamic deposit terms and conditions”, available at: https://www.alliancebank.com.my/Alliance/media/Documents/Banking/Islamic_Deposits_Terms_Conditions_ENG.pdf (accessed 12 July 2022).
Ali, M.M. and Hassan, R. (2020), “Survey on Sharīʿah non-compliant events in Islamic banks in the practice of tawarruq financing in Malaysia”, ISRA International Journal of Islamic Finance, Vol. 12 No. 2, pp. 151-169.
Alkhamees, A.A. (2017), A Critique of Creative Shari’ah Compliance in the Islamic Finance Industry, Martinus Nijhoff Publishers.
Alkhan, A.M. and Hassan, M.K. (2019), “Tawarruq: controversial or acceptable?”, Arab Law Quarterly, Vol. 33 No. 4, pp. 307-333.
Al-Rajhi (2022), “Deposit and investment”, available at: https://www.alrajhibank.com.my/page/personal/deposit-accounts/savings-account-i (accessed 12 July 2022).
Ambank Islamic (2022), “Deposits”, available at: https://www.ambank.com.my/eng/deposits/#saving-account (accessed 12 July 2022).
Asni, F. and Sulong, J. (2018), “Non-ethical elements in tawarruq munazzam product for Islamic housing financing in Malaysia”, International Journal of Academic Research in Business and Social Science, Vol. 8 No. 12, pp. 1013-1019.
Bakar, M.A. and Mansoor, R. (2020), “Form and substance in Islamic finance: from the perspective of Islamic law of contract”, Hazaraislamicus, Vol. 9 No. 2, pp. 73-92.
BIMB (2022), “Deposits and investment products”, available at: https://www.bankislam.com/personal-banking/deposit-and-investments/(accessed 12 July 2022).
BMMB (2022), “Deposit”, available at: https://www.muamalat.com.my/fees-charges-home/fee-charges-deposit/ (accessed 12 July 2022).
BNM (2018), “Tawarruq”, available at: http://www.bnm.gov.my/index.php?ch=57andpg=137andac=767andbb=file%27 (accessed 30 September 2021).
BNM (2021), “Monthly highlights and statistics in July 2021”, available at: https://www.bnm.gov.my/-/monthly-highlights-and-statistics-in-july-2021 (accessed 28 September 2021).
Bogdan, R. and Biklen, S.K. (2007), Qualitative Research for Education: an Introduction to Theory and Methods, 5th ed., Pearson A & B, Boston.
Bouheraoua, A. (2009), “Al-tawarruq al-Maṣrāfī, Dirāsah Taḥlīliyyah Naqdiyyah li al-Ārāʾ al-Fiqhiyyah”, 19th Majmaʿ al-Fiqh al-Islāmī Conference, Sharjah, United Arab Emirates, 26 March–3 April 2009.
Bouslama, G. and Lahrichi, Y. (2017), “Uncertainty and risk management from Islamic perspective”, Research in International Business and Finance, Vol. 39, pp. 718-726.
Braun, V. and Clarke, V. (2006), “Using thematic analysis in psychology”, Qualitative Research in Psychology, Vol. 3 No. 2, pp. 1-43.
Bursa Malaysia (2019), “Bursa Suq Al-Sila’ (BSAS): salam deposit”, available at: https://www.bursamalaysia.com/sites/5d809dcf39fba22790cad230/assets/61006c1f39fba22b114cc439/12_-_Bursa_Suq_Al-Sila__Salam_Deposit.pdf (accessed 17 October 2021).
Būṭī, M.S.R. (2009), Qadāyā Fiqhiyyah Muʿāṣirah, Dār al-Fārābī, Damascus.
CBP (2021), “Akaun Simpanan-Salam”, available at: https://www.cbp.com.my/produk/lembaran-penzahiran-produk/simpanan-al-wadiah.html (accessed 17 October 2021).
Chowdhury, M.A.M., Masud, A.A., Atiullah, M. and Tanvir, J.I. (2020), “Contemporary responses to the criticism of Islamic banks in Malaysia”, European Journal of Islamic Finance, Vol. 15, pp. 1-11.
CIMB Islamic (2022), “Personal”, available at: https://www.cimb.com.my/en/personal/day-to-day-banking/accounts/savings-account.html?filter=islamic (accessed 12 July 2022).
Dchieche, A. and Aboulaich, R. (2016), “Pricing bounded value based ‘salam’”, Journal of Applied Economic Sciences, Vol. 11 No. 4, pp. 1-9.
Fa-Yusuf, H.S. and Ndiaye, N.D. (2017), “Issues with the use of tawarruq in Malaysia”, Journal of Islamic Banking and Finance, Vol. 5 No. 2, pp. 30-36.
GIFR (2016), “Sharīʿah analysis of tawarruq based products”, available at: http://www.gifr.net/gifr2016/ch_10.pdf (accessed 10 October 2021).
Globe Newswire (2014), “Is tawarruq really Islamic finance”, available at: https://www.globenewswire.com/news-release/2014/06/19/645304/10086366/en/Is-Tawarruq-Really-Islamic-Finance.htmlhttps://www.globenewswire.com/news-release/2014/06/19/645304/10086366/en/Is-Tawarruq-Really-Islamic-Finance.html (accessed 20 October 2021).
Hamour, M., Shakil, M.H., Akinlaso, I.M. and Tasnia, M. (2019), “Contemporary issues of form and substance: an Islamic law perspective”, ISRA International Journal of Islamic Finance, Vol. 11 No. 1, pp. 124-136.
Hasan, A. (2011), Fundamentals of Shariah in Islamic Finance, IBFIM, Kuala Lumpur.
Hidayah, N.N., Lowe, A. and Woods, M. (2019), “Accounting and pseudo spirituality in Islamic financial institutions”, Critical Perspectives on Accounting, Vol. 61, pp. 22-37.
HLIB (2022), “Personal-i”, available at: https://www.hlisb.com.my/en/personal-i/home.html (accessed 12 July 2022).
HSBC Amanah (2022), “Accounts”, available at: https://www.hsbcamanah.com.my/accounts/ (accessed 12 July 2022).
Ibn Bāz, A.A.I.A. (2001), Majmū’ Fatāwā wa Maqālāt Mutanawwi’ah, Ri’āsāh Idārah al-Buhūth al-Islāmiyyah, Riyād.
Ibn Nujaym (1983), Al-Ashbāh wa Al-Naẓā’ir, Dār al-Fikr, Damascus.
Ibn Qudāmah (1968), Al-Mughnī, Maktabah al-Qahirah, Lebanon.
IFSA (2013), “Islamic financial Services act”, available at: https://www.bnm.gov.my/documents/20124/8102422b-e6dd-d149-8db0-e3637e89ed5c (accessed at 17 June 2022).
IIFA (2009), “Resolution no. 179 (5/19): essence and types of tawaruq (fiqh compliant vs bank structured)”, Resolutions and Recommendation of the International Islamic Fiqh Academy, International Islamic Fiqh Academy, Jeddah, Kingdom of Saudi Arabia.
Kahf, M. and Habbani, E.I. (2016), “Tawarruq potential risks: the practices of Islamic financial institutions in Qatar”, Journal of Islamic Economics, Banking and Finance, Vol. 12 No. 4, pp. 54-88.
KFH (2018), “Deposit”, available at: https://www.kfh.com.my/malaysia/personal/deposit.html (accessed 12 July 2022).
Khir, M.F., Muhammad, M., Hashim, A., Bouheraoua, S., Hussain, L. and Iqbal, I. (2010), “Ḥiyal dan makharij: ke arah ketelusan di dalam operasi perbankan Islam”, in Hussain, L. (Ed.), 4th Muzakarah Cendekiawan Syariah Nusantara, Putrajaya, pp. 1-31, 10-11 November.
KMAIA (1989), Al-Mawsūʿah al-Fiqhiyyah al-Kuwaytiyyah, 2nd ed., Kuwait Ministry of Awqaf and Islamic Affairs.
Maali, B.M., Fendi, U.A. and Atmeh, M.A. (2020), “The economic reality of Islamic banks' transactions: a qualitative inquiry”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 2, pp. 286-300.
Mahadik, J. (2013), “Salam: a good alternative to controversial tawarruq”, New Horizon: Global Perspective on Islamic Banking and Insurance, Vol. 188, pp. 30-33.
Mahaini, M.G. (2016), “Modified reverse salam: an innovative solution for Islamic liquidity management”, available at: http://www.islamicfinancenews.com/authors/mohammad-ghaith-mahaini (accessed 19 October 2021).
Mahyudin, M.I. and Seman, A.C. (2018), “The application of bay’ al-tawarruq in Islamic banking institutions in Malaysia”, in Rahman, A.A. (Ed.), New Developments in Islamic Economics, Emerald Publishing Limited, Bingley, pp. 169-179.
Maybank (2021), “Leading Asia: annual report 2021 financial statements”, available at: https://www.maybank.com/iwov-resources/documents/pdf/annual-report/2021/Maybank-AR2021-Financial-Statements-Book.pdf (accessed 12 July 2022).
MBSB (2022), “Deposit”, available at: https://www.mbsbbank.com/en/consumer-banking/deposit (accessed 12 July 2022).
Mohamad, N. and Ab Rahman, A. (2014), “Tawarruq application in Islamic banking: a review of the literature”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 No. 4, pp. 485-501.
Muhammad, N. and Bakar, A.A. (2021), “Implementation of bay‘ al-tawarruq in Islamic finance banking and the customer acceptance”, Journal of Global Business and Social Entrepreneurship (GBSE), Vol. 7 No. 21, pp. 89-95.
Muneeza, A. (2019), “Modified reverse salam product as an innovative alternative for mobilizing fixed deposits in jurisdictions with limited Sharīʿah compliant investment avenues to promote financial inclusion”, Al-Iqtishad, Vol. 11 No. 1, pp. 1-21.
Obaidullah, M. (2015), “Enhancing food security with Islamic microfinance: insights from some recent experiments”, Agricultural Finance Review, Vol. 75 No. 2, pp. 142-168.
OCBC Al-Amin (2022), “Deposits”, available at: https://www.ocbc.com.my/ocbcal_amin/pb_deposits.shtml?utm_source=alamin&utm_medium=main_menu&utm_campaign=alamin_personal_banking_i_deposit (accessed 12 July 2022).
PIBB (2022), “Personal banking”, available at: https://www.publicislamicbank.com.my/Personal-Banking/Bankingi (accessed 12 July 2022).
Putri, A.K., Razia, R. and Muneeza, A. (2019), “The potential of bai salam in Islamic social finance to achieve United Nations’ Sustainable Development Goals”, International Journal of Management and Applied Research, Vol. 6 No. 3, pp. 142-153.
RHB (2021), “Islamic banking services”, available at: https://www.rhbgroup.com/overview/islamic/index.html (accessed 12 July 2022).
Rowley, J. (2012), “Conducting research interviews”, Management Research Review, Vol. 35 Nos 3/4, pp. 260-271.
Saleem, M.Y., Mahaini, M.G. and Kureshi, H. (2014), “Reverse salam as an innovative instrument for investment accounts”, ISRA International Journal of Islamic Finance, Vol. 6 No. 1, pp. 182-193.
Shaharuddin, A. (2019), “Bay‘ al-tawarruq application in Malaysian Islamic bank: a critical assessment”, Labuan e-Journal of Muamalat and Society (LJMS), Vol. 13, pp. 54-64.
Sharaiyra, S.W. and Haswa, M. (2019), “The effect of ‘motive’ on characterising organised tawarruq”, Arab Law Quarterly, Vol. 22 No. 2, pp. 179-197.
Siddiqi, M.N. (2007), “Economics of tawarruq: how the mafasid overwhelm the masalih”, paper presented at Tawarruq: A Methodological Issue in Shari’a-compliant Finance, 1 February, London School of Economics, London, available at: http://www.siddiqi.com/mns/Economics_of_Tawarruq.pdf (accessed 16 June 2022).
Smolo, E. and Musa, A.M. (2020), “The (mis)use of al-hilah (legal trick) and al-makhraj (legal exit) in Islamic finance”, Journal of Islamic Accounting and Business Research, Vol. 11 No. 10, pp. 2169-2182.
Standard Chartered (2022), “Deposit products”, available at: https://www.sc.com/my/saadiq/?intcid=p-s-saadiq (accessed 12 July 2022).
Syed, E.A. and Omar, M. (2017), “Hiyal in Islamic finance: a recognition of genuine economic need or circumvention of riba”, Qualitative Research in Financial Markets, Vol. 9 No. 4, pp. 382-390.
Umar, T. (2016), “Commodity murābaḥah/tawarruq: why regulators must stop its use”, Islamic Commercial Law Report 2016, International Shari’ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur.
Uthmānī, M.T. (2009), “Aḥkām al-Tawarruq wa Taṭbīqātuhu al-Maṣrāfiyah”, 19th Majmaʿ al-Fiqh al-Islāmī Conference, Sharjah, United Arab Emirates, 26 March–3 April, p. 519.
Zuḥaily, W. (2009), “Al-Tawarruq Ḥaqīqatuhu, wa Anwāʿuhu (al-Fiqhī al-Maʿrūf wa al-Maṣrāfi al-Munaẓẓam)”, 19th Majmaʿ al-Fiqh al-Islāmī Conference, Sharjah, United Arab Emirates, 26 March–3 April, p. 789.
This paper was produced as part of a research grant provided by the Ministry of Higher Education, FRGS/1/2020/S01/UM/03/01, The Development of Sharī‘ah Smart Contract Risk Management Parameters Based on Blockchain Technology in Offering Malaysian Islamic Financial Products.
About the authors
Muhammad Izzul Syahmi is a PhD student at the Department of Shariah and Economics, Academy of Islamic Studies, University of Malaya, Kuala Lumpur. His research interests are in Islamic economics, Islamic banking and FinTech.
Mohammad Taqiuddin Mohamad, PhD, is a senior lecturer at the Department of Shariah and Economics, Academy of Islamic Studies, University of Malaya, Kuala Lumpur. His research covers the areas of Islamic economics, macroeconomics, Islamic banking and finance.
Mohd Anuar Ramli, PhD, is an associate professor at the Department of Fiqh and Usul, Academy of Islamic Studies, University of Malaya, Kuala Lumpur. The University of Malaya is where he earned all his academic credentials, from bachelor's degree to doctorate. His areas of expertise include the principles of Islamic jurisprudence, halal consumerism, Islamic culture and gender.