Tawarruq - Shariah Requirements and Optional Practices

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1. Tawarruq 5 of 32 PART B SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES 8 . Compliance with Part B 8.1 An IFI which uses tawarruq for its products and services must ensure that such products and services are in compliance with Part B of this policy document. 9. Definition 9.1 A tawarruq consists of two sale and purchase contracts. The first involves the sale of an asset by a seller to a purchaser on a deferred basis. Subsequently, the purchaser of the first sale will sell the same asset to a third party on a cash and spot basis. 10. Nature S 10.1 Each sale and purchase contract in a tawarruq is binding in nature and shall not be terminated unilaterally by any of the contracting parties. S 10.2 The common inherent nature of each sale and purchase contract in a tawarruq is the transfer of ownership of the asset from the seller to the purchaser for a consideration. G 10.3 The sale and purchase contract in the tawarruq may take in the form of a murabahah or musawamah. 11. Contracting parties S 11.1 The contracting parties to each sale and purchase contract in a tawarruq shall be a seller and a purchaser. S 11.2 In relation to paragraph 11.1, the seller in the first sale and purchase contract shall not be the purchaser in the second sale and purchase contract in the same tawarruq. G 11.3 The contracting parties in each sale and purchase contract in the tawarruq may enter into the sale and purchase contract through a wakil (agent). S 11.4 The contracting parties in the tawarruq shall be a natural person or a legal entity that has the legal capacity2 to enter into each sale and purchase contract in the tawarruq. S S 2 Legal capacity of a person, from Shariah perspective, is defined as the capacity to assume rights and responsibilities and capacity to give legal effect to his action. Among the important conditions are that the person must possess sound mind and the capacity to distinguish between what is harmful or beneficial to one’s interests. Legal capacity of a legal entity is defined as eligibility of Issued on: 28 December 2018
2. Tawarruq 6 of 32 12 . Ijab (offer) and qabul (acceptance) S 12.1 Each sale and purchase contract in a tawarruq shall be entered into through an offer and acceptance between the contracting parties. G 12.2 The offer and acceptance may be expressed orally, in writing or by any other methods recognised by Shariah. S 12.3 The offer and acceptance referred to in paragraph 12.1 must be executed in the following sequence: (a) the seller sells an asset to the purchaser by entering into a sale and purchase contract; and (b) subsequently, the purchaser from the first sale and purchase contract enters into another sale and purchase contract to sell the same asset to a third party. 13. Asset S 13.1 An asset which is eligible to be used as the subject matter of a tawarruq shall be either a tangible or an intangible asset provided that the asset is: (a) recognised by Shariah as valuable, identifiable and deliverable; and (b) already in existence and owned by the seller in each respective sale and purchase contracts involved. G 13.2 The asset which is the subject matter of a tawarruq may either take in the form of a whole asset or part of the whole asset. In the case of the latter, the asset may either be divided or undivided. S 13.3 Pursuant to paragraph 13.2, the undivided asset shall be apportioned based on practices which are recognised by Shariah. S 13.4 The following assets shall not be traded in a tawarruq: (a) gold, silver and currencies; (b) assets to be constructed or under construction; and (c) assets which are debt in nature. G 13.5 The asset may be acquired by the seller through a purchase from a supplier, or through any other means of transfer of ownership which is in compliance with Shariah. S 13.6 In the event where the asset is not present at the majlis al-`aqd (contract session), the seller shall provide the purchaser with a specific description of the asset. an entity to acquire rights and assume responsibilities. In Malaysia, this legal capacity is also subject to the Contracts Act 1950 and the Age of Majority Act 1971. Issued on: 28 December 2018
3. Tawarruq 7 of 32 S 13 .7 Transfer of ownership from the seller to the purchaser shall take effect upon entering into a valid sale and purchase contract; notwithstanding there is no registration of legal ownership to the purchaser. S 13.8 The purchaser shall take possession of the asset before the asset can be sold to a third party. S 13.9 Possession of the asset shall either be in the form of qabd haqiqi (physical possession) or qabd hukmi (constructive possession). S 13.10 Possession of the asset shall take effect upon takhliyah (the seller releasing the asset to the purchaser) through any mechanism permitted by Shariah including `urf tijari (customary business practice) in order for tamkin (the purchaser would have access to the asset) to take place and for the purchaser to assume its ownership risk. S 13.11 The seller shall be liable for any loss or damage of the asset before the purchaser takes possession of the asset. S 13.12 Any defect in the asset which occurred before entering into any sale and purchase contract in the tawarruq discovered by the purchaser after the execution of the contract shall entitle the purchaser to the khiyar al-`ayb (defect option). S 13.13 Where the situation in paragraph 13.12 occurs, the purchaser has the right to: (a) terminate the sale and purchase contract; (b) continue with mutually agreed variation of the terms of the sale and purchase contract as a result of the defect discovered; or (c) continue with the sale and purchase contract as it is. S 13.14 Any defect in the asset which is discovered and consented to by the purchaser at the time of entering into each sale and purchase contract in the tawarruq shall disqualify the purchaser from the entitlement to the defect option with respect to such defect. G 13.15 The contracting parties may mutually agree to specify the period of the defect option at the time of entering into the sale and purchase contract. G 13.16 Notwithstanding paragraph 13.12, the contracting parties may mutually agree for the seller to waive liability for any defect on the asset before entering into the sale and purchase contract. S 13.17 In the event that the contracting parties agree to the arrangement in paragraph 13.16, the waiver of liability by the seller shall be mutually agreed between the contracting parties. S 13.18 The same asset shall not be the subject matter of multiple tawarruq at any one time. Issued on: 28 December 2018
4. Tawarruq 8 of 32 13 .19 The tawarruq may be entered into on a group of assets between the same contracting parties at the same time. 14. Price S 14.1 The price used for each sale and purchase contract in the tawarruq shall be determined and be mutually agreed by the contracting parties at the time of entering into each of the respective sale and purchase contract. S 14.2 Where the sale and purchase contract in the tawarruq is on a murabahah basis, the requirements on price in the murabahah sale shall be complied with, including disclosure of cost and profit. G 14.3 The price of each sale and purchase contract in the tawarruq may be paid at any time after entering into the contract and on such terms as may be agreed by the contracting parties, including spot or deferred basis, or in instalments or a bullet lump sum payment. G 14.4 The contracting parties may mutually agree to reschedule the payment period for the remaining debt arising from the sale and purchase contract. S 14.5 In the event the contracting parties mutually agree to reschedule the payment period referred to in paragraph 14.4, such agreed rescheduling shall not lead to any increase of the remaining debt. G 14.6 The contracting parties may mutually agree to enter into a new contract that may result in a new debt obligation, whereby the proceeds of the new contract is to be used to settle the outstanding debt obligation arising from the sale and purchase contract under the earlier tawarruq. S 14.7 Pursuant to paragraph 14.6, such arrangement shall be made only in relation to a solvent debtor. 15. Requirements of the tawarruq S 15.1 Each sale and purchase contract in a tawarruq shall satisfy all the necessary conditions of a valid sale and purchase contract under Shariah. S 15.2 All sale and purchase contracts in the tawarruq shall be executed by entering into a separate and independent sale and purchase contract. S 15.3 Execution of each sale and purchase contract in the tawarruq must be respectively evidenced by appropriate documentation or record. S 15.4 The purchaser in each sale and purchase contract in the tawarruq shall have the right to take delivery of the asset. G Issued on: 28 December 2018
5. Tawarruq 9 of 32 S 15 .5 The sale and purchase contract in the tawarruq shall not contain any terms and conditions that restrict the purchaser from taking delivery of the asset or create an obligation for the purchaser to sell the underlying asset. S 15.6 Payment of any amount of the deferred selling price including profit shall not be made to the seller before entering into the sale and purchase contract. 16. Arrangement of wakalah in tawarruq G 16.1 The tawarruq may be arranged together with a wakalah contract. G 16.2 Any contracting party in the tawarruq may appoint an agent to act on his behalf. S 16.3 The wakalah contract shall be arranged in a contract separately from the sale and purchase contract of the tawarruq. S 16.4 Execution of the wakalah contract in the tawarruq must be respectively evidenced by legal appropriate documentation or record. S 16.5 The wakalah contract for the purpose of the tawarruq shall not restrict the principal or his purchasing agent from taking delivery of the asset. S 16.6 Ownership of the asset shall be transferred from the seller to the purchaser even though the sale and purchase contract in the tawarruq is entered into through an agent on behalf of the seller or the purchaser. S 16.7 Roles and responsibilities of the agent shall be clearly specified in the wakalah contract. S 16.8 The agent shall not be held liable except in the event of ta`addi (misconduct), taqsir (negligence) or mukhalafah al-shurut (breach of specified terms). S 16.9 The principal shall be held liable for the sale and purchase contract entered into by the agent in accordance with specified terms and conditions agreed upon under the wakalah contract. G 16.10 The name of the principal in the wakalah contract may be disclosed in the sale and purchase documentation of the tawarruq between the third party and the principal. G 16.11 In relation to paragraph 16.10, the agent and the principal may agree that only the name of the agent is disclosed in all documents relating to the sale and purchase contract between the third party and the agent. S 16.12 In the event that the principal requires the agent to provide several quotations for the price of the asset, the principal shall clearly specify to the agent the preferred price quotation. Issued on: 28 December 2018
6. Tawarruq 10 of 32 G 16 .13 The agent may advance his own money by way of qard for partial or full payment of the purchase price of the asset to the third party. S 16.14 The amount advanced by the agent under paragraph 16.13 shall be reimbursed by the principal or set-off against the agreed selling price between the principal and the agent. S 16.15 Where a sale and purchase contract in the tawarruq is executed by the agent on a date later than the date on which the fund is received from the principal, the following requirements shall be observed: (a) the fund must be held based on amanah (trust) by the agent; and (b) both the agent and principal must ensure that funds received from the principal shall not be treated as qard to the agent prior to the purchase of the underlying asset. S 16.16 Notwithstanding paragraph 16.15, in a situation where the funds need to be treated as qard to the agent due to necessity and tabi` (unavoidable incidental circumstances), such treatment is allowed. 17. Implementation of a dual-agency in tawarruq G 17.1 Dual-agency may be implemented in a tawarruq. G 17.2 A dual-agency in the tawarruq may involve the following: (a) an action of one of the contracting parties who acts as an agent to purchase an asset on behalf of the other contracting party, and subsequently acts as an agent to sell the asset on behalf of the same contracting party to himself; or (b) an action of one of the contracting parties who acts as an agent to purchase an asset from himself on behalf of the other contracting parties, and subsequently acts as an agent to sell the asset on behalf of the same contracting party to a third party. S 17.3 Pursuant to paragraph 17.2, the execution of the sale and purchase contracts between the principal and the agent shall comply with the following requirements: (a) essential criteria or specification of the authorised task, such as price, tenure and asset specification, shall be mutually agreed by the contracting parties; and (b) the transaction shall be in a proper sequence as provided in paragraph 17.2 and supported by proper evidence. S 17.4 In the event where: (a) the sale and purchase contracts in the tawarruq are executed on a date later than the date on which the funds are received from the principal; and (b) the profit of the sale and purchase contract which is on a deferred basis is calculated from the day the funds are accepted, the selling price shall be disclosed by the agent to the principal. Issued on: 28 December 2018
7. Tawarruq 11 of 32 18 . Arrangement of wa`d (promise) in tawarruq G 18.1 In a tawarruq, the purchaser may provide a promise to purchase the asset from the seller upon its acquisition from a third party. S 18.2 The tawarruq shall not contain any condition that requires the purchaser to promise that the asset will be sold to a third party. S 18.3 In line with paragraph 11.2, the tawarruq shall not contain any condition that requires the purchaser to promise that the asset will be sold to its original seller. 19. Arrangement of assurances in tawarruq 19.1 A tawarruq may be arranged with assurances which may be in the form of other Shariah contracts or concepts such as kafalah (guarantee), takaful, rahn (pledge) or hamish jiddiyah (security deposit). G (a) G 19.2 A guarantee may be arranged on payment of outstanding debt under a sale and purchase contract in the tawarruq in the event of default by the purchaser. (b) G 19.3 Assurance through kafalah (guarantee) Assurance through takaful The seller may require the purchaser to obtain a takaful coverage to secure the payment of outstanding debt under the sale and purchase contract under the tawarruq due to certain events such as death or total permanent disability of the purchaser. (c) Assurance through rahn (pledge) G 19.4 A tawarruq may be arranged with rahn to secure the payment of debt under the sale and purchase contract in the tawarruq. S 19.5 In relation to paragraph 19.4, the contracting parties shall ensure that the rahn arrangement complies with the Shariah requirements specified in Part B of the policy document on rahn issued by the Bank on 18 July 2018 (“Rahn PD”).3 (d) G 19.6 3 Assurance through hamish jiddiyah (security deposit) The seller may require the purchaser to provide security deposit to secure a promise to purchase the asset. Notwithstanding that Part B of the Rahn PD will only come into force on 1 August 2019, for the purpose of this policy document, it shall be deemed to have come into effect on 28 December 2018. Issued on: 28 December 2018
8. Tawarruq 12 of 32 G 19 .7 The security deposit may be used to compensate for actual loss incurred from the purchaser’s failure to purchase the asset from the seller. S 19.8 Pursuant to paragraph 19.7, any excess of the security deposit after compensating for actual loss shall be refunded to the purchaser. S 19.9 The seller shall not utilise the security deposit prior to the execution of the sale and purchase contract in the tawarruq. S 19.10 The security deposit paid to the seller before entering into the sale and purchase contract shall not be treated as part of the selling price including profit. G 19.11 The security deposit may be treated as part of the payment of the agreed selling price for the sale and purchase contract upon entering into the sale and purchase contract. S 19.12 The security deposit shall be refunded in full to the purchaser if it is not treated as part payment of the selling price. 20. Arrangement of ibra’ (rebate) in tawarruq G 20.1 The seller may give a rebate on part or the entire outstanding selling price of the sale and purchase contract in the tawarruq in the form of a discount to the purchaser upon pre-payment and/or early settlement. S 20.2 Notwithstanding paragraph 20.1, a rebate clause shall be incorporated in the sale and purchase contract or other relevant document when it is imposed by the relevant authority. G 20.3 In the event that the sale and purchase contract in the tawarruq involves payment of the deferred price in instalments, the seller may provide periodic rebate on the instalment amount based on a formula mutually agreed by the contracting parties. 21. Arrangement of tawarruq with ta`widh (compensation) and/or gharamah (penalty) in tawarruq G 21.1 The contracting parties may agree to include a clause in any of the sale and purchase contracts in the tawarruq stipulating late payment charges as determined by the relevant authority. S 21.2 The late payment charges shall consist of: (a) compensation for actual loss suffered by the seller, which may be recognised as income to the seller; and/or (b) penalty, which shall not be recognised as income and shall be channelled to baitulmal and/or charitable bodies or purposes. Issued on: 28 December 2018
9. Tawarruq 13 of 32 22 . Dissolution of sale and purchase contract in tawarruq S 22.1 The sale and purchase contract in the tawarruq is dissolved when: (a) the purchaser exercises the defect option to terminate the sale and purchase contract; (b) any of the contracting parties exercises mutually agreed options to terminate the sale and purchase contract within the agreed time period; (c) any of the contracting parties exercises the option to terminate the sale and purchase contract due to breach of the specified terms; or (d) both contracting parties mutually agree to terminate the sale and purchase contract. S 22.2 Upon dissolution of any of the sale and purchase contracts in the tawarruq where the asset has not been sold to a third party, the asset shall be returned to the respective seller and the price paid shall be returned to the respective purchaser. S 22.3 The dissolution of the sale and purchase contract shall be effective provided that the asset can be returned to the seller. Otherwise, the seller is entitled to the value of the asset. 23. Completion of tawarruq S 23.1 The sale and purchase contract in the tawarruq is completed upon fulfilment of the obligations of the contracting parties which include the following: (a) full settlement of the selling price; (b) transfer of the obligation to pay the selling price to a third party through hiwalah al-dayn; (c) waiving of the right to receive the remaining or outstanding selling price through a rebate by the seller; or (d) full muqassah (set-off) of debt obligations between the contracting parties. S 23.2 Upon completion of the tawarruq the contracting parties are free from any contractual obligations. Issued on: 28 December 2018