Islamic financial institutions made a proposal to offer deposit and financing products based on the concept of tawarruq or commodity murabahah. In brief, the mechanism of commodity murabahah deposit involves the following transactions:
1. The customer (depositor) appoints the bank as an agent to purchase metal commodity from a metal trader A, on cash basis, in an established metal commodity market;
2. The bank will thereafter purchase the metal commodity from the customer on a deferred sale, at a cost price plus profit margin; and
3. Next, the bank will sell back the metal commodity to metal trader B in the metal commodity market.
As an agent to purchase the metal commodity on behalf of the customer, the bank receives cash from the customer, for the price of the commodity, which is deemed as deposit in the bank’s account.
As a result of transaction (2) above, the bank assumes liability (the cost price of the commodity plus profit margin) to be paid to the
customer, on maturity. The price of the commodity purchased by metal trader A and the commodity’s price when sold to metal trader B are the same.
With respect to financing mechanism, the sequence of transactions would be as follows:
1. The bank purchases metal commodity from metal trader B on cash basis;
2. Thereafter, the bank sells the metal commodity to the customer on deferred price (cost price plus profit margin); and
3. The customer may appoint the bank as his agent, to sell the metal to metal trader A on cash basis, in the metal commodity market.
While the cash sale price by the customer to the metal trader A enables the customer to obtain cash for financing, the deferred sale price from the bank to the customer enables the customer to pay back the financing facility to the bank, within an agreed term. The issue is whether the above mechanism of transactions complies with the Shari’ah or otherwise.
The Council, in its 51st meeting, held on 28th July 2005 / 21st Jamadil Akhir 1426, resolved that deposit and financing products based on the concept of tawarruq, which is known as commodity murabahah, is permissible.
Issuer: Shariah Advisory Council, Central Bank of Malaysia.