PRACTICE OF BAI AL INAH AND TAWARRUQ

Bai’ al Inah can be defined as a type of business(Sale and Buy-back agreement) where the financier sells his/her assets to a buyer at a fixed price which is payable by the buyer in future. Subsequently, the buyer will sell the same asset back to the seller (financier) at a cash value lower than the price it was originally sold to the buyer for.

It involves the sales of a commodity on credit and repurchasing it for a lesser amount in cash.

Proponents of validity of Bai-al-Inah argue that a person is free to sell what belongs to him to anybody he wishes, therefore, a sale to the person from whom it was bought originally would be permissible. It is also argued that the 2 contracts are separate, valid and not conditional on each other.

However, there have been various arguments against the validity of Bai-al-Inah.

The parties expressly declare through the contract that the vendor in the first contract that takes place on deferred payment will repurchase the asset at a cash price lower than the former deferred price. The two contracts aren’t separate and are conditional on each other therefore the transaction contains element of Haram.

Purpose of Inah sale happens to be an exchange of money in unequal quantities with the commodity acting only as a formality and the difference between the amounts charged can be termed riba.

Also, the original buyer do not wish to own the commodity through the contract, The purpose and objective solely happens to be an exchange of say, $100 for &120, with the commodity only being involved for the purpose of deception.

There has been an increasing need for short-term cash in form of personal financing and to satisfy this need, majority of Shari’ah scholars have permitted the practice known as Tawarruq.

Tawarruq is similar to inah but involves 3 parties not 2. A person purchases a good on credit from the seller and he sells it to another person in cash. In its simple form disliked but allowed. In its organized form in the Islamic finance industry, it is still widely used and highly criticized in the same time.

The argument for Tawarruq is that the goods purchased on credits are sold to a third party for cash and even if it involves a lender acting as financial intermediary, it is not inah. There is no buy-back; rather, the mutawarriq is free to dispose goods to any other party on the open market. Therefore, it is seen as a true sale and therefore permissible. The Fiqh Academy of the Organization of Islamic Conference ("OIC Fiqh Academy"), has, by its Resolution No. 179 (19/5) at its 19th Session held on 26-30 April 2009, held that although classical Tawarruq is permissible (so long as it complies with the requirements of sale transactions), organized Tawarruq and reverse Tawarruq are not permissible. "Organized Tawarruq" or "managed Tawarruq" is the term bestowed on the type of Tawarruq practiced by some Islamic banks today, i.e. where the financier manages the Tawarruq process. One example is when the financier sells the goods to the mutawarriq, financier or its nominee is then appointed the mutawarriq's agent to on-sell the goods on his behalf on the open market. "Reverse Tawarruq" is similar to organized Tawarruq but where the bank is the mutawarriq/customer seeking liquidity.

This mode of transaction is not with its own fair share of criticisms with a classic scholar naming it to be in the brotherhood of Riba