Equipment & Commercial

Property Financing-i
(Bank Islam)

Tawarruq

Ammar Bin Jamaludin (B031710397)

Mohammad Hariz Bin Zahratan Nor (B031710019)
Muhammad Aliff Amirul Bin Norizan (B031610223)
Muhammad Khalish Danil Bin Mohd Khairi
(B031710185)
Mohd Hasif Hamzi Bin Mustaffi (B011710203)

1
Index
1. Introduction

2. Tawarruq

a. Definition
b. Nature
c. Contracting Parties
d. Ijab (Offer) and qabul (acceptance)
e. Assets
f. Price
g. Requirements of the tawarruq
h. Completion of tawarruq

3. Legality of Tawarruq

4. Product structure

5. Bank Islam product that used tawarruq

a. House financing
b. House refinancing
c. Car financing (GradHitz)
d. Superbike Financing
e. Personal Loan

6. References

7. Appendix

2
1.0 INTRODUCTION
Bank Islam Malaysia use Tawarruq concept as basis for most of their product transactions. This
includes financing for equipment and commercial property.
The structure of tawarruq is a contract that is becoming increasingly popular as a means of
financing in the modern Islamic financial system. Short term financing, where various
adaptations of murabahah were employed as the standard mode by many Islamic banks, is
actually structured based on the tawarruq principle. It provides Islamic banks with a much
needed addition to the array of financing products that are in line with Syariah precepts.
The modern application of tawarruq developed by Islamic banks does incorporate several
features that have been expounded by traditional jurists. However, certain variations can also
be found in these two practices. While the original tawarruq is contemplated to have consisted
of two contracts of sale, modern adaptations usually comprise three, or possibly more. The
primary reason for this distinction is that the banking institution, acting as a mere intermediary,
does not possess the commodities that could be readily brought into the tawarruq financing
process and therefore is in need of liaising with a trader, usually an external party, for the
purpose of facilitating the tawarruq contract. Similarly, disposal of such commodities by the
client of the facility sometimes needs to be further simplified by the mediation of an agent. 1

Tawarruq has been widely use in today Islamic finance. Discussion of tawarruq in this article
is to give clear picture about what is tawarruq and how it is being implemented in financing for
equipment and commercial property in Bank Islam Malaysia.

2.0 TAWARRUQ
2.1 Definition
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.2

2.2 Nature
Each sale and purchase contract in the tawarruq is binding in nature and shall not be terminated
unilaterally by any of the contracting parties.
The common inherent nature of each sale and purchase contract in the tawarruq is the transfer
of ownership of the asset from the seller to the purchaser for a consideration.
The sale and purchase contract in the tawarruq may take in the form of a murabahah or
musawamah. 3

1
(International Centre For Education In Islamic Finance (INCEIF), 2013)
2
(Bank Negara Malaysia (BNM), 17 Nov 2015)
3
(Bank Negara Malaysia (BNM), 17 Nov 2015)

3
2.3 Contracting Parties4
The contracting parties to each sale and purchase contract in the tawarruq shall be a seller and
a purchaser.
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.
The contracting parties in each sale and purchase contract in the tawarruq may enter into the
sale and purchase contract through an agent.
The contracting parties in the tawarruq shall be a natural person or a legal entity that have the
legal capacity to enter into each sale and purchase contract in the tawarruq.

2.4 Ijab (Offer) and Qabul (acceptance) 5

Each sale and purchase contract in a tawarruq shall be entered into through an offer and
acceptance between the contracting parties.
The offer and acceptance may be expressed verbally, in writing or any other methods which
could be evidenced by appropriate documentation or record.
The offer and acceptance 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.

2.5 Asset 6
An asset which is eligible to be used as the subject matter of a tawarruq shall either be 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.
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.
The undivided asset shall be apportioned based on practices which are recognised by Shariah.

The following assets shall not be traded in a tawarruq:

(a) gold, silver and currencies;

4
(Bank Negara Malaysia (BNM), 17 Nov 2015)
5
(Bank Negara Malaysia (BNM), 17 Nov 2015)
6
(Bank Negara Malaysia (BNM), 17 Nov 2015)

4
(b) assets to be constructed or under construction; and
(c) assets which are debt in nature.
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.

In the event where the asset is not present at the majlis al-`aqd (contract session), the seller
shall provide the purchaser with specific description of the asset.
Transfer of ownership from the seller to the purchaser shall take effect upon entering into a
valid sale and purchase contract. The purchaser shall take possession of the asset before the
asset can be sold to a third party.
Possession of the asset shall either be in the form of qabd haqiqi(physical possession) or qabd
hukmi (constructive possession). 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.
The seller shall be liable for any loss or damage of the asset before the purchaser takes
possession of the asset.

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 defect option :
(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.
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.

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.
The same asset shall not be the subject matter of multiple tawarruq at any one time.
The tawarruq may be entered into on a group of assets between the same contracting parties at
the same time.

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2.6 Price7
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.
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 of disclosure of cost and
profit.
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.
The contracting parties may mutually agree to reschedule the payment period for the remaining
debt arising from the sale and purchase contract.
In the event the contracting parties mutually agree to reschedule the payment period, such
agreed rescheduling shall not lead to any increase of the remaining debt.
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.

2.7 Requirements of The Tawarruq8

Each sale and purchase contract in the tawarruq shall satisfy all the necessary conditions of a
valid sale and purchase contract under Shariah.
All sale and purchase contracts in the tawarruq shall be executed by entering into a separate
and independent sale and purchase contract.
Execution of each sale and purchase contract in the tawarruq must be respectively evidenced
by appropriate documentation or record.
The purchaser in each sale and purchase contract in the tawarruq shall have the right to take
delivery of the asset.
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.
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.

7
(Bank Negara Malaysia (BNM), 17 Nov 2015)
8
(Bank Negara Malaysia (BNM), 17 Nov 2015)

6
2.8 Completion of tawarruq9
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.
Upon completion of the tawarruq the contracting parties are free from any contractual
obligations.

3.0 LEGALITY OF TAWARRUQ

The legality of the tawarruq arrangement is derived from the Quran and founded on the Sunnah
of Prophet Muhammad (peace be upon him).
The Quran
The following verse of the Quran implies the general permissibility of sales contract including
tawarruq:

“…whereas Allah SWT has permitted trading and forbidden usury…” (Surah al-Baqarah, verse
275)
The Sunnah of Prophet Muhammad (peace be upon him)
There is no direct juristic authority from the Sunnah of the Prophet (peace be upon him)
regarding the legitimacy of the tawarruq. It is deemed permissible based on the general
permissibility of sales in Islamic law.10
The overwhelming majority of jurists from the schools of Hanafi, Shafi’i and Hanbali
appear to have considered tawarruq to be legally permissible. In addition to these traditional
jurists, many contemporary Shari’ah jurists have also regarded this contract acceptable. Among
them are the late Abdul ‘Aziz ibn Baz, and Muhammad ibn Salih al-Uthaymin.11

9
(Bank Negara Malaysia (BNM), 17 Nov 2015)
10
(Bank Negara Malaysia (BNM), 17 Nov 2015)
11
(International Centre For Education In Islamic Finance (INCEIF), 2013)

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4.0 PRODUCT STRUCTURE 12
Financing

A customer requires financing of RM100,000 from the Islamic Financial Institute (IFI).
Upon this request, the IFI executes the tawarruq arrangement.
1. The IFI purchases the asset with selling price of RM100,000 from Asset Supplier 1.
2. The IFI pays cash to Asset Supplier 1.
3. Subsequently, the IFI sells the asset to the customer at an agreed selling price of
RM120,000 (RM100,000 + profit RM20,000).
4. The customer makes deferred payments through monthly instalments for a period of 5
years.
5. Subsequently, the customer appoints the IFI as its agent to sell the asset to Asset Supplier 2
on spot at selling price of RM100,000.
6. The customer obtains a cash of RM100,000 required for the financing.

12
(Bank Negara Malaysia (BNM), 17 Nov 2015)

8
5.0 BANK ISLAM PRODUCT THAT USED TAWARRUQ
5.1 House Financing13
Bank Islam provide property financing@house financing via tawarruq to make house purchase
shariah compliance. Details on how this concept applicability can be read from picture below.

Picture 1.014
Apart from being fully shariah compliance, this house financing scheme also offer high margin
of financing up to 90%.

5.2 Wahdah House Refinancing15

House refinancing is the best way to lower monthly instalment or gaining an extra cash for
personal needs to the customer. Bank Islam provide this services with tawarruq concept. (same
as shown in Picture 1.0 from 5.1)

13
(Bank Islam Malaysia Berhad, 2017)
14
(Bank Islam Malaysia Berhad, 2017)
15
(Bank Islam Malaysia Berhad, 2017)

9
Wahdah house refinancing offer high margin of refinancing up to 90%. On top of that, no
processing fee is being charged to the customer and customer can refer the payment of two
monthly instalments with Payment Holiday features (November and December). This features
allow customer to have extra money at the end of every year, so they can spend it on quality
time with family.

5.3 Vehicle Financing (GradHitz)16

Vehicle Financing-i GradHitz is based on Murabahah with tawarruq (Murabahah to the
Purchase Orderer “MPO”). Customer can enjoy 100% financing at a really affordable rate as
well as flexible repayment period.
Maximum tenure can be up to 9 years.

Picture 2.017

16
(Bank Islam Malaysia Berhad, 2017)
17
(Bank Islam Malaysia Berhad, 2017)

10
5.4 Superbike Financing18
Superbike Financing-i is based on Murabahah with tawarruq financing, to facilitate customer
lifestyle. Same procedure used in Picture 2.0.
Margin of financing can be up to 70%. Maximum repayment period is 7 years.

5.5 Personal Loan19

Personal loan use tawarruq as base of the transaction (Picture 3.0). Eligible amount based on
eligibility limit and subject to minimum amount of RM10,000 and maximum amount of
RM200,000

Picture 3.020

18
(Bank Islam Malaysia Berhad, 2017)
19
(Bank Islam Malaysia Berhad, 2017)
20
(Bank Islam Malaysia Berhad, 2017)

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 Payment period maximum of 10 years (120 months) or up to the retirement age, whichever is
earlier

Flat Rate
 1-10 years : 4.99% p.a.

Floating Rate (Base Rate [BR])

 1-3 years : Base Rate (BR) + 2.25% per annum.
 4-10 years : Base Rate (BR) + 3.15% per annum.
Benefits
 Competitive rate
 No hidden charges
 No guarantor is required
 No deposit
 No processing fee
 Flexible financing tenure
 Selling price – fixed and known
 Fast approval

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6.0 References

Bank Islam Malaysia Berhad. (2017, Jan 26). Package. Retrieved from Personal Financing-i | Bank
Islam Malaysia Berhad: http://www.bankislam.com.my/home/personal-banking/financing-
products/personal-financing-i/package/

Bank Islam Malaysia Berhad. (2017, Jan 26). Package. Retrieved from BI-PDS-Personal-Financing-
Sales_260117 | Bank Islam Malaysia Berhad:
http://www.bankislam.com.my/home/assets/uploads/BI-PDS-Personal-Financing-
Sales_260117.pdf

Bank Islam Malaysia Berhad. (2017, September 1). Property Financing-i (Tawarruq) – Baiti Home
Financing. Retrieved from Property Financing-i (Tawarruq) – Baiti Home Financing | Bank
Islam Malaysia Berhad: http://www.bankislam.com.my/home/personal-banking/financing-
products/home-financing-i/property-financing-i-tawarruq-baiti-home-financing/

Bank Islam Malaysia Berhad. (2017, Sept 1). Property Financing-i (Tawarruq) – Baiti Home Financing.
Retrieved from Attachment-1-September-2017:
http://www.bankislam.com.my/home/assets/uploads/Attachment-1-September-2017.pdf

Bank Islam Malaysia Berhad. (2017, Sept 3). Property Financing-i (Tawarruq) – Wahdah Home
Refinancing. Retrieved from Property Financing-i (Tawarruq) – Wahdah Home Refinancing |
Bank Islam Malaysia Berhad: http://www.bankislam.com.my/home/personal-
banking/financing-products/home-financing-i/property-financing-i-tawarruq-wahdah-home-
refinancing/

Bank Islam Malaysia Berhad. (2017, April). Superbike Financing-i. Retrieved from Superbike
Financing-i | Bank Islam Malaysia Berhad: http://www.bankislam.com.my/home/personal-
banking/financing-products/vehicle-financing-i/superbike-financing-i/

Bank Islam Malaysia Berhad. (2017, April). Vehicle Financing-i GradHitz. Retrieved from Vehicle
Financing-i GradHitz | Bank Islam Malaysia Berhad:
http://www.bankislam.com.my/home/personal-banking/financing-products/vehicle-
financing-i/gradhitz-vehicle-financing-i/

Bank Islam Malaysia Berhad. (2017, April). Vehicle Financing-i GradHitz. Retrieved from Vehicle
Financing-i GradHitz | Bank Islam Malaysia Berhad:
http://www.bankislam.com.my/home/assets/uploads/2017-04_PDS-VF-SALES-ENG-Ver-
2.6.pdf

Bank Negara Malaysia (BNM). (17 Nov 2015). Tawarruq. Tawarruq, 6-19.

Bank Negara Malaysia (BNM). (17 Nov 2015). Tawarruq. Tawarruq, 38.

Bank Negara Malaysia (BNM). (17 Nov 2015). Tawarruq. Tawarruq, 41.

International Centre For Education In Islamic Finance (INCEIF). (2013). Application of Tawarruq.
Application of Tawarruq, 3-5.

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7.0 Appendix

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