Tawarruq Application in Islamic Banking - A Review of The Literature

International Journal of Islamic and Middle Eastern Finance and
Management
Tawarruq application in Islamic banking: a review of the literature
Nasrun Mohamad, Asmak Ab Rahman,
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Tawarruq application in Islamic Tawarruq

application in
banking: a review of the literature Islamic banking
Nasrun Mohamad and Asmak Ab Rahman
Department of Shariah and Economics, University of Malaya,
Kuala Lumpur, Malaysia
485
Abstract
Purpose – This paper aims to present the results of a comprehensive literature review with regard to
the application of Tawarruq in the Islamic banking system covering the period between 2011 and
before. The review aims to synthesize the previous research, capsulize the structural overview
inasmuch as future research might be oriented and identify the gaps and direction for future research.
Design/methodology/approach – A range of published and unpublished documents was collated
and filtered based on the defined rules to identify the determinants of the writing. The documents were
then be classified into few segments in which content analysis was conducted to capsulize the essence
of the subject matter described in the literature.
Findings – The analysis demonstrates that most of the studies discussed the fundamental theories
which concerning the area of jurisprudence, while a few of them did discuss the application aspect in the
banking environment. However, none of the operational process is discussed in-depth, whereas the risk
of Shari’ah non-compliance might arise in the detail transaction.
Research limitations/implications – The databases used in the search might not contain all the
documents that could be relevant for the review. Furthermore, the defined-rule for document searching
and selection excluded the out-of-scope documents that might be relevant.
Originality/value – This paper identifies the gaps that become apparent in the literature in assisting
researchers to ascertain the interesting areas as well as the direction for future research.
Keywords Literature review, Islamic banking, ‘Inah, Cash liquidity, Tawarruq
Paper type Literature review
Introduction
Tawarruq is one of the Shari’ah-compliant modes used for cash-based financial instruments
due to the nature of the tawarruq mechanism, that is, to provide cash liquidity. Therefore, the
concept suits most of the facilities provided by conventional banking, such as deposit, loan,
bond and money market instruments. This mode of cash-based instrument, which is widely
known in the Gulf Region, has recently become popular in Malaysia as an alternative to bay’
al-‘inah, which was adopted in the early days.
Hitherto, ‘inah was widely used in Malaysia and South East Asian countries to
provide cash liquidity. In the setting up of an Islamic banking system, an instrument is
required to compete with conventional banking that deals with riba-based lending,
which is prohibited by Shari’ah. Hence, ‘inah became the preferred mode to fulfill this
International Journal of Islamic and
need. Nevertheless, the application of this principle was later cast in doubt, as ‘inah has Middle Eastern Finance and
been prohibited by the majority of the fiqh scholars. Management
Vol. 7 No. 4, 2014
Due to market forces and the dynamism of the Islamic finance industry, tawarruq pp. 485-501
was introduced in Malaysia as an alternative to the existing ‘inah. Hence, the © Emerald Group Publishing Limited
1753-8394
controversial issue of ‘inah, especially in the operational aspect, must be addressed. DOI 10.1108/IMEFM-10-2013-0106
IMEFM However, the application of tawarruq in modern banking has also become debatable due
to the element of riba or so-called legal stratagem.
7,4 The research on tawarruq has recently received attention in which the issues arising
from the application of tawarruq in the Islamic banking system were discussed among
Shari’ah scholars following the fatwas or resolutions issued by the authorized fiqh
bodies. The prohibition of the tawarruq mechanism in modern banking by the latest
486 collective Shari’ah ruling of the Organisation of Islamic Cooperation (OIC) Fiqh
Academy has affected the Islamic banking industry by positioning the tawarruq
application as having a high risk of non-compliance with Shari’ah.
Tawarruq can be defined as an act to buy the commodity by a person (mustawriq) on
a deferred basis, and then sell it with a lower price on a cash basis to someone else other
than the initial seller to acquire cash (Wizarah al-Awqaf wa al-Shu’un al-Islamiyyah,
1983). Contemporarily, the concept is used to underlie various Islamic banking products
where the mustawriq is either the bank or the customer who desires cash, and the bank
is always an agent (on behalf of the customer) to perform the sale or purchase
transaction with a commodity broker.
This paper presents the results of an extensive literature review of the tawarruq
application in Islamic banking covering the period between 2013 and before. The review
aims to synthesize the content of the previous research, capsulize a structural overview
of the literature and identify the gaps to which future research might be oriented.
The paper is structured as follows. The first section discusses the conducted
approach of the literature review. Subsequently, the segmentation of previous studies on
tawarruq matters is presented. The next section discusses the content description of
each segment. Finally, the review summarizes the literature, clarifies the limitations of
the research methodology and identifies the gaps.
Literature review approach

A comprehensive literature review was conducted by the author to identify the valuable
writing that contributes to the academic discussion and, subsequently, to the Islamic
banking practices. The identification process consists of three main steps (Figure 1):
Define the searching rules

Tawarruq is the subject matter in this literature review. Generally, there are two
different ways to base tawarruq as the subject matter, either from the Shari’ah-based
concept or as a banking product (or domain). From the perspective of the Shari’ah-based
concept, tawarruq can be applied to multiple types of banking product, whereas one
type of product can have multiple concepts to be applied.
As it is difficult to implement such discipline, the rule has been set up to limit the
search for information as follows:
• Tawarruq, as the primary subject matter (or from the concept perspective), is
included in this review. It is restricted to the discussion of tawarruq itself, and also
the application of tawarruq to the banking product or domain.
• Tawarruq, as a secondary subject matter (or from product or domain perspective),
is also included. It is restricted to the discussion on banking products or domains
that use tawarruq as one of its main underlying concepts. It also includes the
discussion of alternate solutions to the concept.
Define the •Primary Subject Matter
•Secondary Subject Matter
Tawarruq
1 Searching Rules
•Accessory Topic application in
Islamic banking
Locate & Retrieve •Library Catalogue
2 the Documents •Online Database
•Other Web Resources 487
Review & Conclude •Fundamental Theory

3 the Content •Domain / Product
•Islamic Financial Institutions Figure 1.
• Tawarruq, as a side topic, which does not fall under either of the categories above,
for example, research conducted on Islamic finance or banking but does mention
tawarruq as part of the whole structure of the Islamic banking concept is excluded
from this review.
The defined rules will be used to scope the required documents, which are limited to the
format of books, journals or peer-reviewed articles, other types of article that are written in
the academic format, such as conference papers, and also dissertations or theses. Hence, only
documents that fall under these rules will be selected for review.
Locate and retrieve the documents

Following the defined rule, the search for document titles has been made via three modes:
library catalog, online database and other Web resources. This search was based on three
descriptors:
(1) “Tawarruq”;
(2) “Commodity Murabahah”; and
(3) “Reverse Murabahah”.
Additionally, the descriptor “Tawarruq” (in Arabic) was used for sites provided in Arabic.
The library catalog is the tool that is used to locate the documents held by higher
education institutional libraries. The institution is filtered by offering courses or
faculties that relate to Shari’ah, economics, finance, accounting or business
management. In this review, the search is done via accessing the Online Public Access
Catalog (OPAC), subject to its availability, which is provided for external networks. The
filtered lists of the institutions that are used for this mode are as follows:
• thirty-three out of the 65 Malaysian universities and universities colleges;
• sixty-one of the 315 OIC universities, which are ranked based on published articles by
the Statistical, Economic and Social Research and Training Centre for Islamic
Countries (SESRTCIC); and
• the ten top world universities ranked by QS Top Universities.
Online databases provide access to journals or peer-reviewed articles, conference

papers, dissertations or other types of document. Accordingly, 16 online databases
IMEFM subscribed to by University of Malaya (UM) Library and 6 open-access databases that
are linked to the UM Library portal were used in this process[1]. The selected database
7,4 also relates to Shari’ah, economics, finance, accounting or business management.
The third mode, i.e. other Web resources, is the search within fiqh al-mu’amalat
related websites and also by random searches using Google search engine. The most
referred to Web sites are as follows:
488 • International Shari’ah Research Academy for Islamic Finance (ISRA).
• Islamic Business Researches Center.
• Mawsu’ah al-Iqtisad wa al-Tamwil al-Islami.
• Mawqi’ al-Fiqhi al-Islami.
The document content made available during the search was downloaded from the
respective database either in a full text, partial text or abstract. The documents were
then compiled and the title indexed for easy reference.
Documents that it was not possible to retrieve online were obtained via services
provided by selected libraries, as follows:
• Main Library, UM.
• Islamic Studies Library, UM.
• Tun Seri Lanang Library, National University of Malaysia.
• Dar al-Hikmah Library, International Islamic University Malaysia.
• Knowledge Management Centre, International Centre for Education in Islamic
Finance.
• Knowledge Management Centre, Islamic Banking and Finance Institute Malaysia
Sdn. Bhd.
In addition, where information was not able to be fetched from a database or library
services, the author of the document was contacted via email to clarify the required
information, as the document is part of the scoping.
With all the steps taken, we believe that we have accessed all the literature in this
area. Even if it is not fully covered, the scoping is sufficient for this literature review, as
it did cover the significant areas of the subject matter.
Reviewing and concluding the content

Each document was reviewed following its retrieval from the database or respective
library. This step was implemented to filter the document to eliminate the unrelated
writing or any breach of the defined rules.
Those collected and filtered documents were then analyzed to identify the
determinants and characteristics of the writing. This analysis blended the content of the
documents and synthesized the correlation between them. As a result, the documents
were grouped together according to their subject heading.
In total, the searching identified 6 books (including 2 chapters in books), 7 journals, 52
other types of article and 6 dissertations written in Arabic, English or Malay. Most of the
written documents were in the form of conference papers in which the earliest relevant
document was published in 1998. Dissertations are the unpublished documents that
were written by Malaysian university students and kept in the respective libraries.
Segmentation framework Tawarruq
This section constructs the segmentation framework, which illustrates the correlation of
the subject matter with regard to the application in the Islamic banking system. This
application in
framework aims to facilitate classification with regard to subject matter, i.e. Tawarruq, Islamic banking
which helps researchers better position their work. In addition, the content analysis was
guided in a structured manner.
The synthesis result of the literature review can be classified into three segments, 489
namely, Fundamental Theory, Banking Domain/Product and Fieldwork of Islamic
Financial Institutions (IFIs). The segmentation can be illustrated as follows (Figure II):
Under the Fundamental Theory segment, most discussion surrounds the verdict of
Tawarruq, which judges the usage of the principle from the fiqh perspective. A few
papers discuss the verdict pertaining to the fund and commodity involved in the
transaction. In addition, one of the books contained a discussion about Shari’ah

methodology, which frames the Tawarruq concept. Furthermore, a few works discussed
related matter, such as framework, practices, arising issues and alternative solutions.
All documents that are classified under the Banking Domain or Product segment
discuss the banking products that are underlain by the Tawarruq concept. Most of the
discussion surrounds the financing domain, which includes personal financing,
Tawarruq
Fundamental Theory Domain / Product IFIs
•Verdict of Tawarruq •Money Market •Bank Negara Malaysia

•Fund & Commodity •Corporate Financing •Bursa Suq al-Sila’
•Qawa’id Shar’iyyah •Personal Financing •Bank Islam
•Others (brief framework, •Credit Card •Bank Rakyat
practicing, issue, alternate •Car Financing •HSBC Amanah
solution) •Property Financing •al-Rajhi (M)
•Share Financing •al-Rajhi
•al-Bilad
•al-‘Arabi al-Watani
•al-Shamil
•Bayt al-Tamwil
•al-Ahli
•al- Arabi
•al-‘Arabi
Qarar / •SAMBA
Qarar /
Resolution,
Resolution, •SABB
Framework,
Framework, •al-Sa’udi al-Faransi
Guideline/Policy
Guideline/Policy •al-Sa’udi al-Hulandi
•al-Riyadh
Figure 2.
IMEFM corporate financing, credit card and other types of financing, while the money market
domain was also discussed in another study.
7,4 Finally, the segment of IFIs describes the case study that has been conducted in
several Islamic banks where the subject matter has been used to underlie some Islamic
products. All these studies were written by Malaysian students in their dissertation,
which cover Islamic banks in Malaysia or the Kingdom of Saudi Arabia. In addition, the
490 CMP paper briefly discusses the application of Tawarruq by Bank Negara Malaysia
(BNM) (2001), and some writings discuss the commodity market platform provided by
Bursa Malaysia, i.e. Bursa Suq al-Sila’ (BSAS) and Jakarta Future Exchange (JFX)
Shari’ah Indonesia.
Overall, the scope of coverage for previous studies of Tawarruq that had been
conducted can be summarized as per Tables I-III.
Content analysis
This section briefly summarizes the literature content of each segment. The conducted
analysis tries to capsulize the essence of the subject matter described in the literature to
simply conclude the assumption for each segment.
Fundamental theory
As mentioned earlier, most discussion surrounds the verdict of tawarruq under this first
segment. With regard to this, the verdict can be divided into parts, i.e. tawarruq that was
discussed in the early days, as mentioned in the fiqh treatise, namely, Tawarruq al-Fiqhi
or Classical Tawarruq and Tawarruq, which is applied in the modern banking, namely,
Tawarruq Munazzam or Organized Tawarruq. The mechanism of both types is as
follows Table IV:
The difference between both mechanisms is the existence of the arrangement to resell
the commodity by the bank in the modern application via a wakalah contract. This
evolvement is required, as the bank’s customer does not have the capability to do so.
Hence, the component becomes debatable inasmuch, as it influences the scholar’s
decision on the verdict of tawarruq, in particular the international fiqh councils’.
In this regard, the council of al-Majma’ al-Fiqhi al-Islami bi Rabitah al-‘Alam
al-Islami in its 17th meeting held in 2003 has resolved that the Tawarruq arrangement
which is being practiced by the Islamic banks is not permissible due to the issue of
fictitious commodity possession and enforcement of wakalah (al-Majma’ al-Fiqhi
al-Islami bi Rabitah al-‘Alam al-Islami, 2003). Prior to that, the council in its 15th
meeting held in 1998 resolved that the Tawarruq principle is permissible, as the original
ruling of trade is permissible (al-Majma’ al-Fiqhi al-Islami bi Rabitah al-‘Alam al-Islami,
1998).
In 2006, Accounting and Auditing Organization for Islamic Financial
Institution-AAOIFI’s Shari’ah Board resolved several Shari’ah considerations in
Tawarruq arrangement that is practiced by Islamic banks where the adaptation of
Tawarruq principle is subjected to strict controls and restrictions. The resolution is then
adopted into the AAOIFI Shari’ah Standard No. 30 (AAOIFI, 2010). Consequently in
2009, under the auspices of al-Majma’ al-Fiqhi al-Islami bi Rabitah al-‘Alam al-Islami’s
resolution and backed with several research papers, the council of Majma’ al-Fiqh
Fundamental
Tawarruq
theory Category Author(s) application in
Verdict of tawarruq Book/book chapter Mahmud Muhammad (2010), al-Abidi (2008), Ab. Islamic banking
Mumin Ab. and Ahmad Sufyan (2006), Rashidi
(2005), al-Salus (2005)
Journal/article Asyraf Wajdi et al. (2013a), 2013b,
Abd al-Rahman (2009), Asmak Ab et al. (2010),
491
Asyraf Wajdi (2010), Azman Mohd and Nur Farhah
(2010), Haytham (2010),
al-Khayyat (2009), ‘Abd al-Rahman (2009),
al-Haddad (2009), al-Salus (2009), Hana’
al-Haniti (2009), al-Shazili (2009), Hussain Kamil
(2009), Ahmad ‘Uthman (2009), al-Dabu (2009),

al-‘Uthmani (2009), ‘Uthman Shabir (2009), Nazih
Kamal (2009), Sa’id (2009), al-Suwaylim (2009),
al-Zuhayli (2009), al-Banna (2009), Asyraf Wajdi
(2007), Hisham Muhammad (2007), ‘Abd al-Fattah
(2007), ‘Abd al-Halim (2007), Mettussin Baki (2006),
Mohamad Anwar (2006), Mohd Parid (2006),
Shamsiah (2006), al-Bahuth (2005), al-Islambuli
(2005), Monzer and ‘Imad (2005), al-Mashiqah (2004),
al-Musa (1993), al-Sa’idi (2003), al-Mani’ (2003),
al-Salus (2003), al-Dharir (2003), al-Qari (2003),
al-‘Uthmani (2003), al-Suwaylim (2003a), 2003b,
al-Ba’li (2014), al-Nasr (2014), Abd al-‘Azim (2014);
Thesis/dissertation Nur Farhah (2010), Iman (2009),
Mohd Irwan Kamil (2009), Rafidah Mohd Azli
(2009), al-Khudri (2009), al-Hamid (2007), Aghim
(2006);
Fund and Journal/article Azahari Abdul (2008), Engku Rabiah Adawiah
commodity Engku (2008a), 2008b, Mohamad Akram (2008),
Zaharuddin Abd (2008);
Qawa’id Shar’iyyah Book Mahmud Muhammad (2010)
Others (including Book/book Engku Rabiah Adawiah Engku (2008a), 2008b, Ab.
framework, chapters Mumin Ab. and Ahmad Sufyan (2006); Table I.
practices, issue and Journal/article Omar (2010), Mohammed (2010), Rafe (2009), Scope of coverage – the
alternative solution) Monzer (2004); fundamental theory
al-Islami al-Duwali in its 19th meeting has resolved that the organized Tawarruq is
prohibited (Majma’ al-Fiqh al-Islami al-Duwali, 2009).
In summary, almost all contemporary scholars permit Classical Tawarruq, while the
majority of them prohibit Organized Tawarruq due to the issue of legal stratagem, i.e.
gaining money for money where the essence of the prohibition is similarly ruled for Bay’
‘Inah. The Shari’ah ruling for both tawarruq types is as follows Table V.
The verdict of tawarruq was discussed in all the literature either in-depth or briefly.
Hence, it is deemed as a core element of the subject matter, as the decided ruling will
formulate the application in the Islamic banking system, which is discussed in the other
two segments.
IMEFM Banking domain/product Category Authors
7,4
Money/capital market Journal/article Asyraf Wajdi (2007), Azman Mohd and Nur Farhah (2010);
Dissertation Nur Farhah Mahadi (2010);
Corporate financing Dissertation Nur Farhah (2010);
Personal financing Journal/article Asmak Ab et al. (2010);
Dissertation Mohd Irwan Kamil (2009), Iman (2009);
492 Credit card Dissertation Rafidah Mohd (2009);
Car financing Dissertation Khudri (2009);
Table II. Property financing Dissertation Khudri (2009),
Scope of coverage – Nur Farhah (2010);
banking domain/product Share financing Dissertation Khudri (2009);
Institutions Category Authors
Bank Negara Malaysia Journal/article Asyraf Wajdi (2007)

Bursa Suq al-Sila’ Dissertation Nur Farhah (2010)
Jakarta Future Exchange Journal/article Asyraf Wajdi et al. (2013a), 2013b
Bank Islam Malaysia Berhad Journal/article Asmak Ab et al. (2010)
Dissertation Iman (2009), Rafidah Mohd (2009)
Bank Rakyat Dissertation Rafidah Mohd (2009)
HSBC Amanah Dissertation Rafidah Mohd (2009)
al-Rajhi (M) Bank Dissertation Mohd Irwan Kamil (2009)
al-Rajhi Bank Dissertation Khudri (2009)
al-Bilad Bank Dissertation Khudri (2009);
al-Arabi al-Watani Dissertation Aghim (2006);
al-Shamil Bank Book al-Rashidi (2005);
Dissertation Aghim (2006);
Bait al-Tamwil Dissertation Aghim (2006);
al-Ahli Bank Dissertation Hamid (2007);
al-‘Arabi Bank Dissertation Hamid (2007);
SAMBA Bank Dissertation Hamid (2007);
SABB Bank Dissertation Hamid (2007);
Table III. al-Sa’udi al-Faransi Bank Dissertation Hamid (2007);
Scope of al-Sa’udi al-Hulandi Bank Dissertation Hamid (2007);
coverage–institutions al-Riyadh Bank Dissertation Hamid (2007);
In addition, in some of the literature, the verdict of fund received and used in the
commodity trading is discussed, which also relates to tawarruq, Shari’ah methodology
in dealing with tawarruq and other minor topics, such as practices, issues and
workaround solution. Generally, these are the interrelated topics to the segment of
fundamental theory which has been conceptually discussed.
Banking domain/product
This segment describes how the subject matter is conceptually applied in the banking
and financial system. Most discussion surrounds the financing domain in which the
financing facility granted by the bank to the customer is underlain by the tawarruq
Classical tawarruq Organized tawarruq
Tawarruq
application in
Modus operandi
al-Mustwariq buys the commodity from someone Customer (al-mustwariq) buys the commodity Islamic banking
on a credit basis with the price higher than the from bank (al-mumawwil) on credit basis with
cash price arrangement of bank as agent (wakil) to resell
al-Mustawriq sells the commodity to someone else the commodity
(third party) on a cash basis with cash price (lower Bank sells the commodity on behalf of
493
than credit price) to acquire cash customer to third party on cash basis
Bank gives cash proceeds from the sale to the Table IV.
customer Classical vs organized
tawarruq mechanism
Classical tawarruq Organized tawarruq
Classical view
Permitted by the majority of scholars due to involvement Not applicable
of third party, which makes the trading permissible and (Evolution occurs in the modern age of
not considered as hilah, regardless of the higher price in Islamic banking)
deferred sale.
Prohibited (or reprehensible) by some scholars due to ‘illah
of gaining money with money (darahim bi darahim),
which is considered as hilah, regardless of the involvement
of third party
Contemporary view
Same view as the majority of classical fiqh scholars, i.e. Prohibited by the majority of scholars
permissible due to the involvement of third party, which due to bank appointment as agent
is not considered as hilah (wakalah) is considered as hilah,
whereby the trading transaction is
fictitious and unable to fulfil the
possession requirement, and has
similarity with ‘inah.
Permitted by some scholars under the
basis of classical tawarruq, in which
each of the transactions, including
wakalah, is valid and fulfils the Table V.
Shariah requirement Classical vs organized
tawarruq verdict
concept. Some of the discussions also talk about money market activities using this
concept.
The essence of the application of the subject matter is for cash liquidity. For any
banking product that requires cash-based dealing, tawarruq could be the most suitable
concept to fulfill the needs. As the cash proceeds are obtained as a result of commodity
trading in the tawarruq transaction, the concept is keenly used in the financing domain
and is similar to the cash supply by conventional lending.
IMEFM In corporate financing, a huge amount of cash is required to fund the working
capital, asset acquisition and other purposes. For asset buying, other concepts such
7,4 as Bai’ Bithaman Ajil, Bai’ Murabahah or Istisna’ can be the alternative, but not
cash injection for working capital or similar purposes. The same principle goes for
personal financing where there is no involvement of asset financing. Nevertheless,
asset-based financing is likely to use this concept, as it provides a clean-cut process
494 and is able to avoid any regulatory procedure and condition pertaining to the asset
where applicable.
A minor topic under this segment concerns the money market mechanism where
the process involves interbank fund transactions that use tawarruq as the
underlying concept. This program, namely, Commodity Murabahah Programme
(CMP) was introduced by Bank Negara Malaysia (BNM) (2010), the central bank of
Malaysia. Basically, this program intends to balance the interbank surplus and
deficit of cash liquidity, especially the Islamic banks.
Islamic financial institutions

The last segment discusses the implementation of tawarruq at the specific IFIs.
Some of the writings only discussed the policy endorsed by the bank, while some
discussed the products or business process in more detail. Some of the listed banks
are in Malaysia, while some are outside, mostly in the Kingdom of Saudi Arabia. In
other words, this segment discusses how the fieldwork operates.
Most of the subject-matter discussions are meant for academic purposes, such as
dissertations and journals, where most are about financing, as mentioned in the
previous segment. In addition, most of the discussions commented that the
implementation by the Islamic banks complies with Shari’ah requirements, as ruled
by the bank’s Shari’ah committee.
Finally, the other institutions that have been discussed are BNM for CMP as
mentioned earlier, Bursa Suq al-Sila’ (BSAS) which is the commodity market
platform provided by Bursa Malaysia Islamic Services Sdn Bhd, a subsidiary of
Bursa Malaysia, and also JFX Shari’ah which is the commodity market of Indonesia.
The writings on BSAS and JFX Shari’ah discusses matters related to the commodity
trading, especially the Shari’ah compliance aspect of the trading in the tawarruq
arrangement.
Conclusion
Summary of the literature
The literature review discussed in this paper demonstrates that most of the studies
discussed the fundamental theories, especially those concerning the area of
jurisprudence of the concept. A few of the studies discussed the application of
tawarruq in the banking product and the operational aspect of its implementation;
the fundamentals of the concept were discussed in the first part.
Therefore, it can be said that the Shari’ah ruling or verdict of the concept is a core
element to articulate the application in the Islamic banking system. Any
jurisprudent decision that is made will formulate the structure of the banking
product, and, subsequently, the operational aspects of the product implementation.
Based on the results of the review, contemporary scholars agree that the classical
Tawarruq is permissible. However, there is disagreement concerning organized
Tawarruq, which is widely applied in the current Islamic banking system. Hence, Tawarruq
any Shari’ah resolution issued by the authorized bodies might impact on the
operational aspect of the Islamic banks where the tawarruq principle underlies the
application in
banking product and the transaction shall abide by the issued ruling. Islamic banking
The abovementioned summary was described within the defined scope or
coverage, which still comprises limitations. However, the scoping of the main areas
has been covered in this literature review, and the results of the review are sufficient 495
to address the core aspect of the subject matter.
Limitations of the methodology used

Even though the methodological rigor has been considered in this review in which
the selective processes were conducted in searching for and locating the relevant
documents, the results of the review might be restricted by certain limitations as
distilling the literature of the subject matter is a complex task.
The main limitation pertains to the databases used in the search (as mentioned
earlier), as they might not contain all the documents that could be relevant for the
review. Furthermore, the defined-rule for document searching and selection
excluded the out-of-scope documents that might be relevant.
Nevertheless, the applied method is assumed to cover the significant aspects of
the subject matter. However, the possibility that relevant work has appeared
elsewhere, which is not covered under this review, is not denied.
Gaps in the previous research

In spite of the assumptions on the scoping, the results show that the verdict of the
subject matter, i.e. Tawarruq, has a significant impact on the concept application in
the Islamic banking system. Any resolution decided will directly formulate the
product development, and, subsequently, be implemented into the day-to-day
operation.
However, the operational process is not discussed in-depth in any of the
literature, whereas the tawarruq arrangement contains a series of transactions, in
which the risk of Shari’ah non-compliance might arise in each transaction. For
instance, the step-by-step procedure in trading and possessing the commodity
among the contracting parties via systems and e-certificates including the wakalah
arrangement and the mustawriq involvement in the trading transaction might
trigger the risk of Shari’ah non-compliance.
In addition, the related areas with regard to tawarruq concept are not widely
explored, such as credit processing for financing products or treasury products that
are underlain with this concept. For instance, the rescheduling and restructuring of
financing might trigger the risk of Shari’ah non-compliance subject to the
appropriate control in place.
In essence, the subject matter can be a research topic by looking at the banking
domain perspective, especially concerning the operational aspect. Any gaps that
become apparent in the literature shall be closed in future research to further
promote prudent Islamic banking. Perhaps this literature review might assist
researchers in identifying interesting areas as well as the direction for future
research.
IMEFM Note
1. See UM Library Interaktif Portal, www.um.edu.my/library/
7,4
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al-Mawsu’ah, al-Fiqhiyyah (1988), “Tawarruq”, 2nd ed., al-Mawsu’ah al-Fiqhiyyah, Vol. 14,
Wizarah al-Awqaf wa al-Shu’un al-Islamiyyah, Kuwait, p. 147.
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directions”, Journal of Quality Maintenance Engineering, Vol. 12 No. 3, pp. 205-238.
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pp. 361-3.
Ngai, E.W.T. (2003), “Internet marketing research”, European Journal of Marketing, Vol. 37 Nos
1/2, pp. 24-49.
Rowley, J. and Slack, F. (2004), “Conducting a literature review”, Management Research News,
Vol. 27 No. 6, pp. 31-39.
About the authors Tawarruq
Nasrun Mohamad serves as a Shari’ah Risk Manager at the al-Rajhi Banking & Investment
Corporation (M) Bhd. He is currently an MA candidate at the Academy of Islamic Studies, UM. application in
Nasrun Mohamad is the corresponding author and can be contacted at: nasr.ghazali@gmail.com Islamic banking
Asmak Ab Rahman serves as a Senior Lecturer at the Department of Shari’ah and Economic,
Academy of Islamic Studies, UM.
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