Tawarruq via the bank and differences in fatwas concerning it from fiqh councils and banks’ scholars
Question

                I found that taking a loan by tawarruq has been permitted by respectful scholars in this field of finance. But I read on your website that the conditions of tawarruq that were stipulated by the bank from the beginning made it haram. I am confused. What I understood after reading on your website about this is that it is not permissible to commit the bank to selling the goods I bought through the same bank. While this is how it works in banks which has been also permitted by other scholars. What is the correct opinion here? 

I read the Islamic permission in the bank and this is why I took the loan by tawarruq. I had to take it because I was in debt due to difficult circumstances. My salary is not enough for my children, me and helping my father and brothers. I did not own a flat in Egypt either. So I had to take this loan by tawarruq in order to pay the debt and buy a flat for my children. 

I tried not to do any doubtful matter, as I heard many opinions regarding this matter. When I found that known scholars here have permitted it I took it.  

If what I did is wrong then how can I correct it? I paid the debts and what is left now is only the instalment of the loan and the interest. May Allah reward you! Make du’a for me to get rid of this grief that keeps me sleepless day and night. I feel so guilty although I prayed istikharah before I took this step.  

Some time after this the bank offered me a credit card without annual fees. And I knew that if I pay what I owe to the bank before the deadline, then I will not have to pay any interest. Enlighten me may Allah reward you! How shall I expiate? How shall I repent? I cannot pay the whole loan back at once.
Praise be to Allah.
    Firstly:  

    Tawarruq may be permissible or haraam. The permissible kind 
    is that which involves buying an item from a trader by instalments, and 
    selling it for cash to someone else. We have discussed the permissibility of 
    this kind of tawarruq and its conditions in the answers to questions no.
    45042 and
    36410. 

    As for the haraam kinds of tawarruq, there are two kinds: 

    1 – Where you buy an item by instalments and sell it to the 
    one from whom you bought it. This is what is called bay’ al-‘eenah, and it 
    is called al-‘eenah because the exact product (‘ayn al-sal’ah) that he sold 
    goes back to him. This is haraam, because it is a trick that is used to get 
    a loan with interest, and it is haraam for that reason according to the 
    majority of scholars.  

    2 – Tawarruq through the banks or organized tawarruq, which 
    means that you buy an item from the bank by instalments – and in most cases 
    it is muraabahah (profit sharing), then you delegate the bank to sell it for 
    cash, and this transaction is also haraam. 

    A statement issued by the Islamic Fiqh Council held from 
    19-23/10/1424 AH (13-17/12/2003 CE) states that this transaction is haraam, 
    and warns banks not to exploit this transaction in ways that are not 
    Islamically acceptable. In it, it says: 

    After listening to the research presented on this topic and 
    the discussions concerning it, it is clear to the council that the tawarruq 
    done by some banks at present means: 

    That the bank, in a regular procedure, buys an item (that is 
    not gold or silver) from the global market or otherwise for the mustawriq 
    (the person who is engaging in this transaction of tawarruq to obtain cash) 
    and sells it to him for a price to be paid later on, on the basis that the 
    bank will commit – either as a condition of a contract or according to 
    custom – to sell it on his behalf to another purchaser for a price to be 
    paid immediately, and it will hand over that price to the mustawriq. 

    After examining and studying the matter, the council has 
    determined the following: 

    Firstly: Tawarruq in the form discussed above is not 
    permissible for the following reasons: 

    1.The seller’s (i.e., the bank’s) 
    commitment in the tawarruq contract to act as the deputy in selling the item 
    to another purchaser or arranging for someone to buy it makes it akin to the 
    ‘eenah transaction that is forbidden in sharee’ah, whether this commitment 
    is stipulated clearly or is assumed on the basis of what is customary.

    2.This transaction frequently 
    leads to a failure to fulfil the condition of taking possession of goods, 
    which is essential according to sharee’ah in order for the transaction to be 
    valid.

    3.This transaction is in fact 
    based on providing finance with interest from the bank to the customer, and 
    the process of buying and selling is illusionary in most cases. 
    

    This transaction is not the genuine tawarruq that is known to 
    the fuqaha’. In its fifteenth session the Fiqh Council stated that it is 
    permissible with regard to genuine transactions and subject to specific 
    conditions which they described. That is because there are many differences 
    that were discussed in previous statements. 

    Genuine tawarruq is based on the real purchase of an item for 
    a price to be paid at a later date, which enters into the possession of the 
    purchaser, and he acquires it in a real sense, and he becomes responsible 
    for it, then he sells it for cash because he needs the money, and he may or 
    may not be able to get it. The difference between the price of purchase that 
    is deferred and the sale price does not come into the bank’s possession, and 
    the bank is only introduced into this tawarruq transaction in order to 
    justify getting more for the loan that it gave to that individual by means 
    of transactions that are illusionary in most cases.  

    Secondly: The Fiqh Council advises all banks to avoid haraam 
    transactions, in obedience to the command of Allaah. 

    Whilst the Council appreciates the efforts of the Islamic 
    banks to save the Muslim ummah from the calamity of riba, it also urges them 
    to make use of the genuine transactions that are based on the rulings of 
    sharee’ah, without resorting to illusionary transactions that are 
    essentially pure financing in return for extras that benefit the financing 
    party. End quote. 

    Shaykh ‘Abd al-Rahmaan ibn Ibraaheem al-‘Uthmaan (may Allaah 
    bless him) said: 

    The reasons why we say that organized tawarruq as done by the 
    banks is not permissible are as follows: 

    1.Riba – as stated above – in the 
    report of Sa’eed ibn al-Musayyab (may Allaah have mercy on him).

    2.(Which is similar to what we 
    have mentioned above) the mustawriq is not interested in the product per se, 
    rather he is interested in the money, and the sale in question is an 
    illusionary sale. The whole issue boils down to obtaining cash immediately, 
    to be paid for later on with a greater amount.

    What indicates that this sale is something illusionary is the 
    following: 

    The bank does not take possession of the product purchased 
    from the global market in any real sense, and it does not receive any 
    original receipts from the warehouses where this product is kept; the 
    product is traded on the stock market and moves from one purchaser to 
    another until it ends up with the final consumer, who is able to take 
    possession of what he has bought. 

    In the case of the mustawriq it is even worse: he does not 
    take possession of the product in a real sense or even on paper. Hence he is 
    selling something that he has never acquired and that is not even specified, 
    because what the bank sells to its customer is something that is owned by 
    the bank, which is defined by a number used to identify the product, and 
    this number does not refer to small quantities of the product, but it is a 
    number that is used for the big unit that the bank divides among those who 
    seek tawarruq. 

    3.Appointing the bank to act on 
    behalf of the customer in the case of bank-type tawarruq is contrary to what 
    is expected of the agent, because what the bank is doing in its role as 
    agent is contrary to the interests of the mustawriq, which is selling the 
    product for a lower price than that for which the mustawriq bought it. (If 
    there is any aim to be achieved from a contract in the true sense of the 
    word, and there is a condition stipulated that contradicts this aim, then 
    this contract is self-contradictory in that it both affirms and denies the 
    aim of the contract, so nothing can be achieved and this kind of condition 
    is invalid.) Appointing the bank as one’s agent in this tawarruq is one such 
    condition, even though it is not stipulated. If there was no such 
    appointment, the mustawriq would not have bought from the bank in the first 
    place.

    4.Giving guarantees to the last 
    purchaser. The bank makes a deal with an independent party that commits to 
    buying the product that is being used in this transaction. This commitment 
    ensures that the selling price will not go beyond a certain limit as a 
    protection against fluctuation in prices. In return for this assurance, the 
    bank is committed to selling it for him, in the sense that the bank is not 
    entitled to sell the product in the open market even if the price rises 
    above the price agreed upon with the second purchaser. Thus these assurances 
    come from both parties: from the bank which commits to sell to the second 
    purchaser, and from the purchaser who agrees to buy it at a certain price.

    5.Organized tawarruq differs from 
    the kind of tawarruq which is permitted by the majority of fuqaha’ in 
    several ways, such as the following:

    (a)The bank is in charge of 
    selling the product that was bought from it, to whomever it wants, whereas 
    when the mustawriq is the one who is in charge of selling when he enters 
    into a tawarruq transaction by himself, and the first seller has nothing to 
    do with the sale of the product to the final purchaser.

    (b)There is prior agreement 
    between the bank and the final purchaser which guarantees that he will 
    purchase whatever the bank offers at the price for which the bank bought it, 
    as stated above, whereas in individual tawarruq, the mustawriq is the one 
    who sells the item for the price that he paid for it, or more or less.

    6.Organized tawarruq comes under 
    the heading of bay’ al-‘eenah which is haraam, because the bank is the 
    source of cash for the mustawriq in both cases. Cash is acquired via the 
    bank and through its mediation; if the purchaser did not know that the bank 
    would give him cash later on, he would not have embarked on this transaction 
    in the first place.

    7.Organized tawarruq through the 
    bank is not the same as bay’ al-‘eenah which is permitted by al-Shaafa’i, 
    because he stipulated that there should be no connection between the two 
    sales, and that one should not show any intention of acquiring cash; neither 
    condition is met in this case.

    8.It nullifies the aims of 
    Islamic banking in many ways:

    (a)It imitates the riba-based 
    banks in offering financing and insurance.

    (b)It limits itself to this and no 
    other forms of investments. Tawarruq now represents 60% of the bank’s 
    financing services.

    (c)It creates confusion between 
    Islamic and riba-based banks.

    (d)It negates the efforts to 
    encourage Islamic banks to offer financing in the form of investments via 
    mushaarakah (partnerships), mudaarabah (profit sharing), and so on.

    9.It causes Muslim money to leave 
    the country, because tawarruq transactions take place in the global market, 
    so Muslim money leaves the country in order for others to benefit from it.

    From the Muslim.com website. 

    Secondly: 

    With regard to the questioner’s comment that this transaction 
    is permitted by senior scholars, that is not correct. Those who said it is 
    permitted are the sharee’ah committees in Islamic banks, or the Islamic 
    departments in riba-based banks! It should also be noted that not all of 
    them regard this transaction as permissible. 

    Many of them have refuted the view of these sharee’ah 
    committees that it is permissible. Shaykh Khaalid al-Mushayqih has 
    undertaken comprehensive research on the prohibition of this transaction. 
    See Majallat al-Buhooth al-Islamiyyah (73/234-237). There are also 
    refutations by Dr. ‘Ali al-Saloos, Dr. Saami Suwaylim and Dr. ‘Abd-Allaah 
    ibn Hasan al-Sa’eedi – who have all presented research on this issue to the 
    Fiqh Council – as well as Shaykh ‘Abd al-Rahmaan al-‘Uthmaan and Dr. 
    Muhammad ibn ‘Abd-Allaah al-Shabaani. Please see Muslim.com website. 

    See also the answer to question no.
    60185. 

    With regard to your own situation: so long as you trusted 
    those committees and followed their opinion, and you did not know that their 
    view is weak, then we hope that there is no blame on you, but you should 
    resolve not to do it again in the future. 

    We ask Allaah to guide you to all that is good and help you 
    to pay off the debts that you have. 

    And Allaah knows best.