and Market Appetite
Commodity Murabahah has presented a challenge to market
practitioners due to concerns ranging from the abuse of
practices to the permissibility of the structure under Shariah,
says HERMIONE HARRISON.
Commodity Murabahah is based on the concept of Institutions (AAOIFI) proceeded to issue a standard
Tawarruq, that is, receiving cash for a debt of a higher guideline on the requirements of Tawarruq (Shariah
amount. The structure attracted considerable attention standard no 31). “I see this as an acknowledgement
when, in 2003, the OIC Islamic Fiqh Academy likened by the body that the concept of Tawarruq in itself is
commodity Murabahah to “organized” Tawarruq which acceptable though the standards of its application need
it deemed a synthetic and fictitious transaction and to be regulated,” Raja Teh explained.
therefore impermissible under Shariah.
The commercial viability of commodity Murabahah
While it is easy to mistake this ruling as a criticism of In place of commodity Murabahah, the OIC Fiqh Academy
the contract of commodity Murabahah or Tawarruq, recommended the use of Qard Hassan, a loan between
according to Bursa Malaysia’s Islamic markets global two parties with no contractual increment to the creditor;
head Raja Teh Maimunah, the concerns raised by the OIC in other words, a benevolent loan. In Raja Teh’s view, this
Islamic Fiqh Academy in arriving at its conclusion related .
“is simply not a commercially viable option”
to the practices regarding the application of commodity
Murabahah or Tawarruq and not the contract itself. In Many proponents of commodity Murabahah share this
particular, the academy expressed concern over the view. In particular, Azizul Azmi Adnan, partner of the
existence of fraudulent trading contracts or an absence Islamic banking practice group of Wong & Partners
of physical commodities underlying the commodity (a member firm of Baker & McKenzie International),
Murabahah structure. considers that “while the use of instruments such as
commodity Murabahah may not be in strict compliance
with the rulings of the OIC Fiqh Academy, or similar
“It will take time for an academies, it is necessary to consider the application of
Islamic finance in the real world” he said, recognizing that
understanding and Islamic finance is developing against a backdrop of an
established conventional finance framework and needs
appreciation of Islamic to be commercially viable.
principles to develop”
In Adnan’s view, to follow the rulings of such academies
would involve a wholesale change to the existing
The distinction between the contract and the practice of framework of Islamic finance which realistically cannot
commodity Murabahah or Tawarruq is an important one. happen overnight.
In Raja Teh’s opinion, “it should be the practices that ought
to be tightened and not the rule on the permissibility of “It will take time for an understanding and appreciation
the contract itself” of Islamic principles to develop,” he said. “Malaysia
appreciates that it is a progressive process. Continuous
Despite the ruling by the OIC Islamic Fiqh Academy, the improvements are being introduced in order to develop
Accounting and Auditing Organization for Islamic Financial Islamic finance.” The development from the widespread
February 2010 . Islamic Finance Asia 31
The structure of a common commodity Murabahah financing arrangement
1. Bank purchases
A on spot basis.
Broker A Bank
2. Bank sells the commodity to
the customer on deferred basis
at cost price plus profit margin
3. Bank, acting as
Wakeel, sells commodity
to Commodity Broker B
on spot basis on behalf Bank (acting
of the customer as Wakeel
use of the Bai al Inah contract in favor of Tawarruq- .
the old days” “It is the evolution of the trading mechanism
based instruments such as commodity Murabahah is as things become more sophisticated,” she said.
an example of the constant improvement of the Islamic
finance systems in Malaysia. According to Adnan, “The practice of leaving things to chance is simply not
“incremental steps are important in increasing awareness conducive in today’s complex financial system. The
and improving the system” . absence of organization will expose banks and their
clients to ‘unhedged’ risks and would certainly not be
Citing the maxim found in Islamic jurisprudence, “severe entertained in today’s financial markets, especially in the
harm is avoided by a lighter harm” or “choosing between aftermath of the global credit crisis.”
the lesser of two evils” some proponents of commodity
Murabahah maintain that the choice is between having Structural features of commodity Murabahah
to resort to liquidity management instruments, which Compared to a simple one-step conventional financing
are imbued with clear-cut riba elements, or to pursue between a lender and borrower, one could be forgiven
the alternative practice of controversial Tawarruq-based for being somewhat confused by the structure of the
instruments for the time being. comparable commodity Murabahah financing, as
According to Dr Asyraf Wajdi Dusuki, head of research
affairs at the International Shari’ah Research Academy for “There is invariably an additional complexity when using
Islamic Finance (Isra), “it is thought that to choose what is Islamic finance as the basis of financing,” Adnan said, in
disputed or doubtful (shubhah) is of lesser evil than to opt recognition of the additional steps involved in structuring
for a transaction that is clearly prohibited (haram)”. and carrying out an Islamic transaction.
Is commodity Murabahah too organized? Does this complexity carry a risk that the structure will
By likening today’s commodity Murabahah to “organized” not be upheld by the courts? According to him, “since
Tawarruq, the OIC Fiqh Academy criticized commodity Malaysia has a system of law which operates separately
Murabahah for being too pre-arranged. While many from Shariah, as long as the documentation does not
practitioners have responded to this criticism by trying to contradict that system of law, there is freedom of contract,
disguise the pre-arranged nature of modern commodity so it is unlikely that a structure, if well documented,
Murabahah transactions, Raja Teh considers the pre- .
will not be upheld by the courts” The multiple roles
arrangement of a commodity Murabahah transaction as that a financial institution may occupy in a commodity
“a necessary development from how things were done in Murabahah transaction is also worthy of note. As shown
32 Islamic Finance Asia . February 2010
in Diagram 1, a bank may act both as itself as well as and each other simply because there is no other viable
wakeel (agent) on behalf of the customer. .
alternative at this juncture”
While permitted under common law, there have been “Commodity Murabahah is the one Islamic money market
concerns regarding the risks of having one party acting tool that can help provide liquidity in the Islamic banking
in several capacities. Adnan, however, does not see this system. There is no other instrument that is as widely used
as a risk that cannot be addressed in documentation. as commodity Murabahah, especially in the short term
money markets. Sukuk are generally of medium to long
“As long as it is clear what the duties of the bank are while tenure whilst other contracts, for example Wakalah, may
acting in differing capacities and as long as the docu- not appeal to some risk managers in the management of
mentation anticipates and addresses what rights and ob- short term liquidity,” she explained.
ligations might arise, it becomes a question of the parties
getting comfortable that the transactions do not pose any It appears that the response from some practitioners to
serious risks,” he explained. the ruling of the OIC Fiqh Academy has been to continue
to develop commodity Murabahah products but with
“The challenge is getting the promoters and investors a view to maintaining the integrity of the underlying
more comfortable with the multiple roles that one party contracts and processes. “In response to the ruling, what
can perform,” he added. we have done is to design the world’s first regulated end-
to-end commodity trading platform specifically to facilitate
These “complexities” do not appear to have translated into Tawarruq transactions,” explained Raja Teh, referring to
a higher risk rating for a commodity Murabahah based the recent achievement of Bursa Malaysia.
financing in Malaysia as opposed to its conventional
counterpart. This could be suggestive of the level of “The structure of the trades to be undertaken via the
comfort that the Malaysian market has developed with platform addresses major concerns raised (such as) the
Islamic products and their underlying structures, however validity of the contracts and the presence of physical
more complex than their conventional equivalent. commodities which are deliverable.
Those wishing to trade through the platform must first
“Commodity Murabahah be admitted as members and are governed by a set of
is the one Islamic money trading rules. Shariah audits are carried out intermittently
by the exchange and members themselves may compel
market tool that can help a Shariah audit to be undertaken upon issuance of a
notice to the exchange.
provide liquidity in the
“Commodity suppliers are first screened and trading
Islamic banking system” flows are scrutinized before seeking approval from the
national Shariah Advisory Council for the admission of a
Adnan pointed out, however, that for US dollar issuances, particular commodity. The whole structure of the platform
investors may demand a higher premium for Sukuk as is designed to ensure integrity in the trade flows.”
opposed to conventional bonds (as they did for the recent
US dollar-denominated combined issue of conventional While the platform started out to provide for ringgit
bonds and Sukuk by Petronas). Nevertheless, “this is likely denominated trades, Raja Teh explained, it has since
to be a reflection of the need for investors to take time to expanded to undertake non-ringgit denominated trades.
understand and get comfortable with the structuring of an “In addition, we have also moved to provide for a hybrid
issue of Sukuk rather than of any inherent additional risk market, thus providing customers access to voice broking
in the structure itself,” he explained. in addition to electronic trades (initially only electronic
trades). We are also admitting other commodities in
What does the future hold for commodity addition to our home star product, that is, crude palm oil,”
Murabahah? she added.
It is estimated that commodity Murabahah has an annual
turnover of over US$1 trillion and in Raja Teh’s opinion, It appears that for the moment, the future of commodity
“demand remains strong” While the ruling by the OIC Fiqh Murabahah is bright. While it is likely that criticisms of
Academy may have resulted in significant discourse on the practices or structure of commodity Murabahah will
the subject of commodity Murabahah and its practices, continue to arise, until a commercially viable alternative
in Raja Teh’s experience, it “has not caused any major can be offered, it seems that practitioners will continue to
change in the way banks transact with their customers enjoy its effectiveness as a liquidity management tool.
February 2010 . Islamic Finance Asia 33