Understanding Islamic Finance - Doha Academy of Tertiary Studies

Some Accessory Contracts 35113.3.1 Use of Tawarruq for Liquidity ManagementSome Islamic banks use Tawarruq to place and obtain funds. It can give a fixed returnto the banks and, hence, it is widely used as Commodity Murabaha or Shares Murabahain the Middle East. Acceptable Tawarruq arrangements can be executed in the followingmanner: one bank (in need of funds) and another bank (intends to place funds) select anycommodity/stocks which are liquid in nature (such as blue chip stocks); the surplus bankpurchases the commodity on cash payment from the market; the deficit bank purchases itfrom the surplus bank on credit (Murabaha) and after taking delivery, sells it in the marketat spot price.The Tawarruq process seems to be very simple. However, extreme care should be takenwhile undertaking such transactions and it should be ensured that the transaction does notbecome a mere exchange of papers between two brokers and one or two banks. Islamicbanks need to understand that Tawarruq arrangements should be used in extreme caseswhere no option is available to avoid interest. Widespread use of such products is harmfulto the Islamic banking industry in the long run. Sharī´ah boards need to strictly monitor allTawarruq-based transactions.13.4 JU‘ALAHJu‘alah is a contract in which one party (the Jā‘il) undertakes to give a specific reward(the Jua‘l) to anyone who may be able to realize a specific or uncertain required result, forexample, finding a stolen car. Ju‘alah is permissible on the authority of the Holy Qur’ān andthe Sunnah. There is reference in Surah Yousuf to the announcement about the lost beakerof the King that the person who would find the beaker of the King would be given rewardof a camel load grain. 5 As regards the Sunnah, the holy Prophet (pbuh) approved a deal bysome Companions who stipulated that if the Chief of the tribe was cured, they would begiven compensation for that. Although some jurists restrict Ju‘alah to a reward for the returnof a runaway slave, the majority of them consider it permissible for a number of activities.The determination of the required end result of the transaction is considered to be sufficientto make it permissible. Ju‘alah is a relevant and useful transaction in events that cannotbe accomplished through Ijarah, such as bringing back a lost property from an uncertainlocation, because the Ijarah contract requires that the work must be specified. Accordingly,Ju‘alah may be used by Islamic banks for recovery of overdue debts and certain otherservices whereby the subject of the required work cannot be minutely specified.13.4.1 Parties to Ju‘alahThe two parties of Ju‘alah are the offeror and the worker; the former offers specifiedcompensation to anyone (the worker) who has to realize a determined result in a known orunknown period. The worker may be any specified person(s) or the general public. In thisrespect also, it is different from Ijarah. Realization of the end result is necessary in Ju‘alahfor payment of the compensation to the worker(s). In other words, if the worker, despitehis effort, is unable to realize the objective, he will not be entitled to any compensation for5 Holy Qur’ān, 10: 70–72.