Accession of Al-Rajhi as CTP with BMIS to boost Tawarruq contract  

(MENAFN - Arab News) The accession of Al-Rajhi Investment and Banking Corporation Malaysia Berhad, the wholly-owned Islamic bank of Saudi Arabia's Al-Rajhi Bank in Malaysia, as a commodity trading participant (CTP) with Bursa Malaysia Islamic Services (BMIS) trading on its Bursa Suq Al-Sila' commodity Murabaha trading platform, could turn out to be a significant boost, not only for the platform but also for the Tawarruq contract.

At the same time it further cements the links between Al-Rajhi Bank and Malaysia, where the Saudi Islamic financial institution has made impressive progress since it was licensed in 2006.

Yet for a global Islamic banking giant (and arguably the largest Islamic bank in the world in terms of balance sheet) which prides itself on its corporate and Shariah compliance conservatism, Al-Rajhi Bank is supporting Tawarruq, a commodity Murabaha financing and investment product, which has attracted some controversy over the last few years and which is popular amongst many Islamic banks and windows in the GCC countries.

Some ultra-conservative Shariah scholars, especially from Qatar, have discouraged the use of or rejected Tawarruq out of hand, although the resolution passed by the International Council of Fiqh Academy, which is an organ of the Organization of Islamic Conferences (OIC), in April 2009 did try to clarify the use and abuse of Tawarruq as a legitimate Islamic financing and cash management contract.

Under this Resolution 179 (19/5), the academy suggested that classical Tawarruq is permissible, whereby "a person (mustawriq) who buys merchandise at a deferred price, in order to sell it for cash at a lower price. Usually, he sells the merchandise to a third party, with the aim of obtaining cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale (bay')."

However, the academy stressed that organized Tawarruq (Tawarruq Munazzam) and reverse Tawarruq are not allowed. This is defined as "when a person (mustawriq) buys merchandise (commodity) from a local or international market on a deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price. Reverse Tawarruq, is similar to organized Tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client."

The rationale is "it is not permissible to execute both Tawarruq (organized and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of Riba."

It is not clear whether the Bursa Suq Al-Sila' has adopted the classical or organized Tawarruq as its underlying contract involving crude palm oil (CPO) transactions. The CPO currently is the only underlying contract available on the platform although Bursa Malaysia, the parent of BMIS, stresses that other commodities including metals would eventually be included in the contract universe.

The dichotomy over Shariah compliance is pertinent given that only last month Cagamas Berhad, the National Mortgage Corporation of Malaysia and leading securitization house, in collaboration with Al-Rajhi Bank issued a supposedly "innovative and the first-of-its-kind" Sukuk Al-Amanah Li Al-Istithmar (Sukuk ALIm) under Cagamas's RM5 billion Islamic Commercial Paper (ICP) and Islamic Medium Term Note (IMTN) programs. Sukuk ALIm, stressed Al-Rajhi Bank is one which would satisfy investors from a Shariah compliance point of view bridging Asia with the Middle East.

Al-Rajhi had shied away from the sukuk market because hitherto it had not found a structure which satisfied its Shariah compliance requirements. The Sukuk ALIm structure, according to the promoter, complies with the provisions for the Sukuk standard of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

"Whilst there had been an emergence of more diversified sukuk such as mixed asset sukuk or Sukuk Istithmar," explained Ahmed Rehman, CEO of Al-Rajhi Malaysia, "this new Sukuk ALIm structure is a type of Sukuk Istithmar but precludes the principles of Inah (sale and buyback), Bai' Dayn (trading of debt) and Wa'ad (undertaking)." As such, the promoters stress that that Sukuk ALIm could set the benchmark for future sukuk issuances, particularly those targeting Middle Eastern markets.

Bursa Suq Al-Sila' at the same time claims to be the world's first end-to-end Shariah-compliant commodity trading platform that facilitates commodity based Islamic financing and investment transactions. "The admission of Al-Rajhi, one of the world's largest Islamic banks, is further testament of the acceptance of the Bursa Suq Al-Sila' platform and the structure of Tawarruq in facilitating Islamic finance by Shariah Scholars from the Middle East," explained a statement from Bursa Malaysia.

Not surprisingly, Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia is confident that "the progress of Bursa Suq Al-Sila' in attracting members locally and in the Middle East has been encouraging and we hope that Al-Rajhi's entry will not only generate greater volume, but will also spur interest for more members to come in as Commodity Trading Participants and commodity supplying participants".

According to Bursa Malaysia, since the launch of the Bursa Suq Al-Sila' platform a year ago, BMIS has registered a total of 23 CTPs locally, as well as across Middle East and Europe.

The largest single transaction conducted on the platform in a single day to date was the RM2.4 billion Malaysian government's Sukuk 1 Malaysia, which was issued in June 2010 and which is structured as a Murabahah Sukuk using Crude Palm Oil as the Murabahah commodity to be traded through Bursa Suq Al-Sila'.

The platform, according to Bursa Malaysia, operates as a hybrid market based on a fully-electronic trading system coupled with the traditional voice broking facility. It is an international platform that is able to facilitate cross border multi-currency commodity-based Islamic financing and investment transactions under the Shariah principles of Murabahah, Tawarruq and Musawwamah.

While 23 CTPs in the first year of operations sounds encouraging, in terms of the global commodity Murabaha trade, which has been estimated at over 1.2 trillion, Bursa Suq Al-Sila' still has a long way to go especially in terms of critical mass of contracts; range of contracts; a wider commodity type transaction universe and the number of participants.

Not surprisingly CEO Yusli Yusoff is keen to admitting more commodities supplying participants (CSPs) on Bursa Suq Al-Sila' to expand commodities offerings on the platform from just crude palm oil. He knows that this will increase the attractiveness and efficacy of Bursa Suq-Al-Sila' as a truly global commodity trading platform.

Al-Rajhi Banking Group's Murabaha book business is enormous. Its investment held at amortized cost in the form of Murabaha with SAMA (the Saudi Arabian Monetary Agency) at end June 2010 alone stood at SR27.5 billion. Net financing for the same period also at amortized cost totaled SR30.8 billion in corporate Mutajara; SR73.7 billion in installment sale; and SR12.7 billion in Murabaha.

By Mushtak Parker