Tuesday, August 28, 2012

Tawarruq versus musharaka using mobile minutes

In my latest newsletter, I included a quote from a paper presented at the OIC Fiqh Academy about the permissibility of tawarruq products, and the essential point made in the paper about the permissibility of tawarruq versus impermissible 'inah was summarized:
“Financing is essentially intended to facilitate exchanges and to serve real productive activity; the return on financing becomes deserved when it is a cause of wealth creation. [The relationship is inverted when] exchange becomes a means and financing becomes the goal, and the sale becomes ancillary instead of primary.”
As a bit of context for the connection between 'inah and tawarruq, the author Dr. Sami ibn Ibrahim al-Suwaylim, the VP of IRTI describes:
It is clear from what has been mentioned that 'inah is not restricted to simple two-way (binary) transactions in which the commodity returns to the seller. It encompasses all formats by which the debtor acquires ready cash in exchange for an obligation to pay a larger amount later by buying a commodity for which he has no need on credit and then selling it for cash.
Transactions based on bay' al-inah (like BBA) are accepted by some schools of Islamic thought, notably Shafi'i fiqh, which is used in Malaysia.  Based on the conclusion from al-Suwaylim, a broader form of 'inah (notably organized tawarruq) is accepted for use in Islamic finance, even if it remains controversial (the OIC Fiqh Academy called organized tawarruq a 'deception' in a fatwa in 2009). 

I am not qualified to rule on whether one interpretation is correct compared with another, it is interesting to view the discussion in the context of a sukuk that used mobile phone minutes as the asset to back a sukuk.  The sukuk was compared with an earlier tawarruq that was also based on mobile phone minutes:
In March 2008, Mobily raised a $2.875 billion syndicated Islamic financing facility, which was based on mobile phone airtime, whereby Mobily was able to sell minutes of airtime to the financiers involved, and then taking on the role of agent to these banks and selling the minutes for a profit.
The sake of minutes in the whole transaction is arguably being used to finance the sale of these minutes from the phone company to the consumer, but the structure of the transaction inserts the syndicate banks as middlemen to add another level of exchange that does not facilitate exchange, but is used to create a financial transaction, with the syndicate investors buying and reselling to the consumers with the mobile provider as the agent.  However, the profit for the banks is likely to be fixed in advance to be the difference between the price paid by consumers and the price the mobile company sells to the syndicate.

Why was this transaction structured this way and not using a musharaka with the mobile company providing the minutes and the banks providing the funds needed by the mobile company?  If the transaction is providing a share of the profits from the sale by the mobile provider to the investors using a tawarruq is viewed as stable enough to fund the periodic payments, why could the investment be made differently to bring cash and minutes together with profit payments determined by the actual sale of minutes?

Undoubtedly, the answer is because the issuer and syndicate banks are more comfortable with something that looks like a conventional loan.  The use of tawarruq, it is often argued (including by me) may not be an optimal structure for Islamic finance to use, but it is often one of the few structures that can finance inter-bank money markets and other short-term financing.  However, a $2.875 billion syndicated financing is not a short-term money market, and there is a readily available structure that should provide a stable enough source of cashflows to (mostly) replicate the economics of conventional debt.

There are many nuances in how tawarruq work in individual cases, and the point is more about the rationale for using one structure over another.  It is mostly a question about whether Islamic finance should focus on bringing innovative versions of products that are similar to conventional debt or finding creative alternatives that may be less controversial.

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