Survey on Sharīʿah non-compliant events in Islamic banks in the practice of tawarruq financing in Malaysia

Purpose – Tawarruq (Islamic commodity financing) has evolved as the most ubiquitous concept in Malaysia’s Islamic banking industry. Nevertheless, the extensive use of tawarruq has invoked a number of Sharīʿah (Islamic law) concerns in its practice. This study aims to investigate the Sharīʿah non-compliant (SNC) phenomena in the practice of tawarruq financing inMalaysia. Design/methodology/approach – This study adopts qualitative research methodology, combining both descriptive and content analysis. A self-administered questionnaire was distributed to 16 Malaysian Islamic commercial banks to unveil the Sharīʿah non-compliance issues in the application of tawarruq in Islamic banks (IBs) in Malaysia. Findings – The study found that some practices of tawarruq in Malaysia might not comply with the Sharīʿah, mainly due to the improper sequencing of contracts. The study also discovered that IBs adopt different approaches in dealingwith SNC events and the income derived therefrom. Finally, the study noted the influence of board of director/ management on certain Sharīʿah decisions particularly on the treatment of nonhal al (impermissible) income. Practical implications – The findings of the study serve as a reference to industry players and regulators in formulating a Sharīʿah non-compliance risk management framework for tawarruq practices. Originality/value – The survey on SNC issues in tawarruq practice constitutes the first of its kind in the existing literature.


Introduction
Tawarruq, commonly known as commodity mur aba Á hah, is a financial instrument that has facilitated the launch of unprecedented and sophisticated Islamic commercial products, ranging from deposit and financing instruments to liquidity management and debt restructuring, structuring of sovereign and corporate Á sukūk (Islamic investment certificates), risk management and hedging instruments. It has gained full acceptance from industry players because of its built-in features and characteristics that can deliver a similar economic outcome to those of conventional products.
Tawarruq has over the past few years evolved as one of the most widely used concepts in the Malaysian Islamic banking system, responding quickly to the Bank Negara Malaysia's (BNM) circular on bayʿ al-ʿīnah (sale and buy-back), which substantially tightened the Sharīʿah (Islamic law) requirements of bayʿ al-ʿīnah products (BNM, 2012). A 2016 BNM Islamic Finance Development Report highlighted that tawarruq is the most significant contributor to the financing portfolios of Islamic banking in Malaysia, standing at 22.4%, a drastic increase of more than 100% in just two years (2014)(2015)(2016). As at the end of 2019, tawarruq financing accounts for an even higher share at 46% of Islamic banks' (IBs) total financing in Malaysia (BNM, 2020b).
Nevertheless, the extensive use of tawarruq in Islamic financial institutions (IFIs) has stirred a plethora of contentious queries from both Sharīʿah scholars and Muslim economists. The fact that tawarruq is designed to merely mirror the characteristics of conventional products challenges a view that IFIs offer a genuine alternative to traditional finance. As a result, the prospects and solutions that IFIs can provide to the economic problems caused by conventional finance are dimming. On the operational side, tawarruq is prone to Sharīʿah non-compliance risk events, mainly because it involves a series of sale contracts conducted in succession.
Following this brief introduction, the study is organised as follows: the next part reviews the literature related to the study; the research method and data used in the research are then discussed; it is followed by the survey findings and analysis section; and the last section concludes the study with a set of recommendations.

Literature review
The review of literature in this study is divided into two parts. The first part discusses the concept and application of tawarruq in IBs, while the second part highlights the previous studies on SNC issues in the modern practice of tawarruq.

Overview of tawarruq
The word tawarruq is derived from the Arabic root word wariq, which means minted silver (Qalʿajī, 1988). The word tawarruq and its verb are not directly traceable in fiqh (Islamic jurisprudence) terminology except in the Á Hanbalī School of jurisprudence (Al-Rashīdī, 2005). The technical definition of tawarruq is understood from its literal meaning, i.e. minted silver, signifying that the intention to enter into the contract is for the attainment of silver or liquidity, and not for the commodity. Therefore, tawarruq is defined as a series of sale contracts in succession whereby a person purchases a commodity from a seller on a deferred basis and subsequently sells it to a party other than the original seller on a cash basis to obtain liquidity (Dusuki et al., 2013).
The early scholars' stand on the Sharīʿah ruling for tawarruq is mainly divided into two groups: those who approve it and those who disapprove. The vast majority of jurists (the Á Hanafī, M aliki, Sh afiʿī and Á Hanbalī schools) held the view that tawarruq is permissible. Abū Manṣūr al-Azharī claimed that all jurists are unanimous on the permissibility of tawarruq. Nevertheless, a prominent Á Hanbalī jurist, Ibn Taymiyyah, departed from the view of the majority of Á Hanbalīs, declaring that tawarruq is impermissible on the basis of blocking the means (sadd al-dharīʿah) to commit rib a (interest) and the statement of ʿUmar ibn ʿAbd al-ʿAziz that tawarruq is the origin of rib a (Ibn Taymiyyah, 1987). He also argued that the main motive behind tawarruq transactions is to facilitate the attainment of liquidity based on a series of sale contracts where the substance is a mere loan with interest (Al-Uthaymīn,1422/1428H). His disciple Ibn al-Qayyim al-Jawziyyah concurred, averring that tawarruq is a mere legal trick to circumvent the prohibition of rib a (Ibn al-Qayyim, 1991).
The modern practice of tawarruq has departed from the classical form of tawarruq approved by the overwhelming majority of jurists. The practice of tawarruq in its traditional way is done by an individual, involving three parties where the transaction among them is concluded naturally with no prior arrangement and promise involved. It reflects a genuine contract that establishes complete physical possession. On the other hand, the modern practice of tawarruq is normally arranged by institutions involving four parties whereby the contractual relationships are fully organised (Dusuki et al., 2013). This leads to differing opinions among contemporary Sharīʿah scholars about the permissibility of the modern practice of tawarruq.
In 1998, Majmaʿ R abi Á tah al-ʿĀlam al-Isl amī, in its 15th session in Makkah, resolved that traditional tawarruq is permissible based on the view of the majority of jurists and the original ruling on the legitimacy of a sale contract. In 2003, Majmaʿ R abiṭah, in its 17th meeting held in Makkah, clarified its previous stand and ended with the resolution that the modern practice of tawarruq is impermissible. In 2009, Islamic Fiqh Academy of the Organisation of Islamic Cooperation in its 19th meetingheld in Sharjah, the United Arab Emiratesreiterated the decision made by Majmaʿ R abiṭah in 1998 and 2003 that the traditional tawarruq is permissible while the current practice of tawarruq is impermissible.
However, the Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM), in its 51st meeting, 2005, resolved the permissibility of tawarruq for deposit and financing products in IBs. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI, 2008) issued Shariʿah Standard no. 30 on tawarruq and resolved that organised tawarruq is permissible subject to specific rules and parameters. The Sharīʿah Advisory Board of Al-Rajhi Bank has also approved the practice of tawarruq as the customer has full liberty to deal with the purchased asset from the platform (Fatwa no. 125, 699 and 713). Kuwait Finance House (KFH, 1986) permitted modern tawarruq but suggested to remove the inclusion of the agency element in the tawarruq structure to avoid the resemblance to characteristics of rib a (Fatwa no. 131, 820 and 851). Dubai Islamic Bank shared the same view with KFH and Al-Rajhi in approving tawarruq provided that the arrangement is free from the element of prohibited ʿīnah arising from the involvement of the third party in the financial agreement (Resolution no. 63). The National Sharia Board of Indonesia Ulema Council (DSN-MUI) also resolved the permissibility of tawarruq with certain conditions (Fatwa no. 82, 2011).
In 2015, BNM issued a policy document on tawarruq outlining specific requirements and parameters for the application of tawarruq in the Islamic financial context in Malaysia. These are as follows (BNM, 2015): Each sale and purchase contract in tawarruq shall satisfy all the necessary conditions of a valid sale and purchase contract under Sharīʿah. All sale and purchase contracts in tawarruq shall be executed by entering into separate and independent sale and purchase contracts. Execution of each sale and purchase contract in tawarruq must be respectively evidenced by appropriate documentation or record. The purchaser in each sale and purchase contract in tawarruq shall have the right to take delivery of the asset. The sale and purchase contract in tawarruq shall not contain any terms and conditions that restrict the purchaser from taking delivery of the asset or create an obligation for the purchaser to sell the underlying asset. Payment of any amount of the deferred selling price including profit shall not be paid to the seller before entering into the sale and purchase contract.
Currently, tawarruq is being used to structure different Islamic financial instruments and products. In the Islamic banking sector, it is used to structure both deposit and financing products. Under deposit products, tawarruq is typically used for term deposits that offer depositors a guarantee of the principal as well as fixed return. A term deposit is a type of deposit which has a specific fixed term, generally short-term, with maturity ranging from a month to a few years (Ismail et al., 2016). A customer opening a term deposit account is bound to maintain his deposit up to maturity. Early notification is required if the customer wishes to withdraw his deposit earlier (Ismail et al., 2016). As for financing products, tawarruq is designed to structure various products based on different clientele needs such as personal financing, asset financing, cash line facility, education financing, personal financing, revolving credit facility, working capital financing, home financing and project financing facilities (Dusuki, 2011). As highlighted above, tawarruq comprises the largest segment of the financing portfolio in Malaysia's Islamic banking industry, standing at 46% of total financing (BNM, 2020b). Figure 1 depicts the composition of financing by Sharīʿah contracts.

Previous studies
A number of past studies discussed the modern application of tawarruq and its SNC issues. Dusuki (2010) and Dusuki et al. (2013) concluded that the practice of organised tawarruq is exposed to four major Sharīʿah violations: (1) defective underlying commodity; (2) lack of possession and delivery; (3) pre-arrangement (taw a Á tuʿ) via a netting facility arrangement between different storage facilities; and (4) inclusion of agency. Radzi (2012) observed that the possible Sharīʿah violations in the practice of tawarruq emerge mainly in the possible redundancy of the underlying commodity used, the interdependency of one contract on another, the suitability of the commodity as the underlying asset and the ability to deliver the commodity. Meanwhile, Firoozye (2009) found that the designated commodity in the tawarruq transaction is merely used as an entry point to the brokers. The legal documentation might restrict the customer from taking delivery of the commodity. Mohamad and Ab Rahman (2014) investigated the potential SNC incidents in IBs in the practice of tawarruq financing in Malaysia with special reference to Maybank Islamic Berhad. The authors concluded that SNC events in tawarruq financing may arise at various levels and in different processes, ranging from credit application, documentation, engagement with clients, disbursement, to credit monitoring and credit recovery (rescheduling and restructuring). In particular, Mohamad (2014) presented potential SNC incidents in tawarruq financing as follows: The tawarruq arrangement is used to grant financing facilities to an individual or to non-individual entities whose activities explicitly involve SNC elements, such as rib a-based transactions, liquor production, gambling and brothels. The bank's staff may engage in SNC activities with the clients in the bank's name.
The commodity and collateral used for the tawarruq arrangement are not in compliance with Sharīʿah. The tawarruq contract is executed before the bank possesses the commodity. The series of sale transactions do not follow the sequential processes appropriately. The terms and conditions are not adequately stated, which may lead to misinterpretation during the contract process. The appointment of an agent before the commodity possession may lead to issues of fictitious transactions. The facility may be disbursed before contract execution. The compensation (taʿwī Á d) for late payment does not reflect actual losses. Debt rollover is executed in restructuring. Practice of tawarruq financing in Malaysia Noor and Azli (2009) studied the Sharīʿah issues in the practice of tawarruq in Islamic credit cards in Malaysia. The study found that the tawarruq-based credit card is prone to exposure to SNC issues, revolving around the fictitious transaction, prearrangement, the profit charge on the unpaid repayment of the credit limit, the appointment of the bank as an agent and resale of unowned merchandise. Ismail et al. (2016) researched the potential Sharīʿah issues in the inclusion of dual agency (wak alah) in tawarruq time deposits as practised in Malaysia. The paper discovered that the application of dual agency via bayʿ al-wakil li nafsihi (sale of the agent to himself) in the modus operandi of tawarruq deposit does not affect the validity of the tawarruq arrangement. However, extreme care should be taken at each step of the transaction to ensure it does not violate the Sharīʿah requirements of tawarruq, i.e. proper sequencing. Mohamad (2014) argued that tawarruq financing involves a high degree of SNC incidents as compared to other modes of financing as it involves a series of processes and steps. Therefore, a proper review and due diligence are required before the contract execution so that the arrangement does not reflect a mere exchange of papers. Rahman (2016) found that the practice of Islamic profit rate swap and options structured based on tawarruq triggers the issue of gambling in which one party may gain in the arrangement at the expense of another party. Ahmad et al. (2020) discovered five main Sharīʿah issues in the application of interbank commodity mur aba Á hah for liquidity management in Malaysia. These include the issue of resemblance to interest, the nature of tradability of commodities, the structure of commodity mur aba Á hah, the duration of the completed tawarruq transaction and the real brokerage cost. Despite the various past studies on the Sharīʿah issues in the modern practice of tawarruq, to the best of the researchers' knowledge, no study has been carried out to empirically survey the Sharīʿah non-compliance incidents in the practice of tawarruq financing in Malaysia. The present study, therefore, undertakes to fill the gap in the existing literature by investigating the SNC events in tawarruq financing.

Research methodology
The present study adopts a qualitative research methodology, combining both survey and content analysis. Accordingly, a structured questionnaire was prepared to collect the primary data on SNC phenomena in IBs in the practice of tawarruq financing in Malaysia. Questionnaire survey refers to "a pre-formulated written set of questions to which respondents record their answers, usually within rather closely defined alternatives" (Sekaran, 2003, p. 142).
Primary data is the most appropriate technique and possible source because of the lack of a database and public documents on the subject matter in the market.

Research population and respondents
The study surveys 16 Islamic commercial banks, comprising 5 stand-alone IBs, and 11 fullfledged Islamic subsidiaries. These represent the population of Islamic commercial banks in Malaysia. Table I depicts the details of the surveyed banks.
The study, however, had to exclude Public Islamic Bank from the survey absence of tawarruq-based product in its portfolio when the survey was conducted. The respective bank still heavily relies on other structures, such as bayʿ al-ʿīnah. A total of 15 IBs were then surveyed, comprising 40% stand-alone IBs and 60% Islamic subsidiaries of conventional banks. The survey was conducted during December 2014 -March 2015.
The study gathers information from 15 respondents representing 15 Islamic commercial banks, with one respondent from each bank. The respondents comprise head of Sharīʿah review (constituting 40% of total respondents), head of Sharīʿah department (20%) and Sharīʿah advisory (20%). The remaining respondents are from the Sharīʿah risk management function (13%) and Sharīʿah research function (7%). The selection of respondents was on the basis that officers in the Sharīʿah departments, to the best of the authors' knowledge, are those who deal directly with the Sharīʿah non-compliance issues. Thus, we consider that they are the most suitable respondents to represent the bank.
In terms of working experience, the majority of respondents (60%) have been in the banking industry from one to five years while 33% of them have served the sector between six and nine years. The rest (7%) have been in the industry for more than 10 years. The experience of respondents is deemed satisfactory to understand the subject matter and thus provide the authors with reliable data and information.
As for the educational background of the respondents, 40% hold master's and PhD degrees, while 27% of respondents are equipped with Islamic finance-related professional qualifications, such as Chartered Islamic Financial Professional of International Centre for Education in Islamic Finance. The remaining 33% hold bachelor's degrees. Most of the respondents also possess Sharīʿah background. Some of them graduated from Al-Azhar University of Egypt and Al al-Bayt University of Jordan. The respondents' educational background substantiates that they are well-educated and well-versed in the subject matter, thus being able to provide the authors with reliable and consistent responses.

Data collection
This study adopts the self-administered questionnaire as the method of data collection. Initially, the questionnaire was distributed to 16 Islamic commercial banks. However, the authors managed to collect 15 completed questionnaires, with the exclusion of Public Islamic Bank.
A self-administered questionnaire has some advantages because the researcher has an opportunity to clarify any doubt that the respondent may have or any question related to the survey on the spot. It also enables the researcher to motivate respondents to give their  (Sekaran, 2003). Also, it allows the researcher to gather the completed responses within a short period (Sekaran, 2003).

Questionnaire content
The structured questionnaire used in this study included some close-ended questions to minimise the element of bias which may arise from the survey. The close-ended questions also allow the researcher to apply a descriptive statistical measure in explaining the findings from the study. They further ensure natural responses as well as consistency and uniformity of the responses (Hale et al., 1994). The draft of the questionnaire was verified by some industry practitioners including head of the Sharīʿah Department of Bank Muamalat, an internal auditor of CIMB Bank, a risk management officer of al-Rajhi Bank, the Sharīʿah advisory officer of Maybank Islamic Bank and head of the Sharīʿah Department of Affin Islamic Bank Berhad. In addition, the instruments have been checked by some International Shari'ah Research Academy for Islamic Finance (ISRA) researchers and representatives from the Sharīʿah risk section of BNM to ensure practicality, relevance and reliability of the variables. Some adjustments to the variables were made based on the feedback.
The questionnaire is separated into three sections consisting of 18 primary questions. Section 1 aims to explore the extent of the use of tawarruq in IBs in Malaysia and to identify various forms of potential SNC events in IBs with particular reference to tawarruq financing. This section comprises eight closed-ended questions which include specific questions on the frequency level of SNC events in tawarruq financing. Both descriptive statistical analysis and content analysis were used to interpret the findings. The authors also measure the frequency level of SNC events in tawarruq financing using a simple weighting method: 1 is given the highest weight, and it signifies the most frequent occurrence, while 5 is assigned the lowest weight and it denotes the least recurring event. This is taking into consideration that some respondents gave the same response/degree for different variables/events. Table II draws the summary of weightage for  different responses. Afterwards, the weighting value for each SNC event is calculated based on the following formula: where Wx is the weighting value for each response and Sx reflects the respondents' feedback for each event. Source: Authors' own Section 2 of the questionnaire explores the approach adopted by IBs in dealing with various SNC events in tawarruq financing, consisting of two questions. A descriptive analysis is used to interpret the responses. Section 3 identifies the treatment of income resulting from SNC events in tawarruq financing. This section comprises five questions. Descriptive and evaluative analyses are used to analyse this section.

Findings and analysis
This part is the core of the paper, being devoted to presenting the survey findings on SNC events in IBs in the practice of tawarruq financing in Malaysia.

Application of tawarruq in Islamic banks in Malaysia
Tawarruq has gained full acceptance from the industry players because of its built-in features and characteristics that can deliver a similar economic outcome to conventional products. It has since the past few years evolved as one of the most widely used concepts in Islamic banking products in Malaysia. This is particularly after the issuance of BNM (2012) circular on bayʿ al-ʿīnah (sale and buy-back), which substantially tightens the Sharīʿah requirements of bayʿ al-ʿīnah-based products. The circular has indirectly pushed IBs in Malaysia to explore alternatives to bayʿ al-ʿīnah actively. Some Malaysian IBs have even phased out bayʿ al-ʿīnah-based products from their portfolios (Ali and Muhammad, 2014).
The survey found that all of the 15 IBs surveyed have applied tawarruq for different types of deposit and financing products. A total of 11 out of the 15 IBs (73%) have also used the tawarruq concept for treasury products.
The survey also revealed that all the 15 Islamic commercial banks in Malaysia use the tawarruq concept for term deposit products. However, some IBs have also offered saving and current accounts based on tawarruq. These include, among others, Hong Leong Islamic Bank, CIMB Islamic Bank, Ambank Islamic, RHB Bank and Kuwait Finance House.
In terms of financing products, most of the IBs under the survey (80%) apply tawarruq for personal financing and term financing products while 60% also use tawarruq for home/ property financing. Some banks further use tawarruq for vehicle financing, Islamic credit card facility and business financing. Figure 2 explains that the tawarruq concept has dominated the financing portfolio of the 15 IBs in Malaysia, representing more than 80% of the total financing portfolio in 3 IBs. The concept also contributes between 61% and 80% to the entire financing portfolio in six IBs and between 41% and 60% in three IBs. The remaining three IBs apply tawarruq in a relatively small portion, notably, less than 40% of their total financing portfolio. Less than 40% 41%-60% 61-80% More than 80%

Practice of tawarruq financing in Malaysia
The survey also queried about the subscription of the IBs to the commodity mur aba Á hah platform, Bursa Suq al-Sila' (BSAS). It revealed that all the 15 IBs have subscribed to BSAS to facilitate tawarruq transactions. In addition to BSAS, some IBs subscribe to the Sedania as-SIDQ tm , Eiger Trading via the London Metal Exchange (LME) and AbleAce [1]. Five banks under the survey are registered members of LME while three banks also subscribe to AbleAce. Multiple subscriptions provide IBs with a wide array of choices and options in meeting the need for the high volume of the commodity. Based on the authors' interview with the Head of Sharīʿah, CIMB Islamic Bank, subscription to two platforms or more will offer flexibility to the bank in dealing with multiple and large quantities of transactions.
Sharīʿah non-compliant events in tawarruq financing IBs in Malaysia apply different sets of Sharīʿah contracts for their financing products, ranging from sale-based to lease-based to equity-based contracts. Currently, sale-based contracts, such as bayʿ bi thaman ajil (BBA) and tawarruq, have dominated the financing products of IBs in Malaysia. It is perhaps for this reason that the degree of SNC events in sale-based contracts is relatively higher than that of other modes of financing. The survey discovered that 80% of SNC events in financing products originated from sale-based contracts. Only 13% of SNC events were found in equity-based contracts, such as mush arakah, while lease-based contracts accounted for 7% of SNC events (Figure 3).
In particular, the survey revealed that tawarruq contributes to a relatively higher portion of SNC events in IBs in Malaysia, making up 40% of SNC events in sale-based financing products thus representing the second most frequent SNC event after bayʿ al-ʿīnah/BBA (46%) (Figure 4). Mur aba Á hah to the purchase orderer and Istisn a' (0%) and Istisn a' (0%) (7%) contributed the remaining SNC events in sale-based financing.
The main reason why tawarruq recorded the highest SNC events is because it involves a series of sale contracts. Failure to observe the Sharīʿah requirements of a valid sale contract in each leg may trigger a Sharīʿah non-compliance issue. This finding is consistent with the finding of Mohamad (2014) that tawarruq assumes a relatively high degree of SNC risk. Another reason may be that tawarruq contributes the largest portfolio in the financing composition of IBs in Malaysia.
The survey also identified potential SNC events in tawarruq financing in IBs in Malaysia as follows: improper sequence of sale contracts; improper facility disbursement; improper disclosure of price; Source: Authors' own the absence of wak alah agreement; inappropriate imposition of taʿwī Á d (compensation); delivery restriction; the absence of new contract execution in facility renewal; improper disclosure of underlying contract; lack of proper asset specifications; SNC purpose; SNC commodity; and SNC collateral.
Based on the potential SNC events, the respondents were asked to rank the frequency level of SNC events in tawarruq financing based on their possible occurrence. The survey revealed that improper sequence of the sale contracti.e. the asset is sold to the customer before the bank purchases it from a brokerrepresents the most frequent SNC event in tawarruq financing with a weight of 3.27. Practically, the whole intent of the customer entering into a tawarruq transaction is only to attain liquidity rather than to acquire the commodity. Therefore, some bank officers are not concerned with the contract's sequence as well as the ownership transfer of the commodity. A similar reason could also become the basis for the second most frequent SNC event: advance disbursement of the facility before complete execution of the tawarrruq transaction (associated weight is 2.47).
From the Sharīʿah perspective, failure to observe proper sequence, i.e. sale of an asset by the bank to the customer before it actually purchases it from the trader, would lead to nullification of the contract. This is because the bank sells the asset which does not belong to it. The Sh afiʿī, Á Hanbalī and Z ahirī schools are of the view that ownership of the asset is a requirement for the conclusion of a contract (inʿiq ad al-ʿaqd) (Zuhaily, 2010). A contract executed by an unauthorised agent (fu Á dūlī) is therefore null and void because of the absence of ownership (milkiyyah) and legal authority (wil ayah) (Zuhaily, 2010). The policy document on tawarruq stipulates the following: The offer and acceptance must be executed in the following sequence: (a) the seller sells an asset to the purchaser by entering into a sale and purchase contract, and (b) subsequently, the purchaser from the first sale and purchase contract may enter into another sale and purchase contract to sell the same asset to a third party (BNM, 2015, p. 7).

Practice of tawarruq financing in Malaysia
Improper disclosure of price constitutes the third most frequent SNC issue in tawarruq financing at 1.87 weightage. In Islamic law of contract, insufficient information (jah alah) may affect the validity of contract as it triggers potential dispute and prevents possession and delivery of the transacted commodity (Munʿim, 2007). According to the majority of jurists, insufficient information in the contract will make the contract null and void; thus, it cannot be rectified (Ibn ʿĀbidīn, 1992). On the contrary, the Á Hanafī School regarded the contract containing insufficient information to be voidable (f asid), that is, rectifiable (Zuhaily, 2004). Accordingly, based on the Á Hanafī approach, if the price is mistakenly disclosed to the customer, the bank may notify the customer on the correction. Once the correction is made, the contract becomes valid and effective [2]. The policy document on tawarruq also stipulates that the price in each sale and purchase contract in tawarruq should be determined and mutually agreed by the contracting parties at the time of the execution of the contract (BNM, 2015).
Absence of a wak alah agreement represents the fourth most frequent SNC event in tawarruq financing at 1.57 weightage. The inclusion of the agency element constitutes an inseparable part of the modern practice of tawarruq. This is particularly true as the existing tawarruq platforms are designed in such a way that only a registered member can deal directly with the platform. From the Sharīʿah perspective, the absence of a wak alah agreement would trigger the issue of unauthorised disposal (taṣarruf fu Á dūlī) in which the bank acts on behalf of the customer to sell the commodity to the platform without authorisation. In Islamic jurisprudence, there are two diametrically opposing views pertaining to the legitimacy of taṣarruf fu Á dūlī. The Á Hanafīs and M alikīs are of the view that the status of contract entered into by a fu Á dūlī is suspended (mawqūf) contingent upon the consent of the rightful owner (Al-Samarqandī, 1994). The Sh afiʿīs and Á Hanbalīs, on the other hand, consider taṣarruf fu Á dūlī null and void (Al-Dasūqī, 1980). AAOIFI (2010) in its Shariʿah Standard no. 23 resolves that taṣarruf fu Á dūlī is a suspended subject to ratification by the rightful owner.
The fifth SNC issue based on the degree of its frequency is the excess of taʿwī Á d over the actual cost (with a weight of 1.33). The SAC-BNM (2010), in its 101th meeting, resolved that taʿwī Á d can be charged on late payment of financial obligations resulting from exchange contracts and qar Á d (loan). IFIs may recognise taʿwī Á d as income on the basis that it is charged as compensation for actual loss suffered by the institution. In 2012, BNM issued the "Guidelines on Late Payment Charges for Islamic Banking Institutions" to facilitate the industry in calculating the amount of taʿwī Á d. The guideline states that "The actual loss to be compensated from any default payment from the date of payment until the maturity date shall not be more than 1% per annum" (BNM, 2012, p. 4). Therefore, any excess over the actual cost charged to customers is illegitimate and requires purification.
The delivery restriction contributes the sixth most potential SNC issue in tawarruq financing (with a weight of 1.27). A Sharīʿah contract is supposed to be free from any invalid condition which may impede the validity and effectiveness of a contract. Nevertheless, there is a possible instance where the tawarruq legal documentation might be embedded with a clause that the customer as a buyer at a stage of mur aba Á hah is restricted from taking delivery of the commodity. In Islamic law of contract, a sale contract is legislated mainly to affect the transfer of ownership of an asset from the seller to the buyer (Al-Nawawī, 1990). According to the Á Hanafī School, it is necessary for the seller to give the buyer full access to the object of sale without any hindrance so that the buyer can have full possession of the object (takhliyah wa tamkīn) (Al-K as anī, 1986). The policy document on tawarruq states that "The purchaser in each sale and purchase contract in a tawarruq shall have the right to take delivery of the asset" (BNM, 2015, p. 11).
Absence of a new contract in the renewal of the tawarruq facility constitutes the seventh most frequent SNC event in tawarruq financing. In Islam, if the debtor is in difficulty, the creditor has to grant him a reasonable period of extension. The common mechanism used by IBs for this purpose is rescheduling or restructuring. Rescheduling is an adjustment of financing payment term without significantly changing the principal terms and conditions. This is done by simply lengthening the financing tenure and revision of the monthly instalment (Mohamad, 2014). Restructuring is the modification of the principal terms and conditions of contract, which includes changes in types or structures or change in its terms (Mohamad, 2014). On this basis, restructuring normally involves a new facility by terminating the earlier facility to justify the new price and additional cost. The increase in price for restructuring without a new contract execution to justify the profit triggers the issue of rib a al-j ahiliyyah. Rib a al-j ahiliyyah refers to an increase in the debt principal because of late payment or an increase imposed on the debtor as a result of extension of credit. In view of this, the SAC-BNM on 26 June 2016 resolved the permissibility of restructuring provided that any change in price to the first facility is reflected in a new contract to avoid the issue of rib a and uncertainty.
The subsequent SNC issue based on its frequency is the presence of SNC purpose. As a business entity established within the ambit of Sharīʿah, IBs have to ensure that their products and services are for Sharīʿah-compliant purposes. Nevertheless, the survey by the authors revealed that there are instances where customers use the financing facility for SNC purposes. This is despite the fact that the prevailing market practice puts a standard clause in the legal document that requires customers to use the financing facility for Sharīʿahcompliant purposes only. The SAC-BNM in its 58th meeting dated 27 April 2006 resolved that IFIs are prohibited from granting financing to companies, bodies or individuals whose activities explicitly involve non-compliant elements such as gambling, liquor industry and brothels (BNM, 2010).
SNC commodity constitutes the second-to-last issue based on the level of its frequency. It is worth noting that this issue is unlikely to arise in the commodity mur aba Á hah platform available in Malaysia. It might be possible if the bank subscribes to international commodity mur aba Á hah platforms. Al-Qaradaghī (2009) revealed that he came across one tawarruq transaction using the international commodity market in which the underlying commodity was actually defective aluminium from Russia that had been in storage for more than 10 years. The commodity is used because it cannot be sold in the market. The policy document on tawarruq states that the asset to be traded in the tawarruq arrangement has to be an asset recognised by the Sharīʿah as valuable, identifiable and deliverable (BNM, 2015).
The last potential SNC issue in the tawarruq financing is the use of SNC collateral. From the Sharīʿah perspective, the requirements of collateral share the same requirements as subject matter in a sale contract: the subject matter should be in existence, be valuable and be recognised by the Sharīʿah. The policy document on tawarruq states that the collateral (marhūn) to secure debt in a sale and purchase contract in the tawarruq arrangement shall be a Sharīʿah-compliant asset (BNM, 2015). Figure 5 draws a list of potential SNC events in tawarruq financing based on their frequency.

Treatment of Sharīʿah non-compliant events in tawarruq financing
On 15 March 2013, BNM issued a circular on SNC reporting which detailed out the regulatory requirements for IBs to submit a report to BNM on any actual and potential SNC events, as well as their rectification plan approved by their respective board. The new Sharīʿah Governance Policy Document issued on 20 September 2019 also mandates senior Practice of tawarruq financing in Malaysia management of IFIs to report to the board and Sharīʿah committee (SC) on any potential and actual SNC event in a timely manner.
In particular, the BNM circular on SNC reporting requires banks to submit the report on SNC events to BNM within 14 days from the realisation of the fact and its rectification plan within 30 days (BNM, 2013).
In this regard, the survey discovered that any SNC finding is tabled and deliberated during the SC meeting. The respective SC will confirm whether the issue is an actual SNC or not, and if it is, present its rectification plan. If the SC decision on the finding is pending, it will become a potential SNC event for reporting to BNM within 30 days. The bank will then notify BNM of the decision made by the SC on any Sharīʿah non-compliance issue based on the timeline given. Nonetheless, the survey revealed that there are instances where the respective Sharīʿah department rectifies the finding on the SNC matter immediately before the SC's deliberation.
Despite the BNM policy that a report is to be submitted to BNM on any SNC finding, potential or actual, the fact remains that not all IBs are adhering to such requirement. Based on supplementary interviews with some respondents during the survey, some of them are reluctant to do so as it may tarnish the reputation and image of IBs. They also raised concerns about the administrative action the BNM may take for the reported events. Under Islamic Financial Services Act (IFSA) (2013), BNM may enforce financial liability and/or criminal proceeding towards IFIs for any breach or failure to comply with the Sharīʿah principles. Section 28(1) of IFSA (2013, p. 60) vividly states: Any person who contravenes subsection (1) or (3) commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both. The survey also found that IBs adopt different approaches and treatments in dealing with SNC events in tawarruq financing. Some incidents involve re-execution of the contract or a rectification process. Some even require IBs to terminate the facility with an immediate effect. Other SNC incidents oblige the bank to notify the customer on the corrective measure or to change the underlying contract. There are also instances where the respective SCs do not deem specific events as a SNC issue. In fact, the same incident may have different treatments and approaches in different banks as it all depends on the SC's decision. This is true as the regulator does not provide the industry with a dedicated guideline and framework to deal with SNC events, particularly for tawarruq transactions. There are also different treatments in regard to the income resulting from SNC events in tawarruq financing. Some incidents require the bank to refund the income to customers or to channel it to charity. There are also incidents which permit the bank to recognise the income as profit after necessary rectification or re-execution.
The survey further revealed that the approach used in dealing with SNC issues and the income derived therefrom follows the direction of the respective SCs. In particular, when the study asked the respondents on the treatment of non-Á hal al (non-permissible) income, in particular, channelling the income to charity, it was found that most of the IBs (40%) in the survey rely heavily upon the direction of their respective SCs. Some IBs (23%) consider the difficulty in refunding the tainted income to customers as a basis of the treatment while others (10%) believe that reputational risk is the key consideration in dealing with non-Á hal al income. Among the interesting findings in the survey was the influence of board of directors/management as the judgement for the treatment of non-Á hal al income (7%). The survey found that most of the non-Á hal al income is channelled to the poor, underserved, daʿwah (Islamic propagation) and school-related activities. Some banks also allocate non-Á hal al income for charitable food, scholarships and building of mosques. A few banks use the non-Á hal al income for the bank staff's welfare.

Conclusion
The study presented the survey findings on the application of tawaruq financing in IBs in Malaysia and its common forms of potential SNC incidents which may emerge in the use of the tawarruq concept in financing products. It is not, however, an exhaustive list. Other potential events may not be captured in the survey. The survey found that tawarruq has become a new phenomenon in the development of the Islamic banking industry in Malaysia as the industry has recently started to actively use the tawarruq concept as an alternative to products based on bayʿ al-ʿīnah. This is because of strict regulatory and Sharīʿah requirements for the application of bayʿ al-ʿīnah in IBs in Malaysia.
The study revealed that most of the SNC events in financing products originated from sale-based contracts. In particular, tawarruq financing represented the second largest SNC event after bayʿ al-inah/BBA. The survey also suggested that improper sequence is the most frequent SNC event in tawarruq financing. This finding calls for IBs to institute more prudent and clear standard operational procedures for tawarruqbased products.
The study further discovered that IBs adopt different approaches in dealing with SNC events and the income derived therefrom. Most IBs do not have a clear guideline and specific methodology to deal with SNC events. Any SNC finding relies mainly on the direction and decision of their respective SCs. Finally, the survey noted the influence of board of directors/ Practice of tawarruq financing in Malaysia management on certain Sharīʿah decisions, particularly about the treatment of non-Á hal al income.
The research suggests the active role of the regulator to mitigate the issue of SNC events in the tawarruq practice. Specifically, the study proposes that BNM and SCs establish controls and parameters in the application of the tawarruq concept in IBs in Malaysia. The restriction on the use of the tawarruq concept is important as organised tawarruq is not internationally acceptable. The overuse of tawarruq may impede the internationalisation of Islamic finance as aspired by Malaysia.
The present study has attempted to provide an empirical finding on the application of tawarruq in Malaysia with respect to potential SNC issues. Nevertheless, the study acknowledges the following limitations that provide more room for future research: The study focuses on SNC phenomena in tawarruq financing. Further research may explore SNC events in other types of contracts or products.
The study investigates SNC issues in the Islamic banking sector in Malaysia. Future research may explore the SNC phenomena in different sectors and other jurisdictions. Further research may examine the implication of failure to comply with the BNM Sharīʿah Standards on the Sharīʿah-compliant status of the transaction. The study admits that the list of identified events is not exhaustive. Other potential incidents may not be captured in the survey findings. Some of them might not be relevant to the current development. Future research may use different research methodology and approaches to arrive at more objective and comprehensive findings.
Notes 1. Sedania as-SIDQ tm is a Sharīʿah-compliant product offering automated Islamic banking tawarruq platform using telco-airtimes. LME is the world-centre for industrial metals trading, serving as the global reference price. This platform is used to facilitate derivatives, such as futures and options, and tawarruq transactions using metal/aluminum. AbleAce is a tawarruq platform and the first Malaysian local company using palm oil and its related commodities as the underlying tawarruq assets.
2. This ruling is also applicable to another two identified issues, namely, improper disclosure of underlying contract and insufficient information on asset specification.