Shariah Non-Compliant events in Tawarruq products: A Malaysian bank case

Abstract

The widespread use of Tawarruq in Malaysian Islamic banks has led to extensive discussions among Shariah scholars and industry experts due to potential Shariah non-compliance (SNC) issues. This study investigates SNC events related to Tawarruq-based products offered by a Malaysian Islamic bank. The main research problem focuses on SNC events questioning the Shariah compliance of these products. The study aims to to analyse the Shariah non-compliant event in products related to Tawarruq concept. Using a qualitative research method, data was gathered through interviews with key experts and a review of secondary sources. Findings show that common SNC events include incorrect sequencing of contracts, incomplete documentation, and issues with the physical presence of commodities. The study highlights the role of regulatory bodies like Bank Negara Malaysia in ensuring compliance through guidelines, policies, and audits. Recommendations include automating processes, implementing detailed Standard Operating Procedures (SOPs), and exploring alternative Shariah-compliant contracts to reduce risks. Insights from this study contribute to developing a robust Shariah compliance framework for Tawarruq practices in Islamic banking, providing valuable guidance for industry players and regulators.