Reputational, Credit, Legal, and Compliance Risks in Tawarruq Transactions: Case

All other previous researches in the subject Tawarruq focus on Fiqh issues only or just review the different views on Tawarruq, or describe the types of Tawarruq as practiced in Islamic financial institutions (IFIs). Risk issues related to Tawarruq operations constitute an important gap that needs to be filled. The present research visits this complicated area and pinpoints four important types of Tawarruq-related risks; reputation, credit, legal, and compliance risks. The importance of the research lies in the following: First: no specific previous researches have been conducted in this very specific area; Second: it analyzes these types of Tawarruq-related risks in the light of Qatar IFIs as a quite matured real experiment, and also review the cases of IICG versus SG, Arcapita investment bank bankruptcy when it discusses the legal risk of Tawarruq; Third: it constitutes the first research to overview Tawarruq as practiced in Qatar IFIs from risk point of view. The research adds the following to the existing stock of knowledge: 1- Even though international Murabahah based-Tawarruq is commonly practiced in most Muslim countries, in Qatar IFIs other types of Tawarruq structures are widely practiced such as; Tawarruq through cars, Tawarruq through Jewelry & Precious Stones in local market and Tawarruq through local stocks. The research reviews, describes them carefully, and shows how they include degrees of collusion. 2- It gives some statistical information about the size of Tawarruq operations in Qatar compared to the total credit and investment portfolios of the IFIs. 3- Most of previous literature in Tawarruq has revealed that IFIs use Tawarruq mainly to deliver cash money to customers which leads to increase money supply, consumption, and spending on luxuries. But this research looks at the problem from credit risk perspective since the main purpose of finance, as one of the main prerequisite elements of making secured credit, is not known. 4- IFIs in most Muslims countries work under a mixed legal environment where their Islamic contracts have to comply with Shari'ah principles as well as with common or civil laws and regulations. In countries that have mixed legal systems like Malaysia and in countries that do not have Islamic laws like UK the case will be very complicated. In the light of some precedent disputes related to some Tawarruq transactions in UK where Shari'ah law is not recognized, this research try to prove that such complicated situation is quite serious might expose IFIs to legal risks and financial losses. 5- The research discusses compliance risk from three different angles as follows: 5-1 Since in Tawarruq Islamic bank is quite ignorant of the end purpose of finance and the customer can use the money the way he/she likes regardless of morality and ethical screen, the nature of Tawarruq as a cash-based financing operation can makes the whole industry exposed to exploitation by money launderers, criminal and terrorism financiers, who may use a complexity of ways to hide both the sources and destinations of money. 5-2 There is also the compliance risk which may result in losing the expected profit and giving it to charity if certain Tawarruq transactions ruled non-Shari'ah compliant. 5-3 Since some central banks regulate Tawarruq transactions, such as, Qatar central bank (QCB) which has issued special regulations on Tawarruq transactions, IFIs might be exposed to compliance risk. These types of Tawarruq-related compliance risks have not been recognized and examined in all previous researches. It also becomes additional knowledge to all stakeholders.