86 AN INTRODUCTION TO ISLAMIC FINANCE
Bai’ bithamin ajil (BBA): In Malaysia and other Southeast Asian
countries, a form of murabahah in which payment is made in installments
sometime after the delivery of goods is referred to as bai’ bithamin ajil. It
is similar to a murahabah in that the fi nancier undertakes to buy the asset
required for resale to the client at a higher price, as agreed to by the parties
involved. However, it differs in that it is used for long - term fi nancing and
the seller is not required to disclose the profi t margin that is included in the
selling price.
Tawarruq: Also known as “reverse mudarabah,” the tawarruq is a
mechanism for borrowing cash by undertaking two separate transactions.
In a typical tawarruq transaction, a person buys a commodity or goods from
the seller on credit, on the understanding that the price will be paid, either
in installments or in full, in the future. Once the commodity is purchased, it
is immediately sold to a third party at a spot price lower than the purchase
price. In this way, a loophole is created to borrow money by using two
legitimate Shari’ah transactions. In fi nancial terms, this mechanism amounts
to the creation of a zero - coupon loan, where the cost of borrowing money
(interest rate) is at the same rate which the original seller might be charging
to defer the payment, excluding any transaction costs.
The practice of tawarruq is a recent development in the Middle East mar-
ket, especially in Saudi Arabia, but it has not received a wide acceptance and
there is considerable resistance to the practice. Technically, from the Shari’ah’s
point of view, the practice is legitimate, but several scholars have condemned
its widespread practice on the grounds that it opens the door to borrowing
money on the basis of riba and without creating any real economic activity,
as the same commodity or product might be sold to several borrowers. The
practice is disliked by scholars, particularly where the borrower of the money
sells the commodity or goods back to the original seller.
Musharakah (partnership)
The partnership is a pre - Islamic contract that was widely accepted and pro-
moted by the Prophet (pbuh). The musharakah — a hybrid of the shirakah
(partnership) and the mudarabah — is a combination of investment and
management.^5 In the absence of debt security, the Shari’ah promotes the
musharakah form of fi nancing and is fairly comprehensive in defi ning different
types of partnerships, in identifying rights and obligations of the partners,
and in stipulating the rules governing the sharing of profi ts and losses.
A musharakah or shirakah can be defi ned as a form of partnership where
two or more people combine either their capital or labor to share the prof-
its and losses, and where they have similar rights and liabilities. A special
case of partnership of capital and labor is known as a mudarabah, which
is the cornerstone of Islamic fi nancial intermediation. In general, the term
musharakah is commonly used to refer to partnerships, but there are further
sub - classifi cations of partnerships with respect to the levels of the partners’
authority and obligations, and the type of their contributions for example,