Using Tawarruq, an Islamic contract, to build high-tech “local” manufacturing industries

Tawarruq is a debt instrument offered in Islamic finance in which a financial institution sells a commodity to a consumer on a deferred payment at cost plus profit, and the customer then sells the commodity on a spot basis to a third party for cash.

Tawarruq was often linked to cases of individuals with dire need for cash where Shari´ah-compliant alternatives are lacking. Hence, some of the Shari´ah scholars and Islamic economists see it as a debt product that was more harmful than beneficial for the economy.

While Tawarruq’s permissibility from the Shari´ah point of view was not in dispute, it was the advisability and scope of its application that must be examined.

And, this article suggests an application of this only debt-like instrument in Islamic finance for building high-tech manufacturing organizations and thereby, create real wealth locally.

The suggested application is in the field of Automobile manufacturing industry by emulating the success of an innovative business model of Local Motors supported by their manufacturing process innovations that made local manufacturing possible, in addition to co-creating some of the components with the local communities.

In this application, Tawarruq is used to pay for the automobiles being assembled locally by a team of trained Engineers and Technicians who collectively own a small manufacturing plant (less than 5,000 Sq Feet) with modern equipment to assemble a car (refer to micro-manufacturing concept of Arizona’s Local Motors). Post-assembly, the team spot sells the assembled automobile in retail as per applicable business regulations and thereby, increases the book value of their business. In other words, Tawarruq, though regarded as a debt instrument, is actually applied to create real wealth in the local communities.

Using an example of the low-cost passenger car, Tata Nano, which is being manufactured by one of the top automobile manufacturers in India, Tata Motors, the application of Tawarruq could be explained with the following sketch:

Tawarruq

Another application of Tawarruq could be in the manufacturing of Air-conditioners.