INTERVIEW-Organised, reverse tawarruq need actual asset sales

* Organised, reverse tawarruq lawful if there are asset sales

* Difficulty arises where assets do not exist at time of sale

KUALA LUMPUR, June 17 - Organised and reverse tawarruq do not fall foul of Islamic tenets provided they involve the actual sale and delivery of goods, a respected sharia scholar said, defending a popular contract which has come under fire from a top industry body.

Debate about the structure's permissibility has rocked the industry since late April when the International Council of Fiqh Academy declared it to be "a deception" that seeks to disguise the use of usury.

However, sharia adviser Engku Rabiah Adawiah Engku Ali told Reuters in a telephone interview organised and reverse tawarruq contracts are permissible.

"The fact is more on how it's being done rather than what it is. It is more on whether the asset is available, whether it can be delivered," said Engku Rabiah who advises the central bank of Malaysia, which oversees the world's largest sharia bond market.

"When they do these transactions, it involves commodities and the problem is when the commodities sometimes are not in existence at the time of sale and cannot be delivered to the buyer."

Widely used as a financing and liquidity management tool, tawarruq is an asset sale to a purchaser on deferred payment terms. The purchaser then sells the asset to a third party to get cash.

Organised tawarruq is similar although the transactions are executed through banks. Reverse tawarruq is akin to organised tawarruq although the buyer would be a financial institution seeking liquidity.

These forms of tawarruq have sometimes been criticised as a mere paper trail designed to circumvent Islamic law, with no real prospect of a physical commodity changing hands.

In declaring organised and reverse tawarruq impermissible, the Fiqh Academy had asked Islamic banks to avoid prohibited financial techniques in order to comply with the sharia.

"If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end," it said in a resolution after its recent meeting in Sharjah, the United Arab Emirates.

The academy also suggested encouraging "financial institutions to provide qard hasan (benevolent loans) to needy customers in order to discourage them from relying on tawarruq instead of qard hasan."

Mohammad Akram Laldin, another top religious scholar, had earlier said organised tawarruq should be allowed although the concept needs further study as it focuses on the creation of debt rather than economic activity, which is a key principle of Islamic finance. (Click on [ID:nISLAMIC] for more Islamic finance stories and <ISLAMIC> for a speed guide) (Editing by Kazunori Takada) ((y-sing.liau@thomsonreuters.com; Reuters Messaging: y-sing.liau.reuters.com@reuters.net; +603 2333 8083)) (