Tawarruq
Tawarruq is a structure in which a person buys an asset on deferred payment terms and immediately sells it to a third party for cash, ending up with cash now and a debt payable later. It is widely used and heavily debated.
Also called: commodity murabaha · monetization · organized tawarruq · reverse murabaha
In its classical form tawarruq is a matter of individual need: someone short of cash buys goods on credit and sells them in the market. Banks use an organised version. The bank buys a commodity — often a metal traded through a platform such as Bursa Suq Al-Sila' in Malaysia or a London metals broker — sells it to the customer on deferred terms at cost plus profit, and then, as the customer's agent, sells it on to a third party for cash, which is credited to the customer.
The result is a personal-finance or liquidity product that delivers cash in exchange for a larger deferred debt, which is why it is so useful and so contested. The International Islamic Fiqh Academy ruled in 2009 that organised and reverse tawarruq are impermissible. Other bodies, including AAOIFI, accept tawarruq subject to conditions intended to keep each sale genuine, and it remains in heavy use in the Gulf and Malaysia, including in interbank liquidity management.
Reverse tawarruq, sometimes called reverse murabaha, runs the same mechanics with the customer as the cash provider, and is how many Islamic banks take term deposits.
In practice
Tawarruq is not universally accepted. Whether a given programme is acceptable depends on the authority the institution follows and on whether the commodity is genuinely bought, held and sold, rather than circulated on paper.
Example
An employee needs US$20,000 in cash. The bank buys US$20,000 of metal, sells it to her for US$21,600 payable over 12 months, and at her request sells the metal to a broker for US$20,000, which it pays into her account. She owes US$21,600.
Commonly confused with
| Term | How it differs |
|---|---|
| Bay' al-'inah | In bay' al-'inah the asset is sold back to the original seller. In tawarruq it is sold to an unrelated third party, which is the feature its supporters rely on to distinguish it. |
See also
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
- Bay' al-'InahBay' al-'inah is a sale and buy-back: a person sells an asset on deferred payment terms and immediately buys it back from the same buyer for a lower cash price, leaving the buyer with cash now and a larger debt later.
- RibaRiba is the prohibited increase at the centre of Islamic finance: an unjustified excess in a loan or in certain exchanges. It is broader than the English word "interest" and is not limited to excessive rates.
- QabdQabd is possession or control of an asset. Islamic law uses it to decide when a sale is complete, when an asset may be resold, and whether a currency or gold exchange has been settled on the spot as required.