Tawarruq

Tawarruq (Arabic, from wariq, silver coin) is a transaction in which a person who needs cash buys an asset on deferred-payment terms and then sells it immediately to a third party, other than the original seller, for a lower spot cash price. The buyer ends up with cash in hand and a debt payable later, so the combined effect is economically similar to a loan. Tawarruq is one of the most widely used structures in modern Islamic banking, and also one of the most debated.

Tawarruq is sometimes called "reverse murabaha" or, in the interbank market, "commodity murabaha". The first sale in the structure is usually a murabaha, a cost-plus sale with a disclosed markup.

Classical tawarruq involved a person buying goods on credit in the market and selling them to someone else for cash. Banks developed an "organized" version in which the bank arranges every step:

1. The bank buys a commodity, typically a base metal or palm oil, from a broker for spot cash.
2. The bank sells the commodity to the customer on a murabaha basis at cost plus a markup, payable in installments or at a future date.
3. The customer, usually by appointing the bank as its agent (wakalah), sells the commodity to a second broker for spot cash.
4. The cash is credited to the customer's account, and the customer repays the deferred murabaha price over time.

Commodity trading platforms support these transactions. Metals traded through London brokers have long been used, and in Malaysia Bursa Malaysia operates a Sharia-compliant commodity platform, Bursa Suq Al-Sila', for the purpose.

Example

A customer needs $100,000 for one year. The bank buys $100,000 of copper and sells it to the customer for $106,000, payable in twelve months. Acting as agent, the bank sells the copper for the customer to a broker for $100,000 cash. The customer has $100,000 now and owes the bank $106,000 in a year, an effective cost of 6%.

Tawarruq is used for personal financing, corporate working capital, refinancing and, in reverse form, for Sharia-compliant deposits, where the customer sells to the bank on deferred terms. It is also a key liquidity-management tool, letting Islamic banks place and borrow funds overnight or for short terms when other instruments are scarce. In some markets it supports sukuk structures and Islamic hedging products.

Scholars generally accept classical tawarruq, where a person in genuine need buys and sells goods independently. Organized tawarruq is more controversial. In 2009 the International Islamic Fiqh Academy of the Organisation of Islamic Cooperation resolved that organized and reversed tawarruq are not permissible, on the grounds that the arranged sequence of sales is a ruse (hilah) to obtain cash for more cash, which amounts to riba. The commodity step exists because Sharia allows money to be exchanged for money only hand to hand, as in the spot trades of a dealer in foreign exchange, and, where the same currency is involved, only in equal amounts, so a direct swap of cash now for more cash later is ruled out. Critics also note that the commodity is often never delivered or inspected, raising doubts about qabd, the possession required for a valid sale.

Other scholars and many Sharia supervisory boards permit organized tawarruq where real commodities are identified, ownership and risk pass at each stage, and the customer is free to take delivery rather than appoint the bank to sell. AAOIFI has a Sharia standard on tawarruq that sets such conditions and discourages its use as a general replacement for other contracts.

Tawarruq is often compared with bay' al-'inah, in which the customer sells the asset back to the same party that sold it on credit. Because 'inah involves only two parties and returns the asset to its origin, most scholars outside Malaysia reject it as a disguised interest-bearing loan. Tawarruq adds a third party, which supporters see as the decisive difference and critics see as a formality. Both structures are frequently cited in discussions of Sharia non-compliance risk and in broader debates within fiqh al-mu'amalat about whether Islamic finance should favor sale-based debt or profit-and-loss sharing contracts such as mudarabah and musharakah.