Financing Products


Some forms of financial transactions continue to raise controversy among people because of the divergence of jurisprudential views. Tawarruq is one of the most interesting transactions, especially the so-called organized tawarruq. It is one of the financial transactions that is widely known in Islamic banking transactions, despite the controversy surrounding this financing formula.

1. Tawarruq Definition

Tawarruq (Monetization / التورق) refers to the process of purchasing a commodity for a deferred price through Musawama (Bargaining / المساومة) or Murabaha (Markup), and selling it to a third party for cash or a price on the spot.

2. Princimples Of Tawarruq :

Tawarruq Contracting Parties :

The parties who are involved in a Tawarruq contract are the seller and the purchaser.

Tawarruq Subject matter :

The subject matter includes the commodity and the selling price. The commodity should be a real and Shariah compliant commodity. It must be owned and in possession of the seller before selling it. It cannot be gold or silver or any type of currency. The commodity must be sold to a party other than the one from whom it was purchased on deferred payment basis.

Conclusion of Tawarruq contract :

A Tawarruq contract can be concluded by means of meeting or exchanging the offer and acceptance in any customary form of modern communication. However, the contract for purchasing the commodity between the purchaser and the seller on deferred payment basis should be independent of the contract of spot sale between the purchaser and the third party.

In addition, neither can the purchaser delegate the seller or its agent to sell, on its behalf a commodity that it has purchased from the same seller, nor must the seller arrange proxy of a third party to sell on behalf of the purchaser, the commodity that the purchaser purchased from the seller. The seller should avoid proxy in selling a Tawarruq commodity, even if proxy is to be arranged with a third party.

Operational Procedure Of Tawarruq :

  1. A customer needs cash and requests the Islamic bank to finance.
  2. Instead of financing in cash, the Islamic bank purchases the commodity from the seller and sells it to the customer through murabaha contract.
  3. After getting the ownership and taking possession of the purchased commodity from the Islamic bank, the customer sells the commodity to a third party purchaser on spot payment basis. The price paid by the third party purchaser on the spot fulfills the need of liquid cash of the customer.
  4. Later the customer pays the deferred price to the Islamic bank pursuant to the agreed upon terms.

Types Of Tawarruq

Based on the ruling of the OIC Fiqh Academy, tawarruq can be categorized into two types :

1. Tawarruq fiqhi (classical tawarruq/ التورق الفقهي):

It is defined as a person (mustawriq / المستورق) buying merchandise at a deferred price in order to sell it at a lower price for cash. Usually, he sells the merchandise to a third party with the aim of obtaining cash.

2. Organized tawarruq (tawarruq munazzam) :

It is when a person (mustawriq) buys merchandise from a local or international market on a deferred price basis. The financier arranges the sale of the commodity either directly or through his agent and forwards the sale proceeds to the customer.

Legitimacy Of Tawarruq

The OIC Fiqh Academy has permitted the classical tawarruq, provided that it complies with the Shariah requirements on sale, and considers the “organized tawarruq”, which is used by banks today to offer financing facility to customers for managing their short-term liquidity, to be impermissible.

There are also a few scholars who have disapproved tawarruq mainly on the aspect of intention. They argue that the intention here is to procure money, which could be tantamount to the sale of money against a different amount of money, while the asset serves only as a medium; an acquisition which is not primarily intended.

In addition, the principle of closing avenues ( سد الذرائع ) is also another important argument cited in support of the illegality of tawarruq. However, a few other scholars from various schools of law appear to have considered Tawarruq to be legally permissible. Scholars who have upheld the permissibility of tawarruq have fundamentally relied on the general connotation of the verse permitting sale while prohibiting usury.

Due to the ambiguity of some aspects of this contract, Tawarruq requires the utmost accuracy in its implementation in accordance with the Shariah rules, as well as caution against some suspicious transactions followed by some Islamic banks to circumvent usury under Islamic names and formulas.

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