Tawarruq is a financial instrument in which a buyer purchases a commodity from a seller on a deferred payment basis, and the buyer sells the same commodity to a third party on a spot payment basis (meaning that payment is made on the spot). The buyer basically borrows the cash needed to make the initial purchase.

Later, when he secures the cash from the second transaction, the buyer pays the original seller the installment or lump sum payment he owes (which is cost plus markup, or murabaha).

Because the buyer has a contract for a murabaha transaction, and later the same transaction is reversed, this scenario is called a reverse murabaha. Both transactions involved must be sharia-compliant.

Tawarruq is a somewhat controversial product. Because the intention of the commodity purchases isn’t for the buyer’s use or ownership, certain scholars believe that the transactions aren’t sharia-compliant. Their argument is that the absence of any real economic activities creates interest, which is prohibited in sharia.

Scholars who accept this contract as valid note that it is based on two valid legal contracts, murabaha and sales. Despite the controversy, however, many Islamic banks, including the United Arab Bank, QNB Al Islamic, Standard Chartered of United Arab Emirates, and Bank Muaamalat of Malaysia, use tawarruq products.

Generally, commodities such as gold, silver, barley, salt, wheat, and dates aren’t allowed in tawarruq. However, the London Metal Exchange (LME) has been used by many Islamic banks as a platform for tawarruq because metal is not part of its commodities transactions.

How does tawarruq work in matters of personal finance? First, the customer purchases a commodity (other than a medium of exchange) from the bank on a cost plus profit basis. Then the customer sells that commodity to a third party. (In reality, the customer simply authorizes the bank to sell the commodity to the third party on his behalf.)

The proceeds from the sale are credited to the customer’s account, and the customer pays back the bank (the cost plus profit).


(Note that the illustration doesn’t indicate that the bank generally sells the commodity on behalf of the customer.)