Tawarruq (Commodity murabaha for cash)

In plain words

Imagine you need cash. You buy a friend’s car for 112, paid over four years, and that afternoon sell it to a dealer for 100 in cash. Nobody lent you money, yet you have 100 today and a fixed debt of 112.

That is tawarruq. In Islamic banking the car becomes a lot of metal in a warehouse, and the friend is the bank. Islamic law prohibits riba, any fixed increase on a loan of money, so tawarruq replaces the loan with two real sales. That is why it is both widely used and widely argued about.

The sale from bank to customer is a murabaha, a sale at cost plus a disclosed profit. With metals it is called commodity murabaha. Tawarruq is the whole loop: commodity murabaha plus the resale for cash.

How it works

How tawarruq works

Two sales of the same commodity, in a strict order, to two different buyers.

1. 1

   The bank buys a commodity

   It pays a broker for an identified lot, such as copper in a warehouse, and owns it.

2. 2

   The bank sells it to you on credit

   At cost plus a disclosed profit, in instalments. The fixed price becomes your debt; the metal is yours.

3. 3

   You sell it to someone else

   To a different broker for cash at the market price, yourself or through an agent. Never back to the bank.

4. 4

   You get cash and repay the price

   The cash reaches your account. You pay the fixed price to the bank over the agreed term.

Animated diagram

The four-party commodity loop behind a SAR 100,000 personal finance

Swipe sideways to see the whole diagram.

1. The bank pays Broker A SAR 100,000 for an identified lot of metal and owns it.
2. The bank sells the metal to the customer for SAR 112,728 on deferred terms, fixed for the whole term. This is the commodity murabaha.
3. The customer appoints the bank as agent (wakala) to sell. This makes the loop “organised” and is the most debated step.
4. As agent, the bank sells the metal to Broker B, a different party, at the spot price of SAR 100,000.
5. Broker B pays. After a SAR 100 fee, SAR 99,900 reaches the customer’s account.
6. The customer repays SAR 2,349 a month for four years. The debt cannot grow, even if payments are late.

The word and where it comes from

In Arabic tawarruq is written تورق. It comes from the root w-r-q, which gives ورق: as wariq, minted silver coins, and as waraq, leaves or paper. Tawarruq literally means seeking silver, that is, seeking cash; the customer is the mustawriq, who wants cash, not goods.

The term comes from the Hanbali school. Most classical jurists allowed buying on credit to sell for cash if the goods did not return to the seller; some, Ibn Taymiyya among them, are reported to have disliked it. Banks turned an occasional private practice into a standard product, and the modern debate began.

How it differs from a conventional loan

On a bank statement, tawarruq and a personal loan look almost identical. The legal form differs, and it decides what the bank may do later.

An overdraft, with interest accruing daily on whatever you use, cannot be copied directly: every amount drawn needs its own commodity trade. Islamic credit lines set a limit and trade per drawdown.

Commodity murabaha: the engine underneath

Commodity murabaha is a murabaha sale of commodities, usually base metals such as copper or aluminium in warehouses, or crude palm oil in Malaysia. The seller discloses cost and profit, and the buyer pays later. It is the first sale inside every tawarruq, and the workhorse of Islamic treasuries.

Interbank placements. An Islamic bank with surplus cash buys metal and sells it to another bank at cost plus profit for a week or three months; that bank sells the metal for cash. Economically a deposit; legally a sale. A London Islamic bank placing GBP 10 million for 30 days at 4.5% earns GBP 36,986 on a 365-day basis. AAOIFI says such liquidity should not go to a conventional bank that will use it for interest-based lending. ²

Why metals. They are standardised, identified by warehouse documents and easy to trade in size. Gold, silver and currencies are excluded because deferred exchange of them raises riba issues. ²

What makes it valid

AAOIFI, the Bahrain-based standard setter, covers tawarruq in Sharia Standard No. 30, “Monetization (Tawarruq)”. It allows it as a response to need, not a normal mode of financing, with controls on every leg. ²

The sixth control is where AAOIFI and practice part ways: many Gulf and Malaysian products make the bank the selling agent by default. Malaysia allows this “dual agency” with clearly separated roles, and in 2019 its Shariah Advisory Council allowed tawarruq through straight-through processing, subject to correct contract sequence with clear evidence, identifiable assets, documented ownership and the customer’s right to take delivery. ³

Products fail when the contract order breaks, when one lot of metal is used twice, or when the broker never held the metal. In Dubai, the DFSA acted against staff of a broker’s commodity murabaha desk that recycled old warrant numbers instead of supplying current title to metal. ⁴

Why scholars disagree

Everyone agrees on the form. The dispute is substance: if the bank arranges every leg and the customer never wants the metal, is this still trade, or a loan with extra paperwork?

• The OIC International Islamic Fiqh Academy ruled in Sharjah in April 2009 (Resolution 179) that classic tawarruq is permitted, but organised and reverse tawarruq are not, because collusion between the parties produces cash now for a larger debt later. It urged support for qard hasan instead. ¹
• The Islamic Fiqh Council of the Muslim World League, in Makkah, accepted classic tawarruq in 1998 and rejected the organised form in 2003.
• AAOIFI allows it under the controls above for need, and lets institutions use it for their own funding only in a real liquidity shortage. ²
• Bank Sharia boards in Saudi Arabia, the UAE and Malaysia approve organised tawarruq, citing need and the real transfer of title.

Academy resolutions are not law. The regulator and the bank’s own Sharia supervisory board decide what is offered.

Illustration

From a benevolent loan to riba: where tawarruq sits

Swipe sideways to see the whole diagram.

Classic, organised and reverse tawarruq

Reverse tawarruq for deposits

Reverse tawarruq, often sold as a commodity murabaha deposit, runs the loop the other way. The customer’s cash buys metal through the bank as agent; the bank buys that metal from the customer at cost plus profit, payable at maturity, and sells it on. The customer holds a fixed claim: a fixed-return term deposit without interest. It is common in the Gulf and Malaysia, though AAOIFI wants it limited; many banks build savings on mudaraba or wakala contracts instead, with no fixed return.

Bai al-inah: the sale and buy-back

Bai al-inah is tawarruq without the third party. The bank sells you an asset for 112 on credit and buys it straight back for 100 in cash. The asset returns home; you hold 100 and owe 112.

AAOIFI requires the tawarruq commodity to go to a third party precisely to avoid inah, which it calls strictly prohibited. ² Most classical schools rejected inah, citing hadith that condemn it, as do most modern scholars. A minority Shafi’i view judged each sale on its own.

That minority view shaped Malaysia, where banks long used bai al-inah for personal financing and credit cards with the approval of the national Shariah Advisory Council. In the early 2010s Bank Negara Malaysia tightened the requirements for inah, and banks moved most personal financing to tawarruq.

Tawarruq next to the other Islamic contracts

A common Sharia board rule: if the customer needs an asset, finance the asset; use tawarruq only for a genuine cash need.

Across the Islamic world and beyond

Saudi Arabia

Saudi banks offer organised tawarruq widely, and it is the usual structure for salary-linked personal finance. Senior Saudi scholars in the Hanbali tradition have long accepted classic tawarruq; each bank’s Sharia committee approves the organised version, under SAMA oversight and its responsible lending limits.

United Arab Emirates

UAE Islamic banks use tawarruq for personal finance, corporate lines and term deposits. The Higher Sharia Authority at the Central Bank of the UAE has made AAOIFI’s Sharia standards binding on banks’ Sharia committees, which brings Standard No. 30 into local practice. A Dubai trading company drawing AED 500,000 for 90 days on a tawarruq working capital line at 7% pays AED 8,630 of profit on a 365-day basis, fixed when the trade is done.

Malaysia

Bank Negara Malaysia has a dedicated tawarruq policy, and its Shariah Advisory Council rulings bind Islamic banks. In August 2009 Bursa Malaysia launched Bursa Suq Al-Sila’, a commodity platform for murabaha and tawarruq using crude palm oil. A Kuala Lumpur saver who places MYR 50,000 for 12 months at 3.5% in a reverse tawarruq deposit receives a fixed MYR 51,750 at maturity.

United Kingdom and Europe

Much of the metal behind Gulf tawarruq is traded through London-based brokers. UK Islamic banks and Islamic windows use commodity murabaha for treasury and some deposit and finance products, and UK tax law treats “purchase and resale” and “deposit arrangements” in line with their interest-based equivalents. ⁵

Building a tawarruq product

For a founder, tawarruq is a sequence of events that must happen in order and leave evidence behind one button.

Design the failures too: a missing confirmation, a trade to unwind, a request for delivery. Malaysia’s 2019 ruling is a useful checklist anywhere. ³ For more on why these controls belong in the first version, read ignoring Sharia compliance can block your entire product.

Example: Faisal’s personal finance in Riyadh

Common misconceptions

FAQ