Sale-based contracts

Tawarruq

Buying an asset on deferred payment and selling it to a third party for cash, to raise liquidity. Its organised form is contested.

Tawarruq consists of two sales: an asset is bought on deferred payment and then sold to a third party for cash, so that the buyer obtains liquidity. Bank Negara Malaysia regulates tawarruq in a dedicated policy document with requirements on the sequence of the sales and on ownership and possession in each leg. The International Islamic Fiqh Academy, in a resolution of its nineteenth session, accepted classical tawarruq but held organised and reverse tawarruq impermissible, so its use depends on the jurisdiction and on the institution's Shariah board.

Sources

This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.

Related terms

Commodity murabahaInterbank and treasury deals in which commodities are bought and sold on deferred payment to place or raise short-term funds.MurabahaA sale at cost plus an agreed, disclosed profit; the seller must own the asset first. Payment is often deferred in instalments.Tawarruq-based term depositA fixed-return term placement in which the customer sells a commodity to the bank on deferred payment.MusawamahA negotiated sale in which the seller does not disclose its cost; the price is simply agreed between the parties.