Tawarruq meaning

Commodity Murabaha and Tawarruq Murabaha contracts can be structured to fund working capital or acquisitions, including property purchases. When used in this way, the structure is often termed a commodity Murabaha. A related technique, Tawarruq (sometimes called ‘reverse Murabaha’), operates in a very similar manner, and the labels are frequently conflated, yet Shari’ah draws a distinction between them. Commodity Murabaha is required to satisfy the general Murabaha rules and is chiefly concerned with the conduct of the Islamic financial institution (IFI). By contrast, Tawarruq is centred on the Customer: the Mustawriq acquires an asset on deferred terms with the express intention of immediately selling it on for cash to a third party. Scholars of Shari’ah do not all recognise Tawarruq as valid; nonetheless, most consider it allowed where the sale complies with Shari’ah conditions. Meeting working capital needs remains among the most challenging matters in Islamic finance. In the UK, the most straightforward and prevalent route to working capital is still to take an interest-bearing loan from an external...

Several observers point out that, in UK tax, the tension between legal form and economic substance mirrors a similar dynamic within Shari’ah. From a Shari’ah vantage point, substance may likewise prevail. Yet, because the contemporary Islamic finance sector is relatively new, uncertainty over what transactions are permissible and the premium placed on Shari’ah conformity have led market actors to prioritise transactional form. Following recognised templates offers comfort that arrangements documented in that way meet Shari’ah requirements. In practice, adherence to approved forms provides reassurance that the transactions represented by such forms align with Shari’ah. Thus, reliance on long-established mechanisms such as Murabaha can seem cautious. Nonetheless, numerous detractors of Islamic finance single out this fidelity to set structures as a principal flaw. They contend these frameworks have been deployed by equity sponsors and financial firms to replicate conventional interest-based dealings, including loans, thereby sidestepping the substantive character of the transactions those forms are meant to capture. Islamic jurisprudence, moreover, covers the interpretive methodologies through which Islamic Shari’ah is deduced from...