In brief
Tawarruq means buying an asset on credit and then reselling it for cash to a third party, at a lower price, in order to obtain money. In its classic form, most scholars accept it. “Organised” tawarruq, in which the bank arranges the purchase and the resale, is prohibited by the International Islamic Fiqh Academy as a stratagem leading to riba (resolution 179, 2009).
Classic tawarruq
A person who needs money buys goods payable later, then resells them for cash to someone other than the seller. They obtain money straight away and pay the price on the due date. Most jurists accepted it, provided that the sales are genuine and the goods do not go back to the original seller (which would be an ʿina sale, which is prohibited).
Organised tawarruq
In banks, everything is arranged: the client “buys” metals on a market, the bank resells them on the client’s behalf for cash the same day, and the money arrives in the client’s account. The International Islamic Fiqh Academy ruled that organised tawarruq and reverse tawarruq (in which it is the bank that obtains liquidity from the client) are not permitted, because they rest on an understanding, explicit or tacit, to obtain money now in return for more later, which is riba (resolution 179 (5/19), Sharjah, April 2009). The Islamic Fiqh Council of the Muslim World League had already prohibited it in 2003.
The Academy recommends that Islamic banks prefer genuine investment contracts instead, and set up interest-free loan funds for people in need.
What this means for you
Many “personal finance” products and cards from Islamic banks are based on organised tawarruq. Some Shariah boards still accept it on the grounds of need; others do not. If you are looking for cash rather than an asset, ask which contract the offer is based on.
Frequently asked questions
Is tawarruq the same thing as murabaha?
No. In murabaha, the client wants the asset and keeps it. In tawarruq, the client resells the asset to obtain money: it is this purpose, and the arrangement by the bank, that raise the problem.