Farruq

Farruq is a controversial financing technique used in Islamic finance to convert commodities into cash through a chain of sale transactions. The term is Arabic in origin and is associated with splitting or dividing, reflecting the multiple exchanges involved. The structure is intended to provide liquidity without paying conventional interest by embedding the financing in sale contracts.

Mechanism: In a typical arrangement, a bank buys a commodity for cash, then sells it to a customer on a murabaha basis with a deferred payment. The customer immediately sells the same commodity to a broker or third party for cash. The broker resales the commodity back to the bank on a deferred price. The net effect is that the customer receives cash from the bank while the obligation to repay is settled through the final deferred price, making the financing resemble a short-term loan rather than a genuine sale.

Legal and regulatory status: Farruq has been the subject of considerable scholarly and regulatory debate. Critics argue that it may amount to gharar (uncertainty) or riba (usury) in disguise and that it does not involve a genuine sale of an asset, undermining the ethical aims of Islamic finance. Several Shariah scholars and standard-setting bodies have issued cautions or restrictions, and some jurisdictions have restricted or discouraged its use. Proponents contend that, properly structured, it can provide liquidity while remaining asset-backed.

Impact and current practice: Outside of strict controls, Farruq has seen declining use in many markets due to reformulations of liquidity facilities and increased preference for transparent, straightforward financing tools. It remains controversial and is not universally accepted across Islamic financial institutions.