Tawarruq

Tawarruq, also known as murabaha financing, is a financial transaction commonly used in Islamic finance. It is structured to comply with the principles of Shariah, which prohibit interest (riba) and speculative trading (gharar). The term "tawarruq" originates from the Arabic word meaning "to sell" or "to purchase," reflecting its core mechanism.

In a tawarruq transaction, a buyer purchases an asset from a seller on a deferred payment basis, typically with an agreed-upon profit margin. The buyer then immediately sells the asset to a third party, often at a lower price, to recover the initial cost. The difference between the purchase price and the sale price is intended to cover the profit margin and any additional costs. This structure allows the buyer to obtain financing while adhering to Shariah principles, as it avoids direct interest payments and speculative dealings.

Tawarruq is frequently used in consumer financing, such as car loans or home purchases, where the buyer seeks to acquire an asset without paying interest. The transaction involves three parties: the financier (who acts as the seller), the buyer (who seeks financing), and a third-party buyer (who acquires the asset). The financier sells the asset to the buyer at a marked-up price, and the buyer then sells it to the third party, effectively securing the funds needed for the initial purchase.

Critics of tawarruq argue that it may involve elements of gharar, particularly if the asset sold is not clearly defined or if the transaction lacks transparency. Additionally, some scholars debate whether the structure genuinely avoids interest or merely disguises it. Despite these concerns, tawarruq remains a widely accepted and utilized financing method in Islamic banking and finance.