SS 30 · Trade

SS 30: Monetization (Tawarruq)

What this standard is about

Tawarruq (buying a commodity on credit and selling it for cash to get money) is a two-sale process. First, a person buys a commodity at a deferred price, usually through a musawamah (bargaining) or murabaha (mark-up sale) contract. Then he sells the same commodity to a third party for an immediate cash price. The result is cash in hand and a deferred debt. This standard lays out the essence of tawarruq and the Shariah conditions that make it valid.

The standard draws a hard line between tawarruq and bay' al-'inah. In 'inah, the person buys on credit and sells the commodity back to the same seller for a lower cash price. The standard says 'inah is strictly prohibited. Tawarruq is only different because the second sale goes to a genuinely independent third party, with no collusion bringing the commodity back to the original seller.

The standard applies whether the one raising cash is the customer or the bank itself. It also says a bank should not run a tawarruq deal to give a conventional bank liquidity for interest-based lending.

Why it exists

Tawarruq can look like real trade while functioning like an interest loan. The controls exist to keep the two sales real and separate: real commodities, real possession, real third parties, and unlinked contracts. Without these, tawarruq collapses into a paper trick that reproduces riba (interest).

The key rules, simply put

The commodity must be real and owned by the seller before it is sold. It cannot be gold, silver, or any currency. If a binding promise is involved, it must come from only one party.
The commodity must be clearly identified and separated from the seller's other assets, for example by warehouse receipts. If it is not available at signing, the buyer must get a full description or a sample showing quantity and storage location, so the purchase is real rather than fictitious.
The buyer must actually or constructively receive the commodity, with nothing further needed to take it.
The second sale must go to a party other than the original seller. The commodity must not return to the seller through any prior agreement, collusion, or market custom.
The credit sale and the cash sale must not be linked in a way that strips the buyer of his right to receive the commodity. Linking them by contract clause, custom, or procedure is prohibited.
The customer must sell the commodity himself or through his own agent, not through the bank he bought it from. The bank must not accept such delegation and must not arrange a proxy third party to sell on the customer's behalf. The bank should give the customer all the information he needs to make the sale.
Tawarruq is not a mode of investment or financing. A bank may use it only when there is a genuine need, such as a liquidity shortage that could interrupt operations and hurt clients. It should first try proper funding modes like mudarabah, investment agency, sukuk, or investment funds.
When the bank itself is the beneficiary, the bank must sell the commodity through its own staff. It may use a broker to help, but not a proxy.

An everyday example

A customer needs cash for an emergency. The bank sells him palladium at a deferred price, and he takes possession through warehouse receipts. He then sells the palladium himself to an independent metals broker for immediate cash, and uses the cash freely. He repays the bank later at the agreed deferred price. The bank does not sell the metal back to itself or arrange the resale behind the scenes.

Words to know

Tawarruq — buying a commodity on credit and selling it for cash to get money
Murabaha — a sale at a disclosed cost plus an agreed mark-up
Musawamah — a sale by bargaining, without disclosing the seller's cost
Bay' al-'inah — buying on credit and selling the item back to the same seller for a lower cash price; prohibited
Mutawarriq — the person or institution raising cash through tawarruq
Riba — interest or usury
Constructive possession — legal control of a commodity (such as warehouse receipts) without physically holding it

Source

AAOIFI Shariah Standard No. 30 — https://aaoifi.com/wp-content/uploads/2020/08/SS-30-Monetization-Tawarruq.pdf