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A tripartite sale. A person purchases a good on credit from the seller and himself is selling it to another person cash. In its simple form disliked but allowed. In its organised form in the Islamic finance industry still widely used and highly criticised in the same time. Due to regulatory and operational obstacles difficult to abandon.

Tawarruq with the involvement of a third party is seen by the Maliki school as reprehensible but more accepted with the Hanbali, Hanafi and Shafi. One classic scholar named it to be in the brotherhood of Riba. The 5th decision of the Muslim World League on Tawaruq considered it as permissible as the technique is derived on two sales contract with the ultimate buyer being not the same as the initial seller (reprinted in: Al Rashidi). This was used by a number of banks as argument to provide cash procurement on a daily business basis. In 2003 the Muslim World League was inquired about this Tawarruq Al Masrafi, being Tawarruq as practised by some banks nowadays, and it turned their decision entirely and declared it as not permissible.

Among other Islamic scholars the permission is based on a case by case decision rather than a allowing a universal retail product. Tawarruq is used to make investments in foreign jurisdictions tax efficient, to replace conventional credits and potentially in cases of utmost need for the client, if the latter was unable to achieve other means to finance an important medical treatment. It also considered as a mean to get a new institution started from the scratch under severe regulatory constraints. But beyond this limitations it could be observed violated and Tawarruq facilities used widely for every kind of need, and likewise being advertised.

Both techniques are very much responsible that Islamic Finance is accused to rename interest as service charge or profit rather than implementing a really different way of financing. It is what is meant, when Jurist debating the issue of “form over substance.” Is the form of the two sales contract relevant or the substance: the ultimate (obvious) goal?

In any case to market cash procurements like Tawarruq on the retail side is ambitious, because it is very difficult to convince pious Muslims about the real difference behind it, which is solely of legal nature. Because of that, financial institutions will face a substantial long term reputational risk among their clients if they are offering products based on cash procurement with returns and endangering the entire sector’s credibility.

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