Tawarruq in Islamic Finance: What Is Permissible & What Is Not
•By Maher Alias
Artikel ini juga tersedia dalam Bahasa Melayu
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Have you ever applied for Islamic personal financing and noticed the term “Commodity Murabahah” or “Tawarruq” in your agreement documents? You’re not alone — many Islamic banking users in Malaysia don’t truly understand how their money is processed through the tawarruq mechanism. More concerning, many also don’t know that there are forms of tawarruq that are permissible and forms that are disputed by scholars.
Quick answer: Tawarruq fardi (individual) — where you personally buy a commodity on credit and sell it to a third party for cash — is permitted by the majority of scholars. Tawarruq munazzam (organized) — where the bank arranges the entire process including the resale — was ruled impermissible by the OIC Fiqh Academy but is permitted in Malaysia by Bank Negara Malaysia’s (BNM) Shariah Advisory Council under strict conditions.
Tawarruq comes from the Arabic word “wariq” meaning silver coins — broadly referring to money in any form. In the context of modern Islamic finance, tawarruq is a financing mechanism where a person in need of cash (mutawarriq) purchases a commodity on deferred payment (at a marked-up price) and then sells that commodity to a third party for immediate cash.
In simple terms, you “buy goods first, sell goods, get cash.” The commodities commonly used include crude palm oil (CPO), metals, and plastic resin — all traded through the Bursa Suq Al-Sila’ platform launched by Bursa Malaysia in 2009.
Here is the organized tawarruq (tawarruq munazzam) process as practiced in Malaysian Islamic banking:
Critical condition: Broker A and Broker B must be different parties — the commodity cannot return to the original seller. This is what distinguishes tawarruq from bai’ al-inah.
This is the original form of tawarruq discussed by classical jurists:
Status: Permitted by the majority of scholars from the Hanbali, Shafi’i, and Hanafi schools.
This is the modern form used in Islamic banking:
Status: Disputed internationally — the OIC Fiqh Academy ruled it impermissible, but BNM Malaysia permits it.
Based on BNM Policy Document BNM/RH/PD 028 issued on 28 December 2018, tawarruq is permitted in Malaysia subject to the following conditions:
At its 19th session in Sharjah (26-30 April 2009), the OIC International Fiqh Academy issued Resolution No. 179 stating:
Reasons for prohibiting organized tawarruq:
Both scholars took an even stricter position — prohibiting all forms of tawarruq including the classical form:
Shariah Standard No. 30 (AAOIFI) on monetization/tawarruq aligns with the OIC position — organized tawarruq is prohibited, while classical tawarruq is permitted with strict conditions.
Malaysia takes a position that differs from the international consensus — permitting organized tawarruq in Islamic banking. This is not a decision made lightly.
BNM’s Shariah Advisory Council permits it based on strict operational safeguards:
Tawarruq is not just a niche product — it dominates the national Islamic finance landscape:
However, BNM’s Financial Sector Plan 2022-2026 recommends reducing reliance on tawarruq and encouraging non-commodity-based contracts such as wakalah and mudarabah.
| Product | Example Usage |
|---|---|
| Personal Financing-i | Cash for personal needs |
| Home Financing-i | Mortgage / property financing |
| Credit Card-i | Islamic credit card (replacing Bai’ al-Inah) |
| Vehicle Financing-i | Car financing |
| Business Financing | Working capital, revolving credit |
| Term Deposit-i | Replacing Mudarabah deposits |
| Islamic Overdraft | Overdraft facility |
| Ar-Rahnu (Pawn) | Islamic pawnbroking (approved by BNM SAC 2019) |
Many confuse these two concepts. Key differences:
| Aspect | Tawarruq | Bai’ al-Inah |
|---|---|---|
| Parties involved | 3 or more parties | 2 parties only |
| Commodity flow | Sold to a third party | Sold back to the original seller |
| Global scholarly acceptance | Majority permissible (classical) | Majority impermissible |
| Status in Malaysia | Permitted | Being phased out |
1. “Tawarruq is the same as Bai’ al-Inah”
No — tawarruq involves a third party, while bai’ al-inah involves only two parties with the commodity sold back to the original seller.
2. “All forms of tawarruq are permissible”
Only classical/individual tawarruq has broad acceptance. Organized tawarruq is prohibited by the OIC and AAOIFI, although Malaysia permits it.
3. “The commodity transaction is just a formality”
For Shariah compliance, the commodity must physically exist, ownership must transfer, and the buyer must be able to take delivery. If commodity trading is merely on paper, the transaction collapses into riba.
4. “Tawarruq completely eliminates riba”
Critics argue organized tawarruq achieves the same economic outcome as an interest-bearing loan — money now exchanged for more money later — and the commodity merely serves as a “legal cover.”
5. “Malaysian scholars are wrong to permit organized tawarruq”
BNM SAC has imposed strict operational safeguards to address concerns that led to the OIC prohibition. This is a considered regulatory decision, not a disregard for Shariah.
Tawarruq involves the actual buying and selling of a commodity as the basis of the transaction, while conventional loans involve direct lending of money with interest. However, critics argue the end economic outcome is similar.
Yes — legally and from a Shariah perspective, you own the commodity momentarily before it is resold. Ownership transfer documents are provided as evidence.
In theory, yes — you have the right to keep the commodity. However, in practice, most customers sign a wakalah (agency) agreement authorizing the bank to sell on their behalf.
Malaysia argues that operational safeguards such as Bursa Suq Al-Sila’, mandatory Shariah audits, and BNM’s dedicated policy document address the concerns that led to the OIC prohibition.
No — tawarruq is used across nearly all Islamic banking products including home financing, credit cards, term deposits, overdrafts, and even Islamic pawnbroking.
Crude palm oil (CPO) is the primary commodity traded through Bursa Suq Al-Sila’. Plastic resin and metals are also used.
The profit rate for tawarruq is typically comparable to or slightly higher than conventional interest rates, depending on the bank and the borrower’s risk profile.
Similar to conventional financing — the bank will impose late payment charges (ta’widh) and may take legal action. However, late payment charges in Islamic banking have limits set by BNM.
Tawarruq is an important mechanism in Malaysian Islamic finance that allows Muslims to obtain cash financing without directly engaging in riba. However, it’s crucial to understand that not all forms of tawarruq are universally accepted — classical tawarruq (fardi) has broad acceptance, while organized tawarruq (munazzam) remains debated between those who permit it (like BNM Malaysia) and those who prohibit it (like the OIC and AAOIFI).
Understanding concepts like tawarruq is the first step to becoming a financially literate Muslim investor — the next step is building your own Shariah-compliant investment portfolio. Open a CDS Trading Account to start investing in Shariah-compliant stocks listed on Bursa Malaysia. Also download the Free Stock Market Basics Ebook to understand the fundamentals of stock investing from a Malaysian Muslim investor’s perspective.