reverse murabaha

(tawarruq)

A method where the financial institution, either directly or indirectly, will buy an asset and immediately sell it to a customer on a deferred payment basis. The customer then sells the same asset to a third party for immediate delivery and payment, the end result being that the customer receives a cash amount and has a deferred payment obligation for the marked-up price to the financial institution. The asset is typically a freely tradeable commodity such as platinum or copper. Gold and silver are treated by Sharia as currency and cannot be used.

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+ tawarruq, aka reverse murabaha

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Also known as a reverse murabaha, tawarruq is an Islamic finance technique used to provide working capital in compliance with Sharia. In a tawarruq transaction, a buyer (the borrower) buys an asset on credit from a lender on a deferred payment basis and then immediately resells the asset on the spot market for cash to a third party. Following this transaction the:

• Borrower has the funds it needs.

• Borrower has an obligation to pay to the lender the original purchase price of the asset (usually the cost of the asset plus a profit element).

• Lender has made a profit on the transaction.