Tawarruq: final analysis

In-Depth Analysis

A renowned scholar of our time sadly opined that although we do find the permissibility of Tawarruq among the eminent jurists of early Islam to deal with an exceptional liquidity need by a person, if they had a clue as to how the contemporary financial institutions would adopt Tawarruq, their opinion would certainly have been different. Commenting on the widespread misuse of Tawarruq, the scholar noted that it is a disappointment that Islamic and conventional banks in certain jurisdictions have adopted Tawarruq as the only product through which they undertake all kinds of transactions, be they from consumer, corporate, or capital market segments of banking. The misuse is particularly evident in commodity Murabahah operations where the transaction is conducted through commodity exchanges using metals like palladium, with the entire process completed in minutes. The customer never sees or has any interest in the commodity — it is merely a mechanism to provide cash financing that, in substance, is virtually identical to a conventional interest-bearing loan. The author strongly advocates for a return to genuine equity-based and asset-backed financing structures such as Musharakah, Mudarabah, Ijarah, and Wakalah. These structures involve real economic activity, genuine risk-sharing, and create actual value in the economy — unlike Tawarruq which is essentially a financial accommodation. The COVID-19 pandemic later exposed the limitations of Tawarruq-heavy institutions, as those relying primarily on equity-based contracts (Mudarabah, Musharakah, Wakalah, Ijarah) were better positioned to manage the economic downturn through natural profit-sharing mechanisms.