Question: What is Tawarruq financing?

What is Tawarruq financing?

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Tawarruq financing is a concept in Islamic finance providing a solution for individuals and businesses to obtain liquidity in a manner compliant with Shariah law Heres a stepbystep explanation of how it works Step 1 Purchase of Goods Individuals Role The individual or business needing liquidity lets call them the buyer agrees to purchase a tangible asset or commodity from a financial institution or a third party Asset Selection The asset must be valuable and possibly a highvolume nonperishable commodity like metals or agricultural products Step 2 Deferred Payment Agreement Payment Structure The buyer agrees to pay the bank or institution for this asset over time under a deferred payment structure This facilitates the financing without involving interest which is prohibited in Islamic finance Step 3 Immediate Sale to a Third Party Onward Sale After purchasing the asset on deferred payment the buyer immediately sells it to a third party for cash Ideally this sale is carried out at the current market price Purpose This sale is crucial as it provides the buyer with immediate liquidity which was the primary goal Step 4 Repayment Deferred Payments The buyer is now obligated to pay the financial institution the originally agreed amount over the specified period Key Insights Islamic Law Compliance The process is structured to adhere to Shariah principles by avoiding riba interest as the operations involve tangibles and trading activities Controversies and Acceptance While widely used Tawarruq has faced scrutiny and debate amongst scholars regarding its permissibility since it can mimic the effects of interestbased loans Some argue it goes against the spirit of Shariah focusing on tangible trade instead of financial speculation Overall Tawarruq is primarily utilized to ensure liquidity in a Shariahcompliant manner while carefully navigating the principles prohibiting interest and encouraging assetbased business ... View full answer

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