In the Name of Allāh,

the Entirely Merciful, the Especially Merciful

Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.

Resolution No. 179 (5/19)

Essence and Types of Tawaruq (Fiqh Compliant vs Bank Structured)

The Council of the International Islamic Fiqh Academy of the Organization of the Islamic Conference, holding its 19th session in Sharjah, United Arab Emirates, on 1–5 Jumādā al-Ūlā 1430h (26–30 April 2009),

Having examined the research papers submitted to the Academy concerning the Essence and Types of Tawaruq (Fiqh Compliant vs Bank Structured),

Having listened to the discussions on the subject,

Having reviewed the resolutions of the Islamic Fiqh Council of the Muslim World League, Makkah al-Mukarramah, regarding this subject,

Resolves

First: Types and Shariah Rulings of Tawaruq

1. In Fiqh terminology, Tawaruq refers to the act of a person (the mustaw- riq) buying a commodity on credit and sells it to someone other than the original seller, at a cash price (in most cases) lower than the pur- chase price, in order to obtain This form of tawaruq is permitted by Shariah, provided that it satisfies Shariah-acceptable conditions of sale.
2. Structured tawaruq in contemporary terminology means the case of a person who buys a good on credit from local or international markets. Then the seller (the financer) arranges selling of the good, either directly or through an agent or in collusion with the buyer (the mustawriq), at a cash price, which is (in most cases) lower than the purchase price.
3. Inverse tawaruq takes the same form of structured tawaruq except that the mustawriq is the institution, and the financer is the client.

Second: Structured and inverse tawaruq are prohibited because they involve explicit, implicit or customary collusion between financer and finance seeker (mustawriq) to make a trick for obtaining a present cash for a larger amount in future debt which is ribā (usury).

Recommendations

1. Islamic banks and financial institutions should use Shariah-permissible modes of investment and financing in all their operations and avoid prohibited and unreliable modes in order to comply with Shariah standards, fulfill the noble Shariah objectives and exhibit merits of Islamic economics to the world, which suffers successive economic fluctuations and crises.
2. Encouragement of qard hasan (benevolent free loan) so that those who need cash would not be forced to resort to prohibited tawaruq. Islamic institutions should consider the establishment of special funds for qard hasan.

Indeed, Allāh is All-Knowing.