Tawarruq: Difference between revisions
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''Islamic finance.'' | |||
Tawarruq is an Islamic finance instrument that is used to obtain cash immediately. | Tawarruq is an Islamic finance instrument that is used to obtain cash immediately. | ||
Revision as of 13:56, 26 June 2015
Islamic finance.
Tawarruq is an Islamic finance instrument that is used to obtain cash immediately.
It is similar to a standard murabaha structure, but with an extra leg.
The standard part of the structure involves the bank buying the commodity from a goods supplier and selling it on to its customer on a deferred payment basis.
The extra step involves the customer selling on the commodity (usually back to the original goods supplier) against immediate cash payment.
The customer is left with cash in hand and a deferred payment liability to the bank.
In addition to credit risk on the customer, the bank also takes on asset risk and third party risk of the supplier reneging on the supply agreement.
Tawarruq is also sometimes known as 'reverse murabaha' or 'monetization'.