Tawarruq - Practical Law - Thomson Reuters
Finance
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Understanding Tawarruq
When it comes to Islamic finance, Tawarruq plays a significant role. Tawarruq refers to a financial arrangement commonly utilized to facilitate liquidity management. It involves the sale of a commodity on a deferred basis, followed by its immediate repurchase at a lower price from a third party. This practice allows individuals and organizations to access funds while complying with Shariah principles.
The Mechanism of Tawarruq
Tawarruq involves several parties, including the buyer, seller, and intermediary institution. The buyer approaches the intermediary institution, which purchases a commodity from the market with a deferred payment arrangement. Once the intermediary institution has possession of the commodity, it sells it to the buyer at a lower price for immediate payment. This transaction ultimately provides the buyer with the liquidity they require, as they can sell the commodity to a third party at a market price.
Key Features of Tawarruq
Tawarruq exhibits several key features that make it a popular liquidity management tool in Islamic finance:
- Deferred Payment: Tawarruq involves a sale on deferred payment terms, enabling individuals and organizations to obtain funds while deferring payment until a later date.
- Immediate Repurchase: The immediate repurchase of the commodity at a lower price allows the buyer to generate liquidity promptly.
- Shariah Compliance: Tawarruq is structured to comply with Shariah principles, making it a viable option for those seeking Islamic finance solutions.
- Flexibility: Tawarruq can be structured in various ways to accommodate the specific needs of different individuals and organizations.
Applications of Tawarruq
Tawarruq finds applications in different areas of Islamic finance, including:
Liquidity Management
Tawarruq serves as a powerful tool for managing liquidity, enabling banks and financial institutions to address short-term funding needs efficiently. With its flexibility in structure and applicability, Tawarruq remains a versatile solution in today's financial landscape.
Commodity Trading
Tawarruq's mechanism resembles commodity trading, making it a feasible option for individuals and organizations looking to participate in Shariah-compliant investment activities. By creating opportunities for trading commodities, Tawarruq promotes economic growth and diversification while upholding the principles of Islamic finance.
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