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Tawarruq

Tawarruq is Shariah compliant cash based financing mechanism which some Islamic banks provide personal financing to facilitate the supply of cash to their customers. As used in personal financing a customer purchases a commodity from the bank on deferred payment basis; the customer then sells the commodity in the market to a third party for cash. Islamic banks also use Tawarruq to guarantee a predetermined percentage rate of return to on investment deposits, buying a commodity from the customer on deferred payment basis then immediately selling the commodity for cash, the deferred payment price paid to the customer being higher than the cash price received by the bank – this is referred to as organized Tawarruq as the purchase and sale transactions are carried out simultaneously and there is no risk for the bank. Reverse Tawarruq is also practiced by some Islamic banks to manage their liquidity, it is similar to organized Tawarruq, but in this case, the banks act as the customer.