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29 March 2024

Tawarruq in Islamic banking is usury: IDB

Published
By Staff

Islamic banks which enforce Tawarruq in their financial and investment operations are involved in usury, which is prohibited in Islam, a senior scholar from the Islamic Development Bank (IDB) has said.

Sheikh Mohammed Mukhtar Al Salami, Head of the Sharia (Islamic) Panel in the Jeddah-based IDB, said many Islamic banks have been involved in such an investment tool in the Islamic banking industry.

“Tawarruq now poses a major problem as many Islamic banks now rely on this activity as a main product in their dealings,” Sheikh Salam was quoted as saying by the London-based Saudi Arabic language daily Alsharqalawsat.

“Tawarruq differs from usury in one thing…a usury deal is done through one window while tawarruq is done through two windows….in tawarruq, buying (the product) takes place at one window and selling at another window…so the whole operation is a mere paper transaction without any value.”

In his remarks, the most outspoken comments against the growing tawarruq activities in Islamic banking, Sheikh Salam described such deals as “concealed usury” which is prohibited in Islam.

“I am fully convinced that tawarruq is haram (prohibited in Islam)…the tawarruq transactions being carried out by Islamic banks are mere concealed usury operations as they are done not only at one place but at two places….this is the view and decision of the Islamic Fuqh (jurisprudence) Council,” said the Islamic scholar from IDB, an affiliate of the Organisation of Islamic Conference.

Bankers describe tawarruq as reverse murabaha. As in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the customer can obtain cash without taking an interest-based loan.