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TAWARRUQ: Control Measures and Conditions set by AAOIFI

~~Adopted from AAOIFI Standards 2010-1431H Arabic Version, Manama, Bahrain~~

AAOIFI Standard 30
According to AAOIFI Standard 30, tawarruq is defined as buying of a commodity on deferred price either through bargaining(musawamah) or markup profit(murabaha), and selling it to a third party other than the original seller in order to get cash on the spot.

AAOIFI declared tawarruq permissible with certain conditions:

[The tawarruq sale] should fulfill the Shariah requirements set for the purchase of commodity on deferred price either through bargaining or markup profit. The existence of the commodity must be confirmed, and the commodity is owned (milkiyah) by the seller before selling it. In the case of a binding promise (waad) it should be unilateral (only from one side). The object of sale should not be gold, silver or various types of currencies. The commodity should be specified in such a way that it can be identified from other assets of the seller either by possessing it or disclosing its certificate identification number. If the commodity is not present during the execution of the contract, the customer must be given details of the commodity by describing it or showing the same model. The commodity should be specified in terms of quantity and its whereabouts so that the purchase of the commodity is real not factitious. It is preferable if local commodities are used in the process. The possession of the commodity should be either physical or legal (possession) and there should be no restriction or a measure that can obstruct such a [physical] possession. The commodity should not be sold back to the original seller and it should not return to him either by a condition, collusion or custom (urf). A condition that requires from the customer to sell the commodity (which he purchased on deferred price) cash on the spot in such a way that he is denied the right of possession is not allowed.

TAWARRUQ: Control Measures and Conditions set by AAOIFI


The institution should not appoint the customer or its agent to sell the commodity which the customer purchased from the institution. The institution should not be appointed by the customer to sell the commodity unless the system cannot allow the customer himself to sell the commodity except through the institution itself, in that case there is NO objection to the appointment of the institution provided that this process takes place after taking possession the commodity physically or legally. The institution should provide for the customer the necessary details for him to sell the commodity by himself or through an agent that he chooses.

Control Measures which are specific for the institution

Tawarruq is not among the investment or financing forms, but it is allowed for a need with its conditions, therefore the institution should not go for tawarruq to provide liquidity to its customers instead of making an effort to obtain finance/assets through mudaraba, wakala-bilistithmar, or issuing investment sukuk or investment funds and the like. It should limit its use of tawarruq to situations of insufficient liquidity to meet its needs and avoid a loss that affects its customers or disruption of its operations.

Allah knows best

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