What is Tawarruq?
Tawarruq is a Sharia-compliant liquidity financing structure widely used by Islamic banks. The customer buys a commodity (commonly platinum or copper traded on commodity markets) from the bank on deferred payment terms at a marked-up price, then immediately sells the commodity to a third party for cash. The customer receives liquid funds while owing the bank the deferred markup price.
How It Works
- Bank buys a commodity in the spot market.
- Bank sells it to the customer on deferred payment at a marked-up price.
- Customer (or an appointed agent) sells the commodity to a third party for spot cash.
- Customer holds the cash and owes the bank the deferred price in installments.
- Sharia boards review structure compliance and disallow if it becomes a back-to-back transaction.
Saudi Context
Tawarruq is one of the most widely used liquidity products in Saudi Islamic banking (Al Rajhi, Alinma, Bank AlBilad). SAMA regulates Islamic banking standards aligned with AAOIFI. The Saudi Sharia Authority of each bank approves Tawarruq structures and audits compliance. Personal financing, SME working capital, and corporate liquidity facilities frequently use Tawarruq.
Example
A customer needs SAR 100,000. The bank buys SAR 100,000 of platinum from broker A, sells it to the customer for SAR 110,000 payable over 24 months, and the customer (via the bank as agent) sells it to broker B for SAR 100,000 cash. The customer receives SAR 100,000 today and pays SAR 110,000 over 24 months.