Specifics of Tawarruq financing models in islamic banking

Hadžić, Fikret and Hanić, Aida (2015) Specifics of Tawarruq financing models in islamic banking. In: 4th international scientific conference "Economy of integration" : Challenges of economy in environment under crisis : ICEI 2015. University of Tuzla, Faculty of economics, Tuzla, pp. 123-139. ISBN 2490-2616

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Abstract

Islamic banking deines money strictly as a medium of exchange; it has no value in itself and each note is the same as another banknote of the same denomination. Because Islamic banking has recent history, not all of their instruments are still fully created and one such model is tawarruq; model known as “reverse or commodity Murabahah that operates by borrowing cash based on two separate transactions. There are two basic types; the irst type implies that an individual buys commodity from a bank, deferred, which later sold to another person or a bank for money in order to obtain the necessary liquidity. Another type is “organized tawarruq” that involves a transaction in which an individual buys commodity from Islamic bank on credit. It is a kind of standardized types such as metal or wheat. The bank purchased commodity sells to the client at a higher price with the term of payment in the future. The client hires the bank as its agent who sells commodity for cash. The result of this transactions means that the client gets the cash and bank owes funded amount plus the anticipated return. Many Islamic experts and economists express reservation under this model, considering that it achieves what Islamic banking seeks to avoid and it is the interest generated by activities of conventional banks. Although the model is acceptable from a legal point of Islamic economics, essentially in a spiritual way it isn’t, since it opens the possibility of creating a multitude of transactions without creating real value and the possibility of creating interest. The aim of this paper is to introduce the basics of tawarruq model and its functioning, to examine its acceptability in terms of Islamic economics, and thereby contribute to further discussion on the admissibility and the purpose of its use.

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