Reverse Murabaha (Tawarruq)

Definition of "Reverse Murabaha (Tawarruq)"

The financier (either directly or indirectly) purchases commodities (usually metals other than gold or silver) at market value for spot delivery and spot payment and then immediately sells the commodities at an agreed mark-up price to the customer on a spot delivery and deferred payment basis. The customer then immediately sells the commodities at market value to a third party for spot delivery and spot payment. The end result is that the customer has received a cash amount and has a deferred payment obligation for the marked-up price to the financier. Although certain commentators have raised the suggestion that this transaction appears like a disguised loan agreement, the counter argument is that the risk profile of the transaction is very different for the financier than the risk profile it would be expected to assume under a conventional loan facility. Under the conventional facility, the primary risk is that of the borrowing entity whereas under the tawarruq structure, the financier also takes commodity risk and risk on the third party supplier, in addition to the customer risk. The tawarruq facility therefore enables Islamic banks to provide funding for customers who require a cash sum to be advanced to them.