Islamic Banking: Tawarruq Mechanism

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What is the mechanism of Tawarruq?

The Islamic bank directly sells the asset to the customer through a Murabaha contract and then the customer sells the asset to a third-party purchaser.

The customer directly purchases an asset from the seller and then sells it to the Islamic bank for a deferred price.

The customer requests cash from the Islamic bank and then purchases an asset from a seller.

The Islamic bank purchases an asset from the seller, delivers it to the customer, and then sells the asset to the customer through a Murabaha contract. (correct)

Why should the commodity sold in Tawarruq be well-identified?

To avoid 'Inah which is strictly prohibited in Islam.

To prevent conventional banks from benefiting from the transaction.

To ensure that it is distinct from other assets of the seller. (correct)

To comply with Shariah principles of the Murabaha contract.

What is the purpose of Tawarruq?

To obtain cash by selling an asset to a third-party purchaser for a spot price. (correct)

To allow conventional banks to benefit from interest-based lending.

To ensure compliance with Shariah principles of finance.

To facilitate deferred payments between customers and sellers.

Why should Islamic banks not perform Tawarruq for the benefit of conventional banks?

To ensure that liquidity is not used for interest-based lending. Signup and view all the answers

Who should the commodity be sold to in Tawarruq to avoid 'Inah?

To a third-party purchaser on a deferred payment basis. Signup and view all the answers

In the process of Tawarruq, what is the purpose of the Islamic bank purchasing an asset from the seller instead of financing in cash?

To facilitate the subsequent sale of the asset to a third-party purchaser Signup and view all the answers

What is the significance of selling the commodity in Tawarruq to a party other than the one from whom it was purchased on a deferred payment basis?

To avoid 'Inah, which is strictly prohibited in Islamic finance Signup and view all the answers

What is the underlying principle behind Islamic banks not performing Tawarruq for the benefit of conventional banks when it discovers their use of liquidity for interest-based lending?

To maintain ethical standards by avoiding involvement in interest-based activities Signup and view all the answers

Why should the commodity sold in Tawarruq be well-identified and distinct from other assets of the seller?

To facilitate subsequent sale to a third-party purchaser and avoid 'Inah Signup and view all the answers

What is the mechanism behind fulfilling the customer's need for liquid cash through Tawarruq?

The Islamic bank purchases an asset from the seller and delivers it to the customer on the spot Signup and view all the answers