Thawarruq practiced in Middle East.

Thawwaruq is always been a controversial financial instrument in Islamic

Banking industry. Though many scholars criticized it of being not fulfilling
Shariah principles, some of the banks in Middle East too uses this financial
instrument.
Thawarruq in UAE
Most of the Islamic Banks in UAE does not use Thawarruq financing.
Procedures of two Banks in UAE which provide Financing on Thawarruq is as
follows. United Arab Bank, which has a window of Islamic Banking provides
Home Financing through Thawarruq mode of Financing has two stage
operations.
Murabaha Stage: The bank and the obligor/customer enter into a commodity Murabaha
contract that is governed by the Murabaha rules of the Shariah Supervisory Board. The
customer will own either physically or constructively the assets subject of the Murabaha
contract.

Asset liquidation stage: Customers can choose either to sell/liquidate the commodity
directly in the market on his own or through an agency agreement through the bank

How does it work: Generally speaking, Tawarruq is allowed for those transactions that
cannot be fulfilled through other Islamic Banking means/structures, such as:

Transferring obligations from a conventional debt structure to Islamic Banking

structure
Working capital finance (Salaries, A/R settlement, ad hoc cash shortages)
Financing intangible personal necessities:
Travel (for legitimate purposes)
Medication
Education
House / real estate maintenance cost
Bridging short term financing, followed by long term financing using
other Islamic Banking Structures (Ijarah, Murabaha, Istisna)

Noor Bank: Commodity Murabaha / Tawarruq: In this sale transaction, the bank buys a
commodity at cost price and sells it to a customer at an agreed deferred sale price (cost
price + profit). Subsequently, the customer can sell the commodity to a party other than the
bank on spot, for the purpose of obtaining cash.

ADIB- Abu Dhabi Islamic Bank (ADIB) launched an innovative new Shariah-compliant
financing product called Al Khair, based on the Islamic concept Tawarruq, which is
approved by Fatwass and the Shariah Supervisory Board. Tawarruq transaction is
used in Al Khair Financing and implements the following, specified steps:
1. The bank purchases a commodity equivalent to the amount of customer's financial
liability and conventional loans.
2. The bank sells the purchased commodity to the customer on a deferred payment
basis at a pre-agreed, clear fixed profit rate.
3. After having the commodity owned by customer and being at his possession, he
sells it at the market price to a party different to that which the bank has purchased
the commodity from.
4. Sell amount resulting from step 3 above is then credited to customer's account
that will be used by him to settle his financial liabilities and conventional loans.

Sultanate of Oman
In Oman, the central bank of Oman has took a strict decision to restrict the Thawarruq using
as a financial instrument. Omani banks appealed to the central banks to permit the use of
thawarruq at least temporarily till the industry find its feet but the rules doesnt permit this
this could be used only in emergency situation for a duration of less than three months.

Saudi Arabia
In Saudi Arabia, like most of the banks in the region doesnt provide the thawarruq facility
due to the restrictions from the Shariah body. However some banks like Riyad bank provides
financing through this facility.

Home Financing in Riyad Bank: A person with a monthly salary of SAR 10,000, working at a
governmental organization would receive a Tawarruq finance as follows, provided he has no
other obligations:

Finance amount of SAR 100,000

Monthly installment of SAR 1,833

Admin fees of SAR 1,000

Tawarruq fees of SAR 30

Finance duration of 60 months

Total finance cost of SAR 110,000

APR is 4.23%

Thawarruq in America