A tawarruq is an Islamic financial product which allows clients to raise money quickly and easily, in theory without breaking Muslim bans on interest. A customer buys an easily saleable asset from an Islamic bank at a marked up price, to be paid at a later date, and quickly sells the asset to raise cash. Tawarruq means "turns into silver".
For example, a customer might buy $1,000 worth of non-precious metal from a bank, to be paid in 12 months' time, and then immediately sells the metal back to the bank for $900 to be paid immediately. Effectively the customer will have borrowed $900 for a year at an interest rate of 11 per cent, meanwhile satisfying the Islamic requirement for tangible assets to underlie all transactions.
Sharia scholars, who have to approve all Islamic financial products and services, have had much discussion about tawarruqs because of their similarity to interest-bearing loans.
They began to question the instrument more closely when they noticed the billions of dollars of commodity-based tawarruq transactions, which did not match with an equivalent amount of the commodity being traded.
In April 2009, the International Islamic Fiqh Academy, a prestigious body of Muslim clerics tied to the Organisation of the Islamic Conference, ruled that "organised use" of the tawarruq financial instrument was prohibited. The move was a blow to Islamic banks which were relying on the instrument both for lending and for liquidity management.
In November 2013, however, the UK was attempting to resurrect plans to market the western world's first Islamic government bond and was hoping to avoid the fate of Goldman Sachs whose attempt two years previously was dogged by religious controversy and eventually foundered because its use of tawarruq was criticised.
“The Goldman Sachs sukuk structure was controversial,” Mohammed Daud Bakar, a prominent Malaysian sharia scholar and president of Amanie Advisors was quoted as saying. “Investors will want to see what the legal structure of the UK sukuk will be.”