Islamic banking operation

Question 1

Commodity Murabahah is an example of product innovation in Islamic banking and finance, which has
been extensively used in Bursa Malaysia. It basically applying the contract of Tawarruq as well in its
transactional flow. Distinguish the differences of Tawarruq and Commodity Murabahah

Tawarruq is also known as Islamic monetization. A transaction whereby a person buys an

asset/commodity from a seller on the basis of deferred payment, whether through
a musawama or murabaha contract , and sells it to a third party on cash basis at a given
price. The price can be equal to, or higher or lower than the original price. The sole purpose
of tawarruq is having access to cash by involving a real, not fictitious, transaction. In this
sense, tawarruq differs radically from eina which constitutes a fictitious transaction meant
for paying and receiving riba in the guise of trading profit. Commercial tawarruq is, per se,
not a mode of financing or investment, but rather a last resort for cash-tight banks and
financial institutions. Such institutions are expected to manage their assets and liabilities
using the principal tools of mudaraba, agency to invest, Islamic mutual funds, investment
susuk, etc. However, temporary or short-term liquidity shortage can be covered through
tawarruq, provided that no other means are available to the bank and that if it doesn’t resort
to tawarruq, its customer base may shrink or its operations may be halted or negatively
affected.