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Difference Between Murabaha and Tawarruq


Murabaha is a mode of financing based on the sale of a commodity for a deferred price. Put another way, it is the sale of commodities at cost plus an agreed mark-up (profit/ ribh). The seller is obliged to reveal to the purchaser (or a purchase orderer) the actual price at which the commodity is purchased. As such, the seller stipulates an amount of profit in addition to that price. The two parties to a contract of murabaha are a financier and a purchaser. The financier must own the commodity before it is resold to the purchaser. It is a shari’a condition that the underlying commodity is purchased from a third party to prevent any collusion or fictitious transactions.

On the other hand, tawarruq (Islamic monetization) is a sale transaction whereby a party 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 main differences between murabaha and tawarruq are summarized below:

Aspect Murabaha Tawarruq
Subject matter Amount of money Commodity
Parties Lender and borrower Financier and finance and/ or expertise seeker
Rollover Typically applicable Impermissible
Collateral Put up before the loan is processed May be posted but after the commodity is purchased
Cost transparency Not a condition Stipulated/ a condition
Compensation Interest Profit
Ownership The lender remains the owner of funds, while the borrower becomes liable for the amount of loan in addition to interest (repayment plus interest) The purchaser becomes the owner of the commodity, and at the same time becomes liable for its full price (cost plus profit)

 



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