Tawarruq is the new Shariah concepts introduced in Malaysia for the use in personal financing. The Syariah Advisory Council of Bank Negara Malaysia  in its 58th meeting held on 27th April 2006 / 28th Rabiul Awal 1427 resolved that the use of ijarah sukuk and Shariah-compliant securities as underlying asset in tawarruq or murabahah to manage liquidity in Islamic financial system is permissible.

Syariah concept personal financing works in different way compare to conventional personal loan. As Islam prohibit taking interest, customer which require financing from bank will buy goods or commodity on credit from the bank on a installment payment basis and then immediately resells it to third party for cash. In this way, the customer can obtain cash without taking an interest-based loan.

The flow chart below illustrate the detailed flow of personal financing, including the bank profit calculation. The information provided below was referenced to Bank Islam site.

Tawarruq is the new Syariah concepts introduced in Malaysia for the use in personal financing. The Syariah Advisory Council of Bank Negara Malaysia in its 51st meeting held on 28th July 2005 resolved that deposit product and financing based on the concept of Tawarruq which is known as commodity Murabahah is permissible.
Syariah concept personal financing works in different way comparing to conventional personal loan. As Islam prohibit taking interest, customer which require financing from bank will buy goods or commodity on credit from the bank on a installment payment basis and then immediately resells it to third party for cash. In this way, the customer can obtain cash without taking an interest-based loan.
The flow chart below illustrate the detailed flow of personal financing, including the bank profit calculation.

Tawarruq flow chart

  1. The customer applies financing product based on Tawarruq concept from the Bank. Bank obtains Tawarruq transaction documents from the customer.
  2. Bank will buy the commodity at London Metal Exchange (LME) through Broker 1.
  3. Under the Murabahah contract, Bank then sells the commodity to the customer at Bank’s Selling Price (Principle + Profit) on deferred payment term.
  4. Under the Wakalah contract, customer requests Bank to sell the commodity in the market.
  5. Acting as the appointed sale agent for the customer, Bank sells the commodity to Broker 2.
  6. Bank then credits the Wariq (proceed) from the sale of commodity to the customer’s account.
  7. Finally, customer pays amount due to the Bank (Principal + Profit) by way of agreed instalment method.

Key note of the Shariah based personal financing:

  • The montly installment is fixed and calculated based on the bank profit rate and the financing tenure. Early settle of the personal financing will no have any rebate or with minimal rebate, which vary from bank to bank.
  • No interest will be charged for late payment. Bank will take legal action if failed to make three consecutive installment payment.