The following Banking & Finance practice note Produced in partnership with King & Spalding provides comprehensive and up to date legal information covering:
Murabaha agreements may be employed to provide working capital or acquisition financing. A murabaha arrangement entered into for such purposes is known as a commodities murabaha. A transaction known as tawarruq closely resembles the commodities murabaha in function, and the two terms are sometimes used interchangeably.
Technically, however, under Shari’ah the two types of transactions represent distinct contracts with their own elements. Commodities murabaha must meet the requirements for murabaha transactions, which largely focus on the behaviour of the Islamic financial institution (IFI).Tawarruq focuses instead on the Customer. Under tawarruq, a person (the mustawriq) buys an asset for a deferred price with the express purpose of selling the asset for cash to a third party. Although Shari’ah scholars do not universally acknowledge tawarruq as an acceptable transaction, the majority hold that it is permissible provided that it complies with Shari’ah requirements governing sales.
In general, the provision of working capital presents one of the most difficult issues in Islamic finance. In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received
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