The Islamic finance market has welcomed the recent resolution passed by the International Council of Fiqh Academy, which is an organ of the Organization of the Islamic Conference (OIC), on the contentious contract of Tawarruq, which is used as a cash management instrument by some Islamic banks. Some Islamic bankers and others providing such services, especially in Europe and Asia, are keen for further clarification as to whether the resolution merely applies to Tawarruq per se or also to commodity Murabaha contracts as they are currently practiced.
According to the International Council of Fiqh Academy ruling "technically, according to the Fiqh jurists, Tawarruq can be defined as: A person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shariah requirements on sale."
However, in recent years the practice of organized Tawarruq has emerged. This is defined — "when a person (mustawriq) buys merchandise (commodity) from a local or international market on a deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price. Reverse Tawarruq, is similar to organized Tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client."