Short answer
Scholars differ. Simple tawarruq, where you buy goods on credit and then sell them yourself to someone else for cash, is allowed by many scholars. Organised tawarruq, where a bank arranges the whole chain so you just receive cash and owe more later, was rejected by the International Islamic Fiqh Academy. Mufti Taqi Usmani allows bank use of it only under strict conditions and real need.
Selling an item back to the person you bought it from on credit ('inah) is makruh tahrimi in the Hanafi school. Selling it to an unrelated third party (simple tawarruq) is permissible, though later Hanafi jurists disliked using it as a routine way to raise cash. Organised tawarruq, where the bank arranges every step, is treated by Mufti Taqi Usmani as a last resort, not a normal product.
Other madhhabs
- Hanbali
- Simple tawarruq through a third party is permitted in the relied-upon view, though Ibn Taymiyya and Ibn al-Qayyim disliked it.
- Shafi'i
- Even 'inah (selling back to the original seller) is valid though disliked, so tawarruq is permitted.
Explanation
Tawarruq comes from wariq, silver coin. A person needs cash, so he buys an item on credit at a higher price, then sells it for a lower cash price to a third party. He has his cash and owes the credit price later. The economic result looks like a loan with interest, which is why scholars argue about it.
The basis for allowing it: the Prophet ﷺ told a companion who wanted better dates not to swap two measures for one, but to sell his dates for dirhams and then buy the good dates with the dirhams. Two real, separate sales are lawful even if the end result resembles a forbidden one.
Three forms:
- 'Inah: you sell the item back to the same seller. Forbidden in the Hanafi, Maliki and Hanbali schools.
- Simple tawarruq: you take possession and sell to an unrelated buyer of your choice. Permitted by many scholars.
- Organised tawarruq (commodity murabaha): the bank buys metal on an exchange, sells it to you on credit, then acts as your agent to sell it on for cash, all in minutes. You never see the metal.
The International Islamic Fiqh Academy ruled organised tawarruq impermissible in 2009, seeing it as a loan in disguise. AAOIFI permits it only with strict controls: real commodities, real transfer of ownership and risk, and no selling back to the original seller. Mufti Taqi Usmani has warned that its widespread use harms the credibility of Islamic banking.
For a customer, prefer products based on real trade, leasing or partnership. See What is murabaha? and Are Islamic banks really halal?
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
The question is whether tawarruq is real trade or disguised interest.
Sahih al-Bukhari 2201
Sahih... بع الجمع بالدراهم ثم ابتع بالدراهم جنيبا ...
"Sell the mixed dates for dirhams, then buy good dates with the dirhams."
Two separate real sales are lawful even when the end result resembles a forbidden exchange.
Where the ruling is recorded
- Radd al-Muhtar (Ibn Abidin), Kitab al-Kafala, discussion of bay' al-'inah. The Hanafi treatment of 'inah and sales through a third party.
- Resolutions of the International Islamic Fiqh Academy, Resolution on tawarruq (2009). Organised tawarruq declared impermissible.
- AAOIFI Shari'ah Standards, Standard on monetization (tawarruq). Strict conditions for tawarruq.
- al-Mughni (Ibn Qudama), Kitab al-Buyu', on 'inah. Hanbali position on 'inah and tawarruq.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.