Contract structure
The bank sells you a commodity on credit at a marked-up price, you sell that commodity to somebody else for cash, and the cash becomes your spending limit.
Tawarruq is a way of getting cash without borrowing at interest. Classically, a person who needs money buys goods on credit and then sells those goods in the market for cash. He ends up with cash now and a larger debt later, and no interest was charged, because the extra came from a sale price rather than from a loan. Banks copied the idea. On a card, the bank buys a commodity, sells it to you on credit at a marked-up price payable in instalments, and the commodity is sold on for cash which is credited to your card account. Your debt to the bank is the marked-up figure, fixed from day one. When the bank arranges every step, including the final sale, the arrangement is called organised or structured tawarruq, and that is the version the scholars fought over.
Illustrative figures, not a real product. Your card limit is RM 10,000. The bank buys a commodity for RM 10,000 and sells it to you for RM 11,700 payable over 12 months. The commodity is then sold for RM 10,000 cash, and RM 10,000 is made available on your card. You owe RM 11,700, in 12 monthly instalments of RM 975, and you owe that whether you spend the full RM 10,000 or nothing at all, unless the bank grants you a rebate. If you settle early, the RM 1,700 mark-up does not automatically disappear: you get back only what the bank agrees to give you as an ibra' (rebate), so ask in writing whether that rebate is a right or a favour before you sign.
Scholars do not all agree about this structure. Both positions are set out here because you are entitled to see the disagreement rather than one side of it.
The permitted version is a chain of real sales, not a loan, so the mark-up is a trading profit rather than interest. AAOIFI Shariah Standard No. 30 sets out the conditions under which it works: a real commodity that the seller owns before selling it, not gold, silver or currency (4/1); the commodity clearly identified and separated from the seller's other assets (4/2); actually or constructively received by the buyer (4/4); sold on to a genuine third party (4/5); the two contracts not linked so as to strip the client of his right to receive the commodity (4/6). Its Appendix B records that the majority of jurists permit tawarruq while prohibiting bai' al-inah, and notes that Ibn Taymiyyah and Ibn al-Qayyim were against tawarruq too.
The OIC International Islamic Fiqh Academy, in Resolution No. 179 (5/19) at its 19th session in Sharjah, 26 to 30 April 2009, prohibited structured tawarruq and reverse tawarruq, on the ground that both 'involve explicit, implicit or customary collusion between financer and finance seeker to make a trick for obtaining a present cash for a larger amount in future debt which is riba'. That is the single most important objection and it lands squarely on the bank-arranged version used in cards. AAOIFI itself, without using the word prohibited, disables most of the automation: the client may not appoint the bank or the bank's agent to sell the commodity for him and the bank may not accept such an appointment (4/7), the bank may not arrange a third-party proxy to do it either (4/8), and tawarruq 'is not a mode of investment or financing' and is to be used only where there is a need (5/1). AAOIFI's Standard No. 30 was issued in November 2006, more than two years before the Fiqh Academy resolution, and the two texts do not say the same thing.
Permitted subject to Shariah Standard No. 30, issued 1 Dhul-Qa'dah 1427 AH / 13 November 2006. The controls are strict enough that a fully automated, bank-executed card tawarruq would breach clauses 4/7 and 4/8. AAOIFI distinguishes tawarruq from bai' al-inah in clause 2 and calls inah 'a trick for practicing Riba' in Appendix B.
OIC International Islamic Fiqh Academy · Resolution No. 179 (5/19), 19th session, Sharjah, 1-5 Jumada al-Ula 1430 AH / 26-30 April 2009
Structured (organised) tawarruq and reverse tawarruq are prohibited because of the collusion between financier and customer to obtain cash now for a larger debt later, which is riba. Classical tawarruq that meets the ordinary conditions of sale remains lawful.
Read the sourceAAOIFI · Shariah Standard No. (30), Monetization (Tawarruq), clauses 4/1 to 4/10 and 5/1
Tawarruq is permitted only with a real, identified commodity, genuine receipt, sale to a third party, no linkage of the two contracts, and no delegation of the onward sale to the bank or its agent. It is not to be used as a general financing mode.
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This explains the mechanism, not the ruling