Realities of Islamic Finance Practice: A Critical Comparison between Tawarruq and Riba-Based Lending within the Maqasid al-Shariah Framework

This extended abstract critically compares tawarruq-based financing in Islamic banking with conventional interest-based lending through the lens of maqasid al-Shariah. Using qualitative document analysis of tawarruq contracts, Shariah standards and resolutions, and peer-reviewed scholarship, the study evaluates legal form, economic substance, and ethical outcomes. Findings indicate that while tawarruq satisfies the formal elements of a sale contract, its organised implementation often results in synthetic cash-financing that mirrors the outcomes of interest-bearing loans. Key concerns include nominal rather than meaningful possession of commodities, agency conflicts when the bank acts as both counterparty and customer’s agent, limited disclosure of costs, and a predominant use for consumption smoothing that can heighten household indebtedness. Assessed against maqasid al-Shariah, these practices risk undermining hifz al-mal, fairness, and the reduction of hardship. The paper proposes system-level reforms: ensuring genuine and demonstrable possession, providing real agency options for customers, enhancing price and cost transparency, and redirecting product development toward risk-sharing or asset-productive modes such as musharakah, mudarabah, and ijarah. These measures can realign practice with the spirit and objectives of Islamic finance while maintaining operational feasibility in modern banking.

Tawarruq, Riba, Islamic Banking

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