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

The global Islamic finance industry continues to experience significant growth, with assets projected to exceed

USD 4 trillion by 2027. This rapid expansion, however, raises a critical question: to what extent do Islamic

financial institutions (IFIs) truly adhere to the spirit of Shariah beyond the formal structures of contracts?

Evaluating compliance should not be confined to legal form but must also address substance, intent, and long-

term socio-economic impact in line with the objectives of Islamic law (maqasid al-shariah).

One of the most widely used yet controversial instruments is tawarruq-based financing, particularly commodity

murabahah, which has largely replaced the earlier bay‘ al-‘inah contracts in Malaysia. Tawarruq provides cash

liquidity in ways functionally similar to interest-bearing loans in conventional banking. This resemblance raises

the central concern: is tawarruq genuinely a legitimate sale contract or a mere legal stratagem (hilah) replicating

riba-based lending under a Shariah-compliant façade?

emphasize justice (‘adl), transparency (bayan), preservation of wealth (hifz al-mal), and the elimination of

exploitation (raf‘ al-haraj). This study aims to critically evaluate the realities of tawarruq practices vis-à-vis

conventional riba-based loans, using maqasid al-shariah as the guiding framework.

The global Islamic finance industry continues to experience significant growth, with assets projected to exceed

USD 4 trillion by 2027. This rapid expansion, however, raises a critical question: to what extent do Islamic

financial institutions (IFIs) truly adhere to the spirit of Shariah beyond the formal structures of contracts?

Evaluating compliance should not be confined to legal form but must also address substance, intent, and long-

term socio-economic impact in line with the objectives of Islamic law (maqasid al-shariah).

One of the most widely used yet controversial instruments is tawarruq-based financing, particularly commodity

murabahah, which has largely replaced the earlier bay‘ al-‘inah contracts in Malaysia. Tawarruq provides cash

liquidity in ways functionally similar to interest-bearing loans in conventional banking. This resemblance raises

of transaction intent.

The debate thus extends beyond technical fiqh to the philosophical underpinnings of Islamic finance, which

emphasize justice (‘adl), transparency (bayan), preservation of wealth (hifz al-mal), and the elimination of

exploitation (raf‘ al-haraj). This study aims to critically evaluate the realities of tawarruq practices vis-à-vis

conventional riba-based loans, using maqasid al-shariah as the guiding framework.

Document analysis reveals that organised tawarruq, while formally structured as a commodity sale, replicates the

economic outcome of conventional interest-bearing loans. Customers obtain immediate cash, incur deferred

obligations, and often remain unaware of the underlying commodity. This functional equivalence raises doubts

as customers are seldom informed of commodity details, pricing mechanisms, or actual cost structures (Huda et

al., 2021). Similarly, the principle of reducing hardship (raf‘ al-haraj) is compromised when tawarruq is used

predominantly for consumption financing rather than productive investment.

The contracts examined show that commodity ownership is typically nominal rather than real, with no physical

delivery to the customer. Banks frequently act both as seller and as the customer’s agent to resell, creating

conflicts of interest and limiting contractual freedom. This raises concerns that tawarruq, in practice, becomes a

legal stratagem (hilah) that undermines the spirit of genuine trade (Majma‘ al-Fiqh al-Islami, 2009; Usmani,

Classical jurists such as Ibn Taymiyyah condemned legal devices that permit riba under the guise of trade.

poses systemic risks to the credibility and innovation of Islamic finance. Such dependence discourages the

development of equity-based contracts like musharakah and mudarabah, limiting the industry’s ability to

differentiate itself meaningfully from conventional finance (Hasan, 2020).

This study shows that although tawarruq fulfils the formal criteria of a sale contract, its organised implementation

in modern Islamic banking frequently diverges from the maqasid al-shariah. Structurally, it mirrors the outcomes

of interest-based lending, with customers receiving cash in exchange for future debt obligations. Substantively,

issues such as nominal ownership, automatic agency, and lack of transparency undermine the objectives of

preserving wealth, ensuring fairness, and reducing hardship.

The findings suggest that tawarruq, while legally permissible, risks becoming a legal device that dilutes the

Sirajuddin (UniSIRAJ). The author gratefully acknowledges the guidance of colleagues and reviewers who

provided constructive feedback during the preparation of this study.