Murabaha vs Tawarruq: what is the difference?

Both are Sharia-compliant ways to pay in instalments without interest, but they suit different needs. Murabaha finances an asset you want to own; tawarruq is used when what you need is cash.

Murabaha vs Tawarruq: what is the difference?

Both structures are sales, not loans: you repay a disclosed, agreed price in instalments. What differs is what you receive.

At a glance

Murabaha: the financier buys a specific asset, such as a car, and sells it to you at a disclosed price that includes an agreed profit.
Tawarruq: the financier buys a commodity and sells it to you on deferred payment at a disclosed price; you then sell the commodity to a third party and receive cash.
In both, the price and instalments are agreed and disclosed at the start.
Murabaha ends with you owning the asset you chose; tawarruq ends with you holding cash and an instalment commitment.
The contracts each institution uses are approved by its Sharia Supervisory Board.

Good questions

Murabaha and tawarruq explained

Which one is for buying a car?

Murabaha. The financier buys the car you have chosen and sells it to you at an agreed price paid in instalments. See Murabaha vehicle financing.

Which one gives me cash?

Tawarruq. You buy a commodity on deferred payment, then sell it to a third party to receive cash, and repay the agreed price in instalments.

Is the profit the same as interest?

No. In these structures the profit is part of the price of a sale of a real asset or commodity, disclosed up front. Interest is a charge on lending money.