Islamic treasury financing covers the techniques that allow a company to meet short-term liquidity needs, or place its surplus cash, through sales, leases or agency arrangements backed by real assets instead of interest-bearing loans and deposits.
Why a conventional overdraft is ruled out
A conventional overdraft charges daily interest on the debit balance, which is riba. A company seeking compliance must replace it with genuine commercial transactions: purchases of goods, deferred-payment sales or a clearly documented investment agency, each tied to an identifiable asset.
Tawarruq, the most widely used liquidity tool
To raise cash, the bank buys a commodity, often a metal traded on an organised market, and sells it to the company at a marked-up price payable later. The company sells the metal for immediate payment to a third party and receives the funds.
What conditions does AAOIFI set for Tawarruq?
The AAOIFI standard on Tawarruq requires the commodity to exist, be identified and be genuinely owned and possessed by the bank before resale. It forbids selling the metal back to the original seller and expects the company to be free to resell it itself.
Limits and criticism of organised Tawarruq
Several scholars, including the OIC International Islamic Fiqh Academy, consider organised Tawarruq too close to a disguised loan. Sharia boards therefore often reserve it for genuine liquidity needs, and cautious companies first look for financing linked to their actual trade.
Funding inventory through a revolving Murabaha line
For a trader or distributor, the bank can open a Murabaha limit: for each order it buys the goods from the supplier, takes possession, then resells them to the company at an agreed margin payable after 60 or 90 days.
Prefinancing agricultural or industrial output with Salam
Under Salam, the bank pays today the full price of a quantity of goods to be delivered later, with quality and delivery date precisely defined. The producer thus obtains its seasonal working capital, while the bank often resells the goods through a parallel Salam.
Intra-group advances structured as Qard hasan
Within a group, a cash-rich subsidiary can lend to another on a Qard hasan basis, repayable at face value with no return at all. Any fee tied to the loan would be riba; only real, justified administrative costs may be recovered.
Late-paying customers: which options remain?
Discounting a receivable below its face value amounts to selling debt, which most scholars reject. Companies instead use a collection agency mandate paid by a fixed fee, or a separate Murabaha facility covering their next purchases of goods or materials.
Placing surplus liquidity without earning interest
Surplus cash can be entrusted to the bank under an investment Wakala, with an expected but unguaranteed return, or placed through a short-dated commodity Murabaha. Deposits paying a guaranteed rate should be avoided, because the promised return would be riba.
Hedging currency risk without speculation
A company that must pay a supplier in dollars cannot enter a conventional forward exchange contract, since currencies must be exchanged on the spot. Banks instead offer a unilateral promise, the wa'd, whose validity is assessed by their own Sharia board.
Comparing the true cost with a conventional credit line
The margin on a Murabaha or Tawarruq is often calculated from a market benchmark rate, which brings its cost close to conventional credit. Brokerage fees on the metal and arrangement fees come on top and must be included in any comparison.
Points to negotiate before signing a treasury facility
Before signing, the company should check the Sharia board's fatwa on the product, how late-payment penalties are handled, normally donated to charity, the bank's rebate policy for early settlement, and which assets are actually used in each drawdown.
Specialist external source
The AAOIFI Shariah Standards set out the conditions for the Murabaha, Salam and Tawarruq transactions that companies use to manage their cash.