Islamic revolving finance is a master agreement setting a limit within which a company makes successive drawdowns, each documented as a separate transaction, often Murabaha or Tawarruq, with the available limit refilling as each resulting debt is settled.
A master agreement rather than an overdraft
A conventional overdraft charges interest on the debit balance, which is excluded. The Islamic version relies on a framework contract setting the limit, tenor, reference margin and drawdown procedure, creating no debt at all until an actual transaction is concluded.
Every drawdown is a stand-alone deal
When the company needs funds, it sends a drawdown request. The bank then buys an asset, takes possession and resells it on deferred terms at a known mark-up. Each drawdown therefore creates a receivable whose amount is fixed from the moment it is concluded.
Commodity Tawarruq to raise cash
For a pure cash need, drawdowns often use Tawarruq: the bank sells a traded metal on deferred terms and the company immediately sells it for cash to a third party. AAOIFI strictly regulates this and rejects its organised form when the steps are fictitious.
Why the order of contracts matters
The bank must acquire the goods before selling them, and the company must receive them before passing them on. Time-stamped confirmations, warehouse certificate numbers and no resale to the original broker show that the sequence is genuine rather than paperwork.
Restoring the limit after repayment
When a drawdown receivable falls due and is paid, available headroom rises by the same amount. The company can then draw again up to the approved ceiling, reproducing the flexibility of a revolving line without interest accruing on an outstanding balance.
No rollover by simply enlarging the debt
Extending an unpaid instalment against an increased amount would be riba. The debt from a drawdown must be settled, possibly using a new and genuinely executed drawdown, rather than postponed for an extra charge; a Murabaha receivable stays fixed.
Commitment fees on the undrawn portion
Charging for the mere promise to make funds available is generally rejected by Sharia boards. Acceptable fees instead cover real administrative set-up costs, or an agent's remuneration where the facility is structured as Wakala rather than as sale.
Late payment: penalties paid to charity
If payment is late, the bank cannot keep any surcharge for itself. The contract may include an undertaking to donate to charity, designed to deter delay, while the bank recovers at most its actual collection costs from the defaulting company.
Rebate for early settlement
If the company settles a drawdown early, the bank is not contractually bound to cut the sale price. It may voluntarily grant a rebate known as ibra, a widespread practice that many agreements describe as customary without turning it into a binding clause.
A Musharaka variant tied to the operating cycle
Some banks offer a running Musharaka: they share in working capital and receive part of operating profit calculated on the funds actually used. The return then depends on results, and the financier carries a real risk of loss alongside the company.
Permitted collateral and security
The bank may ask for a pledge over inventory, an assignment of trade receivables or a director's guarantee. Such security backs payment of an existing debt arising from a sale; it must never itself generate a return for the creditor.
Questions to ask before signing on a revolving line
Ask which asset backs each drawdown, who holds it and on which platform, how long funds take to arrive after a request, how undrawn amounts are treated, the early-settlement rebate policy and the reference of the Sharia board opinion.
Specialist external source
IMF work on Islamic finance covers how Islamic banks are regulated and manage liquidity, factors that shape their capacity to offer short-term credit lines.