Murabaha - Application (Trade Finance)

1
1
Application of Murabaha
2
2
Purchase of raw material; for meeting working capital needs of
trade and industry.
Medium to long term requirements for purchase of land,
building and equipment.
Trade finance products including imports, exports and
alternative to bill purchase.
Financing for consumer durables can be offered on the basis of
Murabaha (sale on installments).
House Financing; for purchase of house or construction
material for building a house.
Applications of Murabaha
3
Local Purchases
4
4
1. The Customer and the bank sign MMFA Agreement to Sell &
Purchase along with Agency Agreement.
2. Customer makes a written request to the bank for the
purchase of Raw Cotton through an Order form.
3. The bank disburses funds amounting to Rs. 100 million to the
Agent (usually the Customer) under Agency Agreement.
4. Agent/Customer purchases and takes possession of the
Cotton on behalf of Meezan bank.
Application of Murabaha Agreement for the
Purchase of Raw Material
Murabaha
5
5
5. Agent/Customer informs Meezan bank that it has
purchased Cotton of Rs. 100 million and has also taken its
delivery/possession on the banks behalf through
Declaration. The Agent then makes an offer to purchase it
at Rs. 105 million to be paid after one year by signing the
Murabaha Contract and submits Murabaha purchase
evidence in the form of an invoice, bill or some other
documentary evidence.
6. Meezan bank accepts the offer and the sale is concluded
whereby ownership as well as risk is transferred to the
Customer.
Murabaha
6
6
Import Murabaha
7
7
Import Letter of Credit (LC)
Letter of Credit
8
8
Letter of Credit
Conventional Banks earn in two ways while opening Letter Of
Credit. They are:
Service charges for opening an LC
Interest charged on the LCs not paid on due date
9
9
Service Charges
Collecting various service charges (such as documentation
charges, correspondence, account maintenance, credit
assessment charges etc.) for the purpose of opening LC is
permissible according to Shariah.
However as per the rule of Shariah, bank cannot charge for
providing guarantee.
At Meezan we have a Shariah approved schedule of charges for
LCs.
Letter of Credit
10
10
SSB has allowed that the bank may charge service
charges for the following services.
Documentation
Credit Assessment
Correspondence
Account Maintenance Services
Monitoring Services
Letter of Credit
11
11
Profit in LCs
The bank may need to charge certain profit in case the LC is
not settled by the importer on time, or if the Nostro account of
the bank is debited before the importer has made payment to
the bank.
In this case appropriate Islamic mode need to be used to
charge the profit.
Letter of Credit
12
12
Basics
All Sight LCs are opened under MMFA/Agency
arrangement, whereby the customer acting as an agent of
MBL procures the goods. The ownership of the goods rests
with MBL till the time it is sold to the customer.
In this case a valid Declaration and Murabaha Contract is a
must for Murabaha to take place and it needs to be signed
at the time of delivery of documents to the customer.
SIGHT LC - Basics Sight LC - Basics
13
13
Basics
In case Ijarah is being done for the goods, Murabaha
Contract will not be signed since the ownership of asset
remains with MBL throughout the Lease period.
SIGHT LC - Basics Sight LC - Basics
14
14
LCs opened and subsequently financed by Meezan Bank are
an ideal example of a direct payment Murabaha.
The customer opens the LC from Meezan Bank as an agent of
the Bank (i.e. places order with the foreign supplier on behalf
of Meezan Bank.
Upon receipt of documents Meezan Bank makes payment to
the foreign supplier.
Meezan Bank sells the goods to the customer on Murabaha
(i.e. cost plus profit basis)
Import Murabaha Sight LC
15
15
Step 1:
Meezan Bank and the customer will sign a Master
Murabaha Finance Agreement for LCs and an agency
agreement for the same.
As per the agency arrangement the customer would
purchase goods from foreign suppliers on Meezan Banks
behalf by opening LCs with Meezan Bank.
Process Flow:
16
16
Step 2:
The customer will negotiate a deal with some foreign supplier
(exporter) for the purchase of goods.
Process Flow:
17
17
Step 3:
Importer will request Meezan Bank to open L/C by
submitting all relevant documents.
Insurance to be arranged by the importer and relevant
policy to be forwarded along with the L/C application form.
Process Flow:
18
18
Step 4:
Meezan Bank will obtain LC opening and other charges from
the customer and issue an LC in the favor of the
beneficiary(exporter)
Process Flow:
19
19
Step 5:
On receipt of L/C exporter will ship the goods and deliver
the related shipping documents to the negotiating bank for
the payment of bill amount.
If the documents are found in order the negotiating bank
will claim reimbursement from MBLs Nostro account and
send documents to MBL
Process Flow:
20
20
Step 6:
On receipt of documents Meezan Bank will contact the
customer and inform him of the availability of the
documents.
The customer will negotiate the FX rate for the required
foreign currency amount.
Meezan Bank will discuss the payment terms with the
customer and settle the bill
Process Flow:
21
21
Settlement:
Incase Client does not need any financing, clients a/c will be
debited to settle LC. Declaration should be signed at the time of
document delivery.
If the client wishes to finance LC against available Murabaha
Limit, sub-Murabaha should be issued. Issuance of Sub-
Murabaha means signing of Murabaha Contract by the
customer and the acceptance of its offer to purchase by MBL.
Profit will be charged from the day MBL Nostro was debited to
the Murabaha settlement date
MBL will release the shipping documents to the customer and
record a Murabaha receivable.
22
22
Settlement:
If MBLs funds are involved (other than Murabaha Financing), two
situations could arise:
a) Nostro Debited before Client settles:
MBL will discuss the payment date with customer and issue a
Sub-Murabaha.
Issuance of Sub-Murabaha means signing of Murabaha
Contract by the customer and the acceptance of its offer to
purchase by MBL. Profit will be charged from the day MBL
nostro was debited to the Murabaha settlement date.
23
23
Settlement:
b) Payment Against Documents(PAD):
Sub-Murabaha will be booked on the day the customer can
arrange funds and shipping documents will be released, after
getting Murabah Contract signed, on the same day.
The price will include profit from the day Meezan Banks
Nostro account was debited till the Sub-Murabaha settlement
date.
24
24
Shipping Guarantees or Delivery Order(DO):
If the goods have arrived prior to the shipping documents the
customer may request Meezan Bank to issue a shipping
guarantee or delivery order.
In such cases Meezan Bank will take 110% margin from the
customer and execute a Sub-Murabaha based on the FX
rate prevailing on that date. The selling price will be fixed at
that stage.
Special Cases
25
25
In this case, Murabaha Contract must be signed at the time
of issuance of DO / SG and should not be postponed till the
document arrives.
Special Cases
26
26
If however, upon arrival of the documents the cost of the
goods comes out to be higher or lower than the cost price of
the Sub-Murabaha, Meezan Bank will settle the difference with
the customer by paying or receiving the differential amount
subject to a Cap & Floor.
This adjustment in price after the execution of Murabaha is
possible because Murabaha is a cost plus profit transaction
and if after the execution of the Murabaha the seller discovers
that the cost was higher or lower he can settle the difference
with the buyer
Special Cases
27
27
Cost Price should include Insurance, LC opening and
miscellaneous charges. If the client has already paid above
charges from his own sources then profit will be calculated
keeping in view the financing amount. An illustration of the
above process is as follows:
Contract Price
28
28
LC Amount= Rs. 1,000,000
LC Opening Charges= Rs. 2,500
Insurance= Rs. 2,000
Miscellaneous charges= Rs. 1,000
Total Cost= Rs. 1,005,500
Assuming that the client has paid all charges upfront, and
needs financing for a period of 30 days against the LC at
10% p.a. The profit for the period will be Rs. 8,220.
The total Murabaha contract price would be Rs.
1,013,720.
If the client wishes to pay on spot then the goods will be
sold to him at Rs. 1,005,500.
Contract Price
29
29
LC Opening
At the time of opening LC, it must be specified on the
LC opening form / Transaction approval sheet whether
LC is being opened under MMFA/Agency arrangement
or without it.
Key Point
30
30
Murabaha FIM (Pledge)
(Financing Against Imported Merchandize)
31
31
Murabaha FIM: (Financing Against Imported Merchandize)
A Murabaha facility in PKR which the subject matter, which is an
imported good, is sold to the customer and then after the
delivery the same goods are kept under a pledge arrangement
as a security.
Murabaha- FIM (Pledge)
32
32
General Process Flow:
The bank will appoint importer as its agent to import the goods on
its behalf. In this step, Agreement to Murabaha and an Agency
Agreement will be signed.
Exporter will ship goods and will send documents (B/L) to the
bank through negotiating bank.
Upon receipt of B/L bank and the customer will execute
declaration.
33
33
General Process Flow: Cont
The sale price in declaration corresponds to the number of days
customer wants to avail financing.
Upon execution of declaration bank will release the documents to
the customer and customer will receive the goods, which will be
kept under a pledge arrangement under banks muccudam as a
security for payment of the Murabaha price.
As per the murabaha contract, customer pays the murabaha
price on time and subsequently goods are released from MBLs
pledge.
34
34
Murabaha FIM (SPOT)
(Financing Against Imported Merchandize)
35
35
Murabaha FIM-SPOT: (Financing Against Imported Merchandize)
A Murabaha facility in PKR in which the subject matter, which is
an imported good, is kept under a pledge arrangement before
selling to the customer and the goods are reflected in the
inventory of the Bank. The subject matter is then sold by the
Bank to the customer against Spot Payments, as and when
required by the customer.
Risk profile is higher than the import murabaha FIM Deffered as
the ownership of the goods remains with the Bank for a longer
of period.
Murabaha- FIM (SPOT)
36
36
Murabaha FIM (SPOT)
Scenarios
37
37
Case I : With Pledge Margin and Nil Cash Margin
In this case a certain portion of the imported goods, equivalent
to the pledge margin is also kept into the pledge along with the
whole consignment and financing is provided to the customer
net off the margin amount.
Since MBL owns all the goods under the LC, therefore upon
receipt of the Documents the customer will provide the
Declaration and MBL will handover the documents to the
Muccadum who would then release the goods, while customer
will pay all the duties and taxes as an agent of the bank and all
these costs will be added to the cost of the asset.
38
38
Case I : Cont
Once the goods are released and are received by our
Mucuddum, MBL will sell its percentage ownership in the
goods equivalent to the pledge margin amount, LC charges,
duties, taxes and other charges (that are paid by the customer
as an agent and he does not require financing of these charges)
through a specially designed Murabaha Contract (attached as
Annexure A).
After executing this first sale Joint Ownership in a specified ratio
will be established on the available goods and will be mentioned
in the above mentioned Murabaha Contract.
39
39
Case I : Cont
The customer would also sign a trust deed (if required) for
holding MBLs share in the assets.
Upon customers request for issuance of Delivery Order from
time to time, MBL and the customer will execute a Murabaha
Contract for the amount equivalent to the ownership ratio of
MBL in the desired lot and MBL will issue the said delivery order
for the release of goods.
40
40
Example:
ABC opens an import LC of Rs 100,000 with 20% pledge margin i.e.
financing requirement is Rs 80,000. Upon receipt of documents and after
release of goods the break-up of all the costs incurred and paid by the
customer as an agent of the bank is as follows:
Cost of Goods : Rs. 100,000
No. of Units : 100
LC Charges : Rs. 10,000 (Already paid by the agent)
Takaful Premium : Rs. 20,000 (Already paid by the agent)
Duties & Clearance
Charges : Rs. 30,000 (Already paid by the agent)
Total Cost of Goods : Rs. 160,000
41
41
Example: Cont
Pledge Margin : Rs. 20,000 (20% of the LC Value)
Amount of first Sale : Pledge Margin Amount +LC Charges
+Takaful Premium +Duties &
Clearance Charges
Amount of first Sale : Rs. 80,000
MBLs ownership ratio
in goods under pledge
after 1
st
sale : 50%
MBL Cost per unit as
per ownership ration : Rs. 800
Delivery Order required for 50 units
MBL Cost in 50 Units : 40,000
Total Value of Lot : Rs.80,000
MBL Percentage ratio
in schedule of Assets : 50%
42
42
Case II : Where Pledge Margins conversion into Cash Margin
In this case LC is established under agency Agreement by
taking certain cash margin into margin account. At the time of
retirement of LC MBL will use its funds with customers cash
margin to retire the LC and than amount of goods equivalent to
the cash margin would be kept as pledge margin. Once this
cash margin is converted into pledge margin the treatment will
be same as discussed in Case I.
43
43
Case III : With Cash Margin Only
In this case a certain amount of money is kept as cash margin in
the margin amount and financing is provided to the full value of
assets.
In this case upon receipt of Documents the customer would
declare the receipt of goods through Declaration and MBL will
handover the documents to the Muccadum who would then
release the goods, while customer will pay all the duties and
taxes as an agent of the bank.
44
44
Case III : Cont
Once the goods are released and are received by our Mucuddum,
MBL will sell its percentage ownership in the goods equivalent to
the LC charges, duties, taxes and other charges (that are paid by
the customer as an agent and he does not require financing for
these charges) through a specially designed Murabaha Contract
(attached as Annexure A). (After executing this first sale
Ownership ratio of the bank and the customer will be established
on the available goods and will be mentioned in the above
mentioned Murabaha Contract as advised in Case 1).
The customer would also sign a trust deed (if required) for holding
MBLs share in the assets.
Upon customers request for issuance of Delivery Order from time
to time, MBL and the customer will execute a Murabaha Contract
for the amount equivalent to the ownership ratio of MBL in the
desired lot and will issue the said delivery order for the release of
goods.
45
45
Example:
No. of Units : 100
Duties & Clearance
46
46
Example: Cont
Amount of first Sale : LC Charges + Takaful Premium +Duties &
Clearance Charges
after 1
st
sale : 62.5%
in schedule of Assets : 62.5%
47
47
Case IV : With Pledge Margin arranged by the Customer
In this case the customer provided the goods equivalent to the
pledge margin amount from his own sources and financing is
provided to the full value of assets. However it must be made
sure that the goods pledge by the customer as security margin
from his own sources must be placed separately from the
imported goods under the said LC.
In this case upon receipt of Documents the customer would
declare the receipt of goods through Declaration and MBL will
handover the documents to the Muccadum who would then
release the goods, while customer will pay all the duties and
taxes as an agent of the bank.
48
48
Case IV : Cont
Once the goods are released and are received by our
Mucuddum, MBL will sell its percentage ownership in the goods
equivalent to the LC charges, duties, taxes and other charges
(that are paid by the customer as an agent and he does not
require financing for these charges) through a specially
designed Murabaha Contract (attached as Annexure A). (After
executing this first sale Ownership ratio of the bank and the
customer will be established on the available goods and will be
mentioned in the above mentioned Murabaha Contract as
advised in Case 1).
The customer would also sign a trust deed (if required) for
holding MBLs share in the assets.
49
49
Case IV : Cont
Upon customers request for issuance of Delivery Order from
time to time, MBL and the customer will execute a Murabaha
Contract for the amount equivalent to the ownership ratio of
MBL in the desired lot (imported goods under LC) and will issue
the said delivery order for the release of goods and will
simultaneously issue another Delivery Order for the release of
goods pledged by customer to maintain the requisite security
margin percentage.
50
50
Example:
No. of Units : 100
Duties & Clearance
51
51
Example: Cont
Pledge Margin
(Customer Own Soucers) : Rs. 20,000 (20% of the LC Value)
Number of Pledge Units : 20
Amount of first Sale : LC Charges +Takaful Premium +Duties &
Clearance Charges
after 1
st
sale : 62.5%
52
52
Example: Cont
in schedule of Assets : 62.5%
Delivery Order for Pledge Units : Rs.10,000 (For 10 units)
53
53
Solutions for Exporters
Import Financing
54
54
Islamic Export Refinance
Scheme (IERS)
55
55
The first and the only Shariah Compliant Export Refinance
Facility available in Pakistan.
Meezan Bank is the only Islamic bank currently practicing this
unique product.
Meezan Bank has developed a product using Murabaha &
Istisna to finance exports under Part I & Part II of Export
Refinance Scheme.
Meezan Bank & SBP have created a joint pool under
Musharakah to finance exporters.
56
56
The Client Leg
Having the L/C in hand, the exporter primarily needs funds to:
o Purchase raw material
o To manufacture the finished product
The Bank fulfills the need of the exporter by providing funding
through:
o Murabaha
o Istisna
Murabaha is provided for purchase of Raw Material
Istisna is provided to manufacture the required goods
57
57
The State Bank Leg
SBP will enter into a Musharaka agreement with
Meezanbank.
SBP and the bank will invest in a pool of assets.
Income of the pool will be shared according to a pre- agreed
profit sharing ratio.
Loss will be shared according to the investment ratio in the
pool
58
58
Islamic Alternative to Export
Bill Discounting
(Based on Murabaha & Bai Salam )
Bill Negotiation
59
59
Murabaha against Usance Export Bill
- an alternative
to Export Bill discounting
60
60
After shipping goods as per the LC/Contract terms,
Exporters do not wish to wait for the proceeds that are
expected at some future date.
In order to generate liquidity, exporters bring Export Bill to
a Conventional Banks counter and get them discounted.
The Bill discounting process as followed by conventional
banks is not allowed in Shariah as it involves Sale of debt.
However, the same purpose can be achieved through the
use of Murabaha. In this transaction, MBL sells the goods
required by the Client on Murabaha against a deferred
payment in FCY.
Usance Bill Negotiation
61
61
Meezan Bank issues a New Murabaha to meet the
Liquidity requirement of the Exporter.
MBL will disburse PKR equivalent of US$ to be realized
after X no. of days (after agreeing to a conversion rate).
Under the Agency Agreement the Exporter will purchase
the agreed commodities and submit the Declaration.
After offer & acceptance the sale would be concluded.
62
62
At maturity of Murabaha, the Exporter will make repayment
to MBL. The repayment should not be contingent upon
arrival of the LC proceeds.
Meezan Bank may ask the exporter to assign its receivable
(under this LC) to Meezan Bank.
It must be understood that payment of Murabaha Contract
Price is not contingent to the arrival of LC proceeds. In case
Bill proceeds do not arrive on time, the Client will have to
arrange FCY from his own sources to make timely payment.
63
63
Customer approaches MBL for financing against specific
Export Usance Bill under LC/Contract
MBLs Treasury / branch TF will negotiate an appropriate
exchange rate with the Client. This rate is used to calculate
the equivalent PKR amount.
On the basis of the agreed exchange rate, instead of
discounting the export bill, the bank will extend a new
Murabaha facility to the client. The export bill under
LC/Contract may be kept as a security to this Murabaha
transaction alongwith any other security.
Process Flow
64
64
The Client will submit an Order Form for disbursement of
the funds in PKR upto the equivalent amount of the Bill
(calculated with reference to the agreed exchange rate).
MBL will disburse the funds in Pak Rupees to the client
under agency or directly to the supplier for purchase of
required goods.
The Client will make purchases of the disbursed funds (as
an Agent of MBL) and furnishes Purchase Evidence and
Declaration (as per attached format) for the same with in
the duration of the bill period.
Process Flow
65
65
The Client will offer, through Murabaha Contract of Usance
bill Murabaha, to purchase the goods in FCY equivalent to
the value of the Bill.
After confirming the presence of goods, MBL (related
RM/BM) would accept the offer to sell the goods to the
client in FCY and Murabaha sale would be executed.
On maturity of Murabaha, the Client will make payment of
Contract Price in FCY. The Client will assign its receivable
against maturity of the Bill to MBL.
Process Flow
66
66
It must be understood that payment of Murabaha Contract
Price is not contingent to the arrival of LC proceeds. In
case Bill proceeds do not arrive on time, the Client will
have to arrange FCY from his own sources to make timely
payment.
67
67
Bai Salam against Sight Export Bill
- an alternative
to Export Bill discounting
68
68
Exporter does not wish to wait for the payment to be received
from the LC issuing bank and needs an instant Liquidity.
Meezan Bank will enter into a Salam transaction with the
customer whereby Meezan Bank will buy FCY from the customer
against PKR.
The FCY will be delivered on a specified future date and the
PKR will be paid by MBL full in advance (Spot). The Delivery of
FCY should not be contingent upon arrival of the LC proceeds.
Sight Bill Negotiation
69
69
No consideration with respect to the delivery date of FCY will
affect the conversion rate of FCY into Pak Rupee.
Meezan Bank may ask the exporter to assign its receivable
(under this LC) to Meezan Bank.
Sight Bill Negotiation
70
70
TRADE FINANCE
Import Financing through Import Murabaha & Musharakah
Sight & Usance LCs - Shariah Compliant alternative
Shariah Compliant alternative of Bill Discounting Dollar
Salam (for Sight Bills) & Murabaha (for Usance Bills)
Islamic Export Refinance scheme Part I & Part II
Trade Finance Products
71
71
Conclusion
72
72
Islamic banking transaction are sensitive transactions and
requires extreme care in execution.
A small mistake at any stage may convert Murabaha into an
interest based loan.
It is the responsibility of each one of us to ensure that our
Murabahas are executed in the best manner and the income
derived is Halal in true letter and spirit.
Conclusion

Murabaha - Application (Trade Finance)

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Murabaha - Application (Trade Finance)

Uploaded by

Copyright:

Available Formats

1

You might also like