Meezan Tijarah (Finished Goods)

Presentation Outline
What is Meezan Tijarah Salient Features of Meezan Tijarah Finished Goods as a Mode of Finance Financing to Local Customers Process Flow Graphical Process Flow Risk Mitigation in Finished Goods Financing Legal Documentation

What is Meezan Tijarah

Meezan Tijarah is a Sale & Agency based financing facility for Customers who sell Finished Goods on Credit basis. basis.

The facility will enable the Customers to sell their Finished Goods stock, meet their working capital requirements and enjoy the benefits of Cash sales. sales.

What is Meezan Tijarah

Under this concept the Bank will purchase the finished goods of the Customers and will appoint the Customer as its agent to sell the same goods in the market generally on Credit basis. It is necessary for the validity of Finished Goods transaction that the price is fixed with the consent of the parties and that the necessary specification of the required items is fully settled between them. The Finished Goods price is ideally paid on Spot with immediate delivery of Goods.

Salient Features of Meezan Tijarah

Salient Features of Meezan Tijarah under the Finished Goods Financing Agreement A Finished Goods contract is permitted for Completed/ Finished Goods that have been transformed from their natural state by a manufacturing or construction process involving labor. The price of a Finished Goods contract is ideally paid on the spot with immediate delivery of goods. goods.

Salient Features of Meezan Tijarah

The delivery of the subject matter may take place through constructive possession. possession. At this point, the liability of the Customer in respect of the subject matter comes to an end and the liability of the Bank begins until its sale to the ultimate purchaser. purchaser.
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The parties may agree on a period during which the Customer will be liable for any defects. defects.

Finished Goods as a Mode of Finance

Finished Goods Agreement can be used for providing financing facility in transactions where final / transformed goods are available for sale. sale. It is just like a normal sale purchase transaction where a seller (the Customer) sells a good to a buyer (the Bank) on cash basis. basis. The Bank then appoints the Customer as its Agent to sell the same goods to a third party. party.

Finished Goods as a Mode of Finance

The Goods through Finished Goods Agreement can be sold by the Bank in one of the following manners: manners: 1. Outright sale by the Bank to some 3rd party after receipt of delivery of goods. goods. 2. Appoint the Customer as an Agent to sell the goods in the market. market. 3. The Bank can also have a promise to buy Finished Goods from some 3rd party for the goods having same specifications as the ones available with the Bank. Bank.

Financing to Local Customers

Option 2 - Appoint the Customer as an Agent to sell the goods in the market. market. A Customer (Manufacturer/ trader) has a stock of specified goods that are generally sold on credit. Since the Customer will be short of funds credit. during the credit period and this will affect his working capital. The capital. Customer has approached MBL for financing facility based on Sale & Agency. Agency.

Meezan Tijarah - Process flow

A. Credit Approval Stage

1. After proper Credit and Shariah approvals; MBL and the Customer will approvals; enter into a Master Finished Goods Agreement a MOU where the customer agrees on the general terms & condition related to sale of the Finished Goods stock to MBL from time to time via proper Sale. Sale. 2. The Customer and MBL will also enter into an Agency Agreement through which the Customer, acting as Banks Agent, will sell the Finished Goods to creditworthy buyers on credit basis. basis.

B. Transaction Stage
3. Upon requirement of funds, the Customer (usually a manufacturing/ trading concern) will offer to sell a specific stock of Finished Goods to MBL. MBL. The Customer will give Written Offer (Appendix A) to sell the finished good and specify the quantity, price, specification and place of delivery and the delivery date. date. 4. Upon acceptance of the offer, MBL will pay the Finished Goods price (X% less than the selling price) to the Customer. (X% Customer.

B. Transaction Stage
5. MBL will take the delivery either by physical or constructive possession of the Goods purchased. In case of constructive possession the storage purchased. facility or warehouse of the customer would be used. used. MBL representative will inspect the goods to ensure that existence of goods, its proper identification & separation from the customers owned stocks (i.e. goods not sold). (i. sold). (Note: (Note: This step is very important to ensure proper Shariah Compliance of the transaction). transaction).

B. Transaction Stage

6. A Goods Receiving Note (Appendix B) will be executed at this moment by the Bank representative & Customer to evidence the delivery of the Finished Goods to MBL. MBL. The risks and rewards associated with the Goods will be transferred to MBL at this stage. stage.

C. Agency Stage
7. After delivery of Goods MBL, through the Notice, as mentioned in the Schedule I of the Agency Agreement, shall authorize the customer to sell the Finished Goods at the price declared in the Notice. Notice. The Agent will arrange Takaful/permissible Insurance of the Goods. Goods. The Agent will now be responsible for recovery of Sale price and its payment to MBL with a certain number of days. days.

C. Agency Stage
8. As per the Agency Agreement, the Agent will be required to sell the goods on CREDIT[1] basis according to the terms agreed between the CREDIT[ Bank and the Agent (i.e. Schedule 2 of the Agency Agreement). The (i. Agreement). Agent will sell the Goods in --------- days[2] upon receiving the Notice days[ and collect the payment with in the specified time frame. frame. [1] As agreed upon in the specific process flow of the Customer. Customer. [2] As agreed upon in the specific process flow of the Customer. Customer.

C. Agency Stage
9. The Agent will be entitled to a fixed Agency Fee for providing the services as per Agency Agreement (including Takaful cost, transportation costs, storage etc). etc). In addition to the Agency Fee, the Agent will also be entitled to an Incentive Fee for arranging the proceeds earlier than the agreed schedule. schedule. This increase or decrease in the fee may be on a daily basis. The incentive basis. will be reduced if the Agent fails to arrange the proceeds on the due date. date.

D. Independent Guarantee

10. The Customer in an independent capacity will also provide an independent Corporate Guarantee to MBL for guaranteeing the credit worthiness of the Buyer and will undertake to compensate the bank in case of failure the Buyer to pay the sale price to the Bank. Bank. Note: Note: As per Shariah Supervisory Boards ruling, this independent Corporate Guarantee will be given after identification of the

Creditworthy Buyer and not before that. (i.e. The Guarantee cannot be that. (i. given for an unknown buyer.) buyer.

E. Sale of Goods & Collection of Sales

11. The Agent will sell the goods on MBLs behalf and will confirm the Bank 11. that it has sold the goods on behalf of the Bank via the Confirmation of Sale of Finished Goods (Schedule 3 of the Agency Agreement). As per Agreement). the payment terms, the buyer will pay the selling price to the Agent. After Agent. receiving the payment, the Agent will pass on the proceeds (net of applicable Agency & Incentive fee) to MBL. MBL.

Graphical Process Flow

6. Agency / Incentive Fee

1. Finished Goods Agreement

Customer

2. Delivery of Goods 3. Agency Agreement

MBL

4. Sale of Goods

Local Buyer

5. Sale Proceeds

Risk Mitigation in Finished Goods Financing

RISKS 1 Delivery Risk MITIGANTS

Delay in delivery of goods from the Customer is liable to pay back the full Customer to MBL amount to MBL The Customer delivers defected/inferior goods, which is realized by MBL only when the ultimate purchaser points it out. out. MBL has recourse on the Customer for an agreed time period OR KhiyarKhiyar-e-Aib may be exercised by MBL by asking Customer to rectify the defect. defect.

Quality Risk

Price Risk

Market price of the subject matter Parallel Finished Goods or promise decreases after MBL enters into to purchase from a 3rd party will Finished Goods agreement. agreement. mitigate the risk. risk. The ultimate purchaser cancels the The subject matter of Finished order based on which MBL entered Goods may be sold in the market to into Finished Goods Agreement with a 3rd party. party. the Customer. Customer.

Order Cancellation

Risk Mitigation in Finished Goods Financing

RISKS
The goods once delivered by Customer will be at MBL's risk before the same are sold to the ultimate purchaser

MITIGANTS
This may be covered through Takaful of the goods and by minimizing the time duration between acceptance of delivery under Finished Goods and delivery to the ultimate purchaser. purchaser.

Storage Risk

Non performance of Agent

Agent is unable to arrange sale proceeds within a The Incentive Fee will be reduced on daily specified time period or delays basis. basis. in passing on to the proceeds to MBL. MBL. The ultimate purchaser The Customer (in its independent capacity as refuses to make payment on MBLs Agent) may be asked to provide time or goes bankrupt. bankrupt. Corporate Guarantee to guarantee payment obligations of ultimate buyers. buyers.

Default by ultimate Purchaser

Legal Documentation for Finished Goods Financing

Legal Documentation for Finished Goods

Legal Documents in Finished Goods Financing comprises of: of: Master Finished Goods Agreement Finished Goods Agency Agreement Finished Goods Corporate Guarantee

Legal Documentation for Finished Goods

Master Finished Goods Agreement Purpose : This is the main Agreement through which the Customer sells the Finished Goods to the Bank. Bank. Components : A. Written Offer: Offer: Description of Goods including quantity, quality, delivery date, cost price, place of delivery etc B. Goods Receiving Note: Note: Date, time, address, description of goods received. received.

Legal Documentation for Finished Goods

Finished Goods Agency Agreement: Purpose : The Bank appoints the Customer (manufacturer/ trader) its Agent to sell the ready-to-sell goods. ready-toComponents : A. Notice The Bank authorizes the Agent to sell the Assets as its undisclosed Agent and details of the Assets are mentioned. mentioned. B. Agency Fee Comprises of Agency fee and Incentive Fee C . Confirmation of Sale of Finished Goods It is the confirmation of Sale of MBL goods. goods.

Legal Documentation for Finished Goods

Finished Goods Corporate Guarantee Purpose : An independent Corporate Guarantee from the Agent regarding the credit worthiness of the end buyer(s)

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