Trade Finance –

Import Musawamah
Import Letter of Credit (LC)

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 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

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 Letter of Credit

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.

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 Letter of Credit

SSB has allowed that the bank may charge service charges for the following services.

 Documentation
 Credit Assessment
 Correspondence
 Account Maintenance Services
 Monitoring Services

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 Letter of Credit

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.

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Import Musawamah

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 SIGHT LC - Basics

Basics
• All Sight LCs are opened under MSFA/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 Musawamah Contract is a must for

Musawamah to take place and it needs to be signed at the time of delivery of
documents to the customer.

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 SIGHT LC - Basics

Basics
• In case Ijarah is being done for the goods, Musawamah Contract will not be
signed since the ownership of asset remains with MBL throughout the Lease
period.

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 Import Musawamah– Sight LC

• LCs opened and subsequently financed by Meezan Bank are an ideal example of a
direct payment Musawamah.

• 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 Musawamah (i.e. on agreed price)

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 Import Musawamah– Sight LC

Process Flow:

Step 1:
• Meezan Bank and the customer will sign a Master Musawamah 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 Bank’s behalf by opening LCs with Meezan Bank.

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 Import Musawamah– Sight LC

Process Flow:

Step 2:

The customer will negotiate a deal with some foreign supplier (exporter) for the
purchase of goods.

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 Import Musawamah– Sight LC

Process Flow:

Step 3:

• Importer will request Meezan Bank to open L/C by submitting all relevant
documents.

• Insurance to be arranged by the importer as agent of MBL and relevant policy to

be forwarded along with the L/C application form.

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 Import Musawamah– Sight LC

Process Flow:

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)

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 Import Musawamah– Sight LC

Process Flow:

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 MBL’s Nostro account and send documents to MBL

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 Import Musawamah– Sight LC

Process Flow:

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

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 Import Musawamah– Sight LC

Settlement:
• Incase Client does not need any financing, client’s 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 Musawamah Limit, sub-
musawamah should be issued. Issuance of Sub-Musawamah means signing of
Musawamah 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 Musawamah
settlement date
• MBL will release the shipping documents to the customer and record a Musawamah
receivable.

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 Import Musawamah– Sight LC

Settlement:

If MBL’s funds are involved (other than normal Musawamah Financing), two situations
could arise:
a) Nostro Debited before Client settles:
• MBL will discuss the payment date with customer and issue a Sub-Musawamah.
• Issuance of Sub-Musawamah means signing of Musawamah 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 Musawamah settlement date.

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 Import Musawamah– Sight LC

Settlement:
b) Payment Against Documents(PAD):
• Sub-Musawamah will be booked on the day the customer can arrange funds and
shipping documents will be released, after getting Musawamah Contract signed, on
the same day.
• The price will include profit from the day Meezan Bank’s Nostro account was
debited till the Sub-Musawamah settlement date.

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 Contract Price

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:

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 Contract Price

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 Musawamah 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 a contract price
of Rs. 1,005,600.

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 Key Point

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 MSFA/Agency
arrangement or without it.

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 Import Musawamah – Sight LC

Special Cases
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, against which possession of
goods can be taken.

• The Offer and Acceptance (via Musawamah Contract) will be signed at the time of
issuance of DO/SG to execute actual Musawamah

• Musawamah Contract Price will be calculated on the basis of cost price plus % profit
margin.

• Disbursement should not be made at this stage in the client’s account since actual date of
payment to the supplier/ beneficiary will be determined after the receipt of Shipping
documents

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 Import Musawamah – Sight LC

Special Cases
Shipping Guarantees or Delivery Order(DO):
• The tentative cost would be determined on the basis of FCY conversion rate prevailing on
the day of execution of Musawamah Contract. The Musawamah maturity date would be
set on the basis of expected date of disbursement.

• The actual cost of goods in PKR may change due to the fluctuation in foreign currency
rates as the payment/disbursement will be made after receipt of documents.

• In case the actual cost of goods in PKR is changed then as per the rules of Musawamah
the contract price can be revised to adjust both cost and profit proportionately.

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 Import Musawamah – Sight LC

Special Cases
Shipping Guarantees or Delivery Order(DO):

• At the time of receipt of documents, disbursement should be made as per the actual
cost to make payment to the beneficiary. This actual cost would be mentioned in the
Musawamah Contract Price Revision Table.

• At this stage Musawamah Financing (non funded) will be adjusted and Musawamah
Financing (funded) will be booked by MBL.

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Musawamah – Usance LC

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 Import Musawamah – Usance LC

• The customer usually do not require financing for Usance LC therefore customer
does not open Usance LC from Meezan Bank as an agent of the Bank .

• However, where customer requires financing for the LC amount customer opens the
LC as an agent of MBL and lock the price of FCY (to be paid at expiry of Usance
Period) via Promise based Islamic Forward.

• Upon receipt of Shipping documents Meezan Bank sells the goods to the customer
on Musawamah basis.
• Customer settles the Musawamah Payment on maturity date.

• If Promise-based Islamic Forward is not taken by the customer then process of

Shipping Guarantee can be used.

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LC Opened Through Other Banks

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 Import Musawamah – Usance LC

• In case LC is opened through Islamic Banks, the Islamic Bank is the owner of
Goods. Hence Musawamah with Customer possible

• In case LC is opened by the customer then;

• If B/L is issued, Musawamah with Customer not possible
• If B/L is not issued, Musawamah with customer not possible

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Forward Cover and Close Outs

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 Forward Cover

• Usually these transactions are used to cater trade finance needs of the customers, e.g; Customer have to make
payment in the foreign currency to his foreign supplier on the future date in order to hedge the foreign exchange
risk, customer take forward promise from the bank.

• In this type of transaction, parties agree to keep the Maturity Date after a certain period of time in future.

• IBI treasury enters into the forward promise with IBI customers.

• In forward promise with IBI’s customer there is an option period in which customer can execute his promise (option
period till maturity), whereas before option period customer cannot exercise his promise or mature the deal.

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 Forward Cover

FOREX TRADING
FORWARD PROMISE WITH CUSTOMER

There are following scenario in which customer terminate his forward

promise.

NORMAL TAKE UP CLOSE OUT

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 Forward Cover

Normal Take-up

• It is the simplest scenario of termination of the forward promise.

• On maturity customer comes to the bank with the funds to fulfil his promise by exchange their position on the
maturity date, by executing offer and acceptance with reference to the promise.

• To review these transactions, check the offer and acceptance should be as per the Shari'ah Department approved
format, does customer and MBL signed the document on the maturity date.

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 Forward Cover

Close-Out

• IBI will sell the USD$ to customer on promised price.

• Customer will sign agency agreement to sell USD$ in market to procure PKR.
• Difference b/w promised value and market value will be passed on to customer.

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Musawamah – FIM (Pledge)
(Financing Against Imported Merchandize)

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 Musawamah- FIM (Pledge)

Musawamah FIM: (Financing Against Imported Merchandize)

• A Musawamah facility in PKR in 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.

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 Musawamah- FIM (Pledge)

General Process Flow:

• The bank will appoint importer as its agent to import the goods on its behalf. In this step,
Agreement to Musawamah 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 and Musawamah
Contract.

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 Musawamah- FIM (Pledge)

General Process Flow: Cont…

• The sale price in Musawamah Contract will correspond to the number of days customer
wants to avail financing.

• Upon execution of Musawamah Contract bank will release the documents to the
customer and customer will receive the goods, which will be kept under a pledge
arrangement under bank’s muccudam as a security for payment of the Musawamah
price.

• As per the Payment Schedule, customer pays the Musawamah price from time to time
and releases the corresponding value of goods. MBL issue a D/O in this regard.

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Musawamah – FIM (SPOT)
(Financing Against Imported Merchandize)

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 Musawamah- FIM (SPOT)

Musawamah FIM-SPOT: (Financing Against Imported Merchandize)

• A Musawamah 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 Musawamah FIM Deffered as the ownership of
the goods remains with the Bank for a longer of period.”

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 Issues in Import Musawamah

• Date of BL mentioned before date of LC

• Financing of Duties & Taxes
• Open BL
• Issuance of DO without taking possession
• Using wrong formats for Import

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 Ijarah- Plant & Machinery
(Long Term Financing Against Imported Assets)

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Ijarah- Plant & Machinery
(For Sight LC Transactions)

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 Import Ijarah (Sight LC’s)

Import Ijarah: (Long Term Financing Against Imported Assets)

A medium to long-term Islamic leasing facility for plant and

machinery. The subject matter of Ijarah may be imported by the customer as an agent
of the Bank.

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 Import Ijarah (Sight LC’s)

Process Flow

Following Process flow should be followed when Ijarah is to be done for asset being
imported under Sight LC:
1. The customer has approached MBL for Ijarah Facility for asset which has to be
imported through opening of Sight LC.
2. After necessary Credit and Shariah approval MBL will appoint customer as its agent
to import the assets and sign the ‘Ijarah Agency Agreement’ with MBL. Customer
will establish Sight LC under agency from MBL counter.
3. The client will also give an ‘Undertaking to Lease’ to ensure that the customer will
get the asset leased via MBL.

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 Import Ijarah (Sight LC’s)

Process Flow

4. Upon arrival of import documents, the bank will deliver the documents to the
customer (acting as agent of MBL) after normal checking.
5. Acting as MBL’s agent, customer will get the Assets released from the Port and pay
the relevant duties, taxes, transportation and other charges to port for release of
assets from the port.
6. After the delivery of assets, MBL will get the assets insured from Takaful Companies.
MBL can also appoint the client as its agent to get the asset through Takaful.

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 Import Ijarah (Sight LC’s)
7. Following points should be taken care of in deciding the usability of Ijarah Asset and
signing of Ijarah Agreement:

a) In case Ijarah is to be done for the whole Plant, the Client (acting as MBL’s agent) will
carry out certain activities that are necessary to bring the plant in workable state.
Such costs that are directly related to get the whole plant in commissioning state shall
be pre-agreed with MBL. All Costs incurred by customer acting as Agent of MBL will
be added up to Invoice Value/ Import Cost to determine the Total Cost of the Asset.
After the asset comes into a usable state, MBL and customer will enter into Ijarah
Agreement.
b) In cases where Ijarah is to be done on an identified machinery of a Plant (and not on
the whole plant), Ijarah Agreement must be signed right after the delivery of
asset to the customer’s premises in usable condition.

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 Import Ijarah (Sight LC’s)

Process Flow
8. Cost incurred by customer acting as Agent of MBL, mentioned in points 5, 6 & 7(a)
above, will be added up to Invoice Value / Import Cost to determine the Total Cost
of the Asset. This cost will be used for determining the Lease rentals. The client
would be reimbursed for the cost incurred by them as MBL’s Agent.
9. Lease rental will start from the next month/ Quarter/ Period.
10. The rental amount may be calculated with reference to a well known benchmark
(with a clearly defined balanced Floor & Cap) agreed upon at the time of signing of
Ijarah Agreement. However, the amount of rental for the first period should be
specified in Rupees Terms at the beginning of the First Period at the time of signing of
Ijarah Agreement.

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 Import Ijarah (Sight LC’s)

Process Flow
11. After signing of Ijarah Agreement customer will undertake to purchase the Ijarah
Asset through ‘Undertaking to Purchase’ upon the early termination / maturity of
the lease period.

12. On completion of the tenor of the lease and upon receipt of all rentals and other dues
from the customer the Bank shall gift the asset to the customer by executing the Gift
Deed.

13. Upon early termination of the lease, the customer will purchase the asset from MBL at
the relevant price as set out in the under the Undertaking to Purchase via
executing the Sale Deed.

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Ijarah- Plant & Machinery
(For Usance LC Transactions)

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 Import Ijarah (Usance LC’s)

Process Flow

Following Process flow should be followed when Ijarah is to be done for asset being
imported under Usance LC:
1. The customer has approached MBL for Ijarah Facility for asset which has to be
imported through opening of Usance LC.

2. After necessary Credit and Shariah approval MBL will appoint customer as its agent
to import the assets and sign the ‘Ijarah Agency Agreement’ with MBL. Customer
will establish Usance LC under agency from MBL counter.

3. The client will also give an ‘Undertaking to Lease’ to ensure that the customer will
get the asset leased via MBL.

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 Import Ijarah (Usance LC’s)

4. Upon arrival of import documents, the bank will deliver the documents to the
customer (acting as agent of MBL) after normal checking.

5. Acting as MBL’s agent, customer will get the Assets released from the Port and pay
the relevant duties, taxes, transportation and other charges to port for release of
assets from the port.

6. After the delivery of assets, MBL will get the assets insured from Takaful Companies.
MBL can also appoint the client as its agent to get the asset through Takaful.

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 Import Ijarah (Usance LC’s)
7. After the arrival of import documents and before signing of Ijarah Agreement Forward
Cover will be taken for the payments to be made by MBL against Usance LC to fix
the import cost of goods in PKR.

8. Acting as MBL’s agent the Client will carry out certain activities that are necessary to
bring the assets in workable condition. Such costs that are directly related to the
asset or as may be decided between MBL and the customer as being directly related
to the asset will be reimbursed to the client.

9. Import Costs, insurance costs, cost incurred for the release of assets (duties),
transportation costs and other costs related directly to the ownership of the assets
will be added up to determine the total cost of the asset. This cost will be used to
determine the lease rentals.

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 Import Ijarah (Usance LC’s)

10. After the assets comes into usable condition MBL and client will enter into Ijarah
Agreement. Lease rentals will start from the next month/quarter/period. The signing of
Ijarah Agreement shall not be delayed till the maturity of Usance Period.

11. For determination of the rentals, profit rate will be estimated based on the respective
Benchmark Rate (For e.g. KIBOR)

12. The rentals for the first period (the Usance Period) would be decided and fixed in
rupee terms at the inception of the Ijarah Agreement along with the formula for
charging the rentals after the end of the first period.

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 Import Ijarah (Usance LC’s)
13. In cases where the client is not willing to pay the rentals during the Usance Period; so
as to allow the machinery sufficient time to generate cash flows to service rentals; the
rentals for the whole Usance Period would be fixed and charged from Day 1 when the
asset is delivered in Usable Condition and the Ijarah Agreement is signed. However,
the payment of the rental amount would be defferred until the expiry of the credit period
under the Usance L/C. Rentals fixed for the Usance Period should not be a nominal
amount, for this reason it should be atleast be equal to 50% of the subsequent periodic
rental (this may also include the Takaful expenses and as well as other expenses like
duties paid).

14. At the end of the first period, the lease rentals for the next period will be decided based
on the respective Benchmark rate (with a clearly defined cap & floor ) as mutually
agreed at the time of Ijarah Agreement.

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 Import Ijarah (Usance LC’s)

15. The customer will also give an “Undertaking to Purchase” to purchase the asset in
case of the early termination/after maturity of the lease period.

16. On the date of maturity of Usance L/C MBL will execute payment of the Usance L/C
in foreign currency to the foreign supplier.

17. Upon the maturity of the lease term the leased assets shall be sold to the customers
as per the Undertaking to Purchase.

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Diminishing Musharakah- Plant &
Machinery
(Long Term Financing Against Imported Assets)

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 DM Import (Sight LC’s)

Diminishing Musharakah
(Long Term DM Financing Against Imported Assets)

A medium to long-term facility for joint purchase of plant & machinery from a third
party (import) & Ijarah of Bank’s share to the customer. This facility is based on Shirkat
ul Milk

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 DM Import (Sight LC’s)

Process Flow
Following Process flow should be followed when Diminishing Musharakah is to be done
for asset being imported under Sight LC

1. The customer has approached MBL for Diminishing Musharakah Facility for asset
which has to be imported through opening of Sight LC.

2. After necessary Credit and Shariah approval customer will sign the ‘Musharakah
Agreement’ with MBL and will establish Sight LC as agent/under Musharakah from
MBL counter. Tentative Total Cost of Asset (calculated by using current FCY
conversion rate of that day), share of MBL and customer shall be included in the
Appedix B of the Musharakah Agreement at this stage.

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 DM Import (Sight LC’s)

3. The customer will also give an ‘Undertaking to enter into Payment Agreement’ to
ensure that the customer will get the MBL share in the asset leased via MBL.

4. Upon arrival of import documents, the bank will deliver the documents to the
customer after normal checking.

5. Customer will get the Assets released from the Port and pay the relevant duties,
taxes, transportation and other charges to port for release of assets from the port.
Generally these charges become part of customer’s share or sometime customer get
these changes reimbursed from the Bank.

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 DM Import (Sight LC’s)

6. Following points should be taken care of in deciding the usability of Musharakah

Asset and signing of Payment Agreement:
a) In case Musharakah is done on the whole Plant, the Customer will carry out certain
activities that are necessary to bring the plant in workable state. Such costs that are
directly related to get the whole plant in commissioning (usable) state shall be pre-
agreed with MBL. All Costs incurred by customer in this regard, costs mentioned in
point 5 and LC opening charges will be added up to Invoice Value/ Import Cost to
determine the Total Cost of the Asset. After the asset comes into a usable state, the
share of each party shall be completely determined; accordingly Appendix B of the
Musharakah Agreement will be revised and MBL will sign Payment Agreement with
the customer

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 DM Import (Sight LC’s)

b) In cases where Musharakah is done on an identified machinery of a Plant (and not on

the whole plant), Cost incurred by customer, mentioned in points 5 above and LC
opening charges, will be added up to Invoice Value / Import Cost of that
specific Machine to determine the Total Cost of the Asset. Accordingly Appendix
B of the Musharakah Agreement will be revised and MBL will sign Payment
Agreement with the customer right after the delivery of the machine/asset to the
customer’s premises in usable condition.

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 DM Import (Sight LC’s)

7. Periodic Payment under Payment Agreement (Lease rentals) will start from the next
month/ Quarter/ Period.

8. The rental amount may be calculated with reference to a well known benchmark (with
a clearly defined balanced Floor & Cap) agreed upon at the time of signing of
Payment Agreement. However, the amount of rental for the first period should be
specified in Rupees Terms at the beginning of the First Period at the time of signing of
Payment Agreement.

9. MBL’s share of assets will be divided into Musharakah Units, which will be sold to
the customer on a monthly/ quarterly/ Semi Annually basis.

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 DM Import (Sight LC’s)

10. After signing of Payment Agreement, the Customer will give an Undertaking to
purchase MBL’s Musharakah Units in this regard.

11. MBL will also give an Undertaking to Sell in case the customer wants to
purchase the units earlier than the normal schedule.

12. Musharakah in the said assets would be limited to the specific assets and not to the
business or whole enterprise.

13. The assets should be covered through the Islamic Concept of Takaful.

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GROUP EXERCISE
1) Devise solution for import short term financing for LC opened by
other Islamic Banks where LC is/to be established under Agency
Agreement. Cover all possible scenarios
2) Devise solution for import short term financing for LC opened by
other Islamic Banks where LC is/to be established without Agency
Agreement. Cover all possible scenarios
3) Devise solution for import short term financing for LC opened by
Conventional Banks. Cover all possible scenarios.
4) You are required to sign a LC participation Agreement. What areas
should be covered in case the LC is opened by Conventional bank.