6. murabaha - application (trade finance)

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Application of Murabaha

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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

3Local Purchases

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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

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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

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Import Murabaha

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Import Letter of Credit (LC)

Letter of Credit

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Letter of Credit

Conventional Banks earn in two ways while opening Letter Of Credit. They are:

9Service charges for opening an LC

9Interest charged on the LCs not paid on due date

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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

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SSB has allowed that the bank may charge service

charges for the following services.

9 Documentation9 Credit Assessment9 Correspondence9 Account Maintenance Services9 Monitoring Services

Letter of Credit

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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

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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 - BasicsSight LC - Basics

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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 - BasicsSight LC - Basics

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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

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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:


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Step 2:

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

Process Flow:


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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:


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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:


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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:


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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:


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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.


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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 MBLnostro was debited to the Murabaha settlement date.


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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.


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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 atthat stage.

Special Cases


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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


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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

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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

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LC Amount= Rs. 1,000,000LC Opening Charges= Rs. 2,500Insurance= Rs. 2,000Miscellaneous 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

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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

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Murabaha FIM (Pledge)(Financing Against Imported Merchandize)

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Murabaha FIM: (Financing Against Imported Merchandize)

A Murabaha facility in PKR which the subject matter, which is animported 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)

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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.


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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 tothe 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 murabahaprice on time and subsequently goods are released from MBLspledge.


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Murabaha FIM (SPOT)(Financing Against Imported Merchandize)

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Murabaha FIM-SPOT: (Financing Against Imported Merchandize)

A Murabaha facility in PKR in which the subject matter, which isan 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)

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Murabaha FIM (SPOT)

Scenarios

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Case I : With Pledge Margin and Nil Cash Margin

In this case a certain portion of the imported goods, equivalentto the pledge margin is also kept into the pledge along with thewhole 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.


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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 mentionedin the above mentioned Murabaha Contract.


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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.


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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


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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. 80,000MBLs ownership ratio in goods under pledgeafter 1st sale : 50%MBL Cost per unit asper ownership ration : Rs. 800

Delivery Order required for 50 unitsMBL Cost in 50 Units : 40,000Total Value of Lot : Rs.80,000MBL Percentage ratioin schedule of Assets : 50%


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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.


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Case III : With Cash Margin Only

In this case a certain amount of money is kept as cash margin inthe margin amount and financing is provided to the full value ofassets.

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.


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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 establishedon the available goods and will be mentioned in the above mentioned Murabaha Contract as advised in Case 1).


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.


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Example:

Cost of Goods : Rs. 100,000No. of Units : 100LC 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)



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Example: Cont

Amount of first Sale : LC Charges + Takaful Premium +Duties &Clearance Charges

Amount of first Sale : Rs. 60,000MBLs ownership ratio in goods under pledgeafter 1st sale : 62.5%MBL Cost per unit asper ownership ration : Rs. 1000

Delivery Order required for 50 unitsMBL Cost in 50 Units : 50,000Total Value of Lot : Rs.80,000MBL Percentage ratioin schedule of Assets : 62.5%


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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.


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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).



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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.


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Example:

Cost of Goods : Rs. 100,000No. of Units : 100LC 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)



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Example: ContPledge 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

Amount of first Sale : Rs. 60,000

MBLs ownership ratio in goods under pledgeafter 1st sale : 62.5%

MBL Cost per unit asper ownership ration : Rs. 1000


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Example: Cont

Delivery Order required for 50 units

MBL Cost in 50 Units : 50,000Total Value of Lot : Rs.80,000MBL Percentage ratioin schedule of Assets : 62.5%

Delivery Order for Pledge Units : Rs.10,000 (For 10 units)


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Solutions for Exporters

Import Financing

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Islamic Export Refinance

Scheme (IERS)

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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.


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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


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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


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Islamic Alternative to Export

Bill Discounting(Based on Murabaha & Bai Salam )

Bill Negotiation

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Murabaha against Usance Export Bill

- an alternative

to Export Bill discounting

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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

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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.


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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.


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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

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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

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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

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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.


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Bai Salam against Sight Export Bill

- an alternative

to Export Bill discounting

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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

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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

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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

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Conclusion

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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

6. murabaha - application (trade finance)

Documents

purchase of house

murabaha purchase evidence

behalf of meezan bank

bill purchase

purchase of raw cotton

purchase of land

bank sign mmfa agreement

credit assessment charges