AlHuda Islamic Modes Agricultural Financing 20-10-2008-Lahore

7/31/2019 AlHuda Islamic Modes Agricultural Financing 20-10-2008-Lahore

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Islamic Modes for Agricultural

FinancingPRODUCTS Murabahah andSalam

Lahore 16 17 May, 2008Al Huda Training Programme

Muhammad KhaleequzzamanHead Islamic banking DepartmentIntl Islamic University Islamabad


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Islamic Modes Agricultural Financing

Agricultural production Cycle - Crops

Acquisition of land/Choice of crop

Preparation of land

Crop productionoperations

Harvesting

Post harvest &Marketing

Entering Contract of cultivation incase of rented land, decision about crop

in view of market demand

STAGE ACTIVITY

Sowing/transplantation, Irrigation,Fertilization,Weeding, Pesticide application

Clearing, Leveling, Plowing, Seed bed preparation,Installation of Irrigation/drainage system

Cutting/ picking,threshing

Cleaning, Grading, Processing, Packing,Storage, Transportation, Sale of produce


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Areas of Financing (including crop production)

Working Capital (Short term): Crop production [Purchase of inputs i.e. seeds, fertilizers,

pesticides, etc.] {Murabahah}

Poultry Farming [purchase of feed/raw material,birds/chicks, vaccination/medication, utensils, etc.]

{Murabahah}

Dairy Farming [purchase and production of feed/fodder,milk container, vaccination/medication, utensils, etc.]

{Murabahah}

Fish Farming [purchase of fuel, ration, processing{Murabahah} equipment, purchase of handling andstorage boxes, etc.]

Liquidity Requirement [repair & maintenance of machinery

& equipment, labor/water/utility charges, etc.) {Salam}


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Term Financing (medium and long term: Farm Mechanization [Purchase of tractor and farm

machinery for tillage, sowing/planting, pesticideapplication, harvesting/threshing, etc.] {Murabahah/ Ijarah}

Transport [purchase of trailers, reefer vans, milk cooling/

chiller tanks/carriers, motorcycles/pickups, of feed/rawmaterial, birds/chicks, vaccination/medication, utensils,etc.] {Ijarah/Diminishing Musharakah}

Live stock [purchase/replacement of animals for milk &meet production, refrigerated storage, animal sheds, water

supply system, generator, fencing slaughter house etc.]{Murabahah/DM/Istisna}

Irrigation System [t/wells, sprinkler/drip/solar pumps,water course lining, etc.] {Ijarah/Murabahah/DM/ salam}

Forest development and enhancement [nursery raising,

tree plantation, etc.] {DM}


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Term Financing (medium and long term: Poultry Farming [construction of breeding & hatchery

farms, utensils, feed mills, transport & distributionvehicles, slaughtering & processing, etc.] {Murabahah/DM}

Fish Farming/catching [construction of fish ponds &hatcheries, purchase/replacement of fishing boats,engines, and related facilities & equipments, constructionof cold storage, etc.] {Murabahah/DM}

Dairy Farming [milk processing, plants, etc.]

{Murabahah/DM/Ijarah} Miscellaneous [green houses, godowns, dairy/livestock

farms, seed/milk/fruits/vegetables processing equipment]


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BLANK SLIDE



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Training Workshop Islamic Microfinance

ISLAMIC MODES/INSTRUMENTS: Sale Contracts:

Murabaha/Murabahah to the Purchase Orderer

Salam/Parallel Salam

Istisna/Parallel istisna Participatory Modes:

Mudarabah/Resource Mobilization

Musharakah/Diminishing Musharakah

Rent based Modes: Operating ijarah

Ijarah wa iqtina


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Theory & Practice of Murabahah

Preliminary: Rules applicable for Islamic Sale

1. Subject (good to be sold) must exist at the time of sale2. Subject must be in ownership of seller Physical or constructive

possession [exception in Salamand Istisna]

3. Subject must be property of value

4. Subject should be halal

5. Subject must be known and identified

6. Sale must be instant and absolute

7. Sale must be unconditional

8. Delivery of sold item must be certain

9. Price of subject must be certainRisks and responsibilities attached with the subjectmust transfer from seller to the purchaser as a resultof sale


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Training Workshop Islamic Microfinance

Preliminary:

Murabahah; historical perspective

Murabahahand Musawamah

Spot and Deferred Murabahah

Deferred Murabahahand Bai Muajjal

Banking Murabahah


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Murabahah Concept and Historical perspective

Murabahah defined: Selling a commodity as per the purchasing price with a defined

and agreed profit (Ribh means profit).

Profit may be a percentage of the selling price or a lump sum.

The transaction may be concluded with or without any promise inwhich case it shall be called as ordinary Murabahah or bankingMurabahah or Murabahah to the purchase orderer.

Shariah Legitimacy of Murabahah:

Quraan: Surah Ale ImranIt is no crime for you to seek the

bounty of your Lord [verse 198]Surah Al-BaqarahAllah has permitted trade[Verse 275]

Sunnah: The Prophet (PBUH) purchased a she camel from AbuBakr (RAA) for use as transportation from Medinah...


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Process Flow:

Promise Stage Negotiation/Approval of overall limit

MOU/Master Murabahah Facility Agreement

Requisition + Undertaking + Security Deposit (Hamishjiddiyah)

Bank ClientMOU/Master MFA

Approval of Limit

2

1

Requisition, Undertaking, Sec. Dep. 3



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Agency Stage

Third party appointed as agent [Optional]

Clint can be appointed agent [case of dire need]

Payment to the Supplier Direct


ClientBank

Supplier

3

2Agency Agreement

PaymentSupplier

Agent(3rd Party)

Bank

Supplier

2

1Agency Agreement

Payment

Agent(Client)

Receipt of Payment

3

Draft of Payment2 A

Receipt of

Payment


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Acquisition/Possession Stage

Constructive Possession Payment to supplier

Discount of supplier/benefit to client

Title of goods

Transfer of risk and responsibilites


BankAgent

(3rd party)Supplier

Title Goods

Agent(Client)

Risks and Responsibilities


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Execution of Murabahah / second Sale

Receipt / Possession report Offer of client to purchase

Acceptance of offer by the bank

Return of security deposit

Collateral obtained

Delivery of goods / Transfer of Risk & responsibility

Ownership changes

Payment of earnest money (Urboun) [Optional]

Payment of Murabahah Price Client pays Murabaha price as per agreed schedule

Collateral released

Murabahah terminates



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Execution of Murabahah

ClientAcceptance of Offer

1

2

3

Offer to Purchase

Receipt , Possession Report

Payment of Murabahah Price

Murabahah Terminates

1

Bank ClientMurabahah Price

2

Bank

Sec. Deposit/Hamish jiddiyah

Urboun/Securities 4

3


DP Note


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Purchase of poultry feed stock

Murabahah transaction: Rs. 100,000

Murabahah Facility: 90 Days

Payment: Lump sum

Rate of Profit: Six monthsKIBOR+2%

Freight: 5% of cost of goods

Securities: Pledge of feed stock,

post dated cheques



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Particulars Amount (Rs.)

Cost of goods Rs. 100,000

Rate of Profit Kibor + 2%

Six monthly KIBOR 10% p.a.

Freight/Insurance 5% of cost

Total cost 100000 x 5% 100000 + 5000

=105000

Profit 10%+2% = 12% p.a. 105000 x 12% x

90/365 = 3107

Murabahah Price 105000+3107= 108107

Pricing of Murabahah [Example]:



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Issues in Murabahah:

Oral promise/unilateral bilateral promise with option

Suppliers price in the name of customer/without any

name/banks discretion (offer to negotiate)

Prior contractual relationship (customer and supplier)

Vendor being third party [buy back (inah)] Commitment or credit facility fee

Documentation charges

Syndication charges

Feasibility study fee

Performance guarantee from customer in case thevendor is of its choice


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Issues in Murabahah:

Hamish Jiddiyah/trust/return/investment

Arboun/treatment/timing

Sequence of transactions

Timing of promissory note

Rollover in murabahah

Timing of executing murabahah

Default by the client

LIBOR/KIBOR being reference price

Rebate on early payment


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BLANK SLIDE



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Islamic Modes/Instruments - Sale Contracts:

Salam:DefinedA salamtransaction is the purchase of acommodity for deferred delivery inexchange for immediate payment. It is a

type of sale in which the price, known asthe salamcapital, is paid at the time ofcontracting while the delivery of the item

to be sold known as subject matter ofsalam(al Muslam fihi) is deferred. Salam isalso known as Salaf (lit: borrowing)


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Salam:ShariahLegitimacy Allh says O ye who believe when you deal with

each other, in transactions involving futureobligations in a fixed period time, reduce them towriting [Al Baqara Verse 282]

Ibn Abbas reported, the Prophet (PBUH) came toMedina on Hijrat and found that people wereselling dates for deferred delivery (salam) over aperiod of one or two years. The Prophet (PBUH)

said: whoever pays for dates on a deferreddelivery basis (salam) should do so on the basisof specified scale and weight [Bukhari and

Muslim]


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Wisdom of allowing Salam Farmers, orchard owners, merchants can

fulfill their working capital andconsumption needs before the commodity

is ready to be sold


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Salam: It is an exception to the possession (a rule

of sale)

A purchase contract with deferred delivery

of goods in exchange of advance pricefully paid on spot (opposite to Murabahahfinancing)

Benefits both the seller and purchaser

Seller (client) receives the price in advance

Purchaser (Bank) contracts the price whichis lower than the market price at the time ofdelivery


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Conditions of Salam:

Salam is a binding contract Full price at spot, otherwise selling debt for debt

(exception upto 3 days) Salam capital (price) in principle be in cash,

however, it can also be fungible commodities

(wheat etc.), or usufruct [Imam Malik] Debt not recognized as salam capital Sale in case of commodities satisfying condition

of fungibility (Dhawatul Amthal), quantity bespecified exactly

Standardized production of companies can also betreated as salam commodity Product of a particular field or farm cannot be sold

under Salam


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Certain date and place of delivery The commodity should remain in the market

throughout the period of contract [Differentopinions]

Time period for delivery should be sufficient toallow use of salam capital conveniently and effectprices, preferably be at least 15-30 days [Differentopinions]

Subject matter of salam can be exchanged with

other goods only after the date of delivery as longas this replacement is not the part of contract. Butmarket value of exchanged goods should not bemore than the market value of salam goods


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If the buyer refuses to take delivery of goods(when these meet the specification criteria) heshould be compelled to take delivery

If seller fails to deliver due to insolvency he should

be granted an extension in time of delivery

Salam contract can be cancelled with the consentof both parties, and only the original price paid isreturned

A security/guarantee or personal surety can beobtained as safeguard against risk of default


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Bank Client

Payment of Salam Price 1-1-2007

Delivery of Goods 30-6-2007

Salam

Transaction Agent

Third Party


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Salam:Procedural Alternatives:

The banks face limitations in receivingcommodities and selling them in the market

Banks can overcome the limitation by establishinga subsidiary to undertake this task

Banks can adopt Parallel Salam or Third partysales to avoid this situation

Banks can appoint the client its agent to sell thecommodity. The agency agreement should be

separate from the salam agreement If agent has been able to sell the commodity at a

price more than the one stipulated in agencyagreement, he is entitled to get the difference


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Client Delivery ofCommodity20 Dec 06

PurchaserMFI

Third Party2nd Salam15 June 06

Delivery ofCommodity20 Dec 2006

ParallelSalam

Salam Sale Contract 1 June 061

2

5

Salam Price Payment 1 June 06

2ndS

alamCo

ntract

Paymentof

Price

Client Delivery ofCommodity20 Dec 06

PurchaserBank

Third Party2nd Salam15 June 06



2

5

3 4


2ndS

alamCo

ntract

Paymentof

Price

6

15June06


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ClientDelivery ofCommodity20 Dec 06

PurchaserBank

Third PartyPromise and

Payment


Third PartyPromise


2

5

3

4

6


Pays20Dec

06

PromisetoPurchase

15June06


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Rules of Parallel Salamand Third party promise

Both the contracts viz. salam and parallel salammust be independent of each other, otherwise itbecomes two sales in one contract

Parallel salam is allowed only with third parties.

Therefore the original seller cannot be entered intothe parallel salam

If one party breaches its obligation, the bank hasno right to refuse delivery of goods in parallel

contract

The third party giving unilateral promise shouldnot pay the price as this is not allowed in Shariah


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Difference Between Salam and Murabaha

Salam Murabahah

Delivery of good is deferred,price is paid at spot

Good is delivered at spot,payment of price is deferred

Price has to be paid in full Price can be paid on spot ordiffered, lump sum or ininstallments

Salam is not executed in thecommodity of particularspecifications or thecommodity from particular

origin

Murabaha can be executed inparticular commodity.


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THANKS


AlHuda Islamic Modes Agricultural Financing 20-10-2008-Lahore

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Transcript of AlHuda Islamic Modes Agricultural Financing 20-10-2008-Lahore