Trade and Consumer Financing

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Trade and Consumer

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Trade FinancingOne of the most important service offered by Islamic

banking

..Address the needs of the business involving cross-bordertransactions

..Can be categorized into:

1.Domestic involves buying and selling of commodities in the

country which includes retail trade and wholesale trade

2.International trade is the external trade of the country, and it

encompasses the exchange of comodities between the

country and other countries including the import and export

trade

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ILC is a written undertaking given by the Islamic bank to the

seller (the beneficiary) at the request and the instructions of

the buyer (the applicant), to pay at sight or at a determinable

future date, a stated sum of money within a prescribed time

limit and against stipulated documents which must comply

with terms and conditions

..Can be offered based on a few contracts:

..Wakalah(agency)

..Murabahah(cost-plus profit)

..Musharakah(partnership)

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Islamic Letter of Credit (ILC)


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Islamic Letter of Credit (ILC)

Wakalah: -the customer must pay in advance the full value ofthe item prior to the issuance of the ILC. The IFI will receive acommission or service fee upon the service rendered to

customer.

Murabahah: -the IFI would import or purchase the goods andsubsequently sell to the customer at a mark-up priceagreeable to both parties. The title of the goods will be

transferred to the customer only on the arrival of the importdocuments. If the customer does not have deferred paymentfacilities, he or she must settle in full to the IFI, prior toreceiving the import documents


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Islamic Letter of Credit (ILC)Musharakah: -

the principle of musharakah is used in addition to

wakalah or murabahah in certain jurisdiction. IFI willrequire the customer to deposit a certain percentage

of money prior to the importation of goods. The IFI

will then, issue the ILC and make the payment usingboth customers and own fund. The customer is

responsible for the selling of goods and returning the

IFIs portion of capital together with the portion ofprofit agreed earlier

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Islamic Trust Receipts (ITR)

..ITR is a facility to finance domestic and international trade

documents drawn against ILC

..Islamic banks issue ITR facility to the customer based on

the Murabahah principle for financing the purchase of

goods

..It is a document of trust signed by the customer(importer), the strength on which the IFI allows the

customer to obtain release the merchandise but make a

lump sum payment at a later date


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- IAB is a result of the securitization of a murabahahI TR

- IAB is drawn to finance the trading of tangible halal

goods and formulated based on the murabahah (cost-

plus sales) principle and bay al dayn ( sale of debt)- The result of securitizing the murabahah ITR, creates a

debt owed to the IFI. E.g. A customer approaches an IFI

for trade financing. The IFI will appoint the customer as

an agent to purchase the asset from the supplier. The IFI

will pay the supplier cash. The asset then will be sold to

the customer at a price comprising the profit and to be

paid by installment or a later date.


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- Defined as financing activities where the main

emphasis in on service for individuals rather than

corporate and business entities

- Delivered through a network of outlets and servicepoints

- Very narrow and specific to basic individual necessities

that can be divided into three broad categories:

Home financing Automobile financing

Personal financing

Consumer Financing


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Most common types:

- Bay bithaman ajil (deferred payment sale)

- Musyarakah mutanaqisah (diminishing partnership)

- Ijarah(leasing)

- Parallel istisna (construction-required sale)

Home Financing-Bay Bithaman Ajil (BBA)

- Based on shariahconcept of defereedpayment sale

- Defined as a sale contract which the payment of the price is

deferred and payable at a particular time in the future

- The term BBA is commonly used in Malaysia and Brunei

- In other jurisdiction, the terms that are used to connote the

same meaning are bay muajjal (South Asian Region) and

baymurabahah (Middle Eastern countries)


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Home Financing-Musharakah Mutanaqisah (MM)- A hybrid contract which was recently developed by contemporary

scholars

- Defined as a form of partnership in which one of the partners

promise to buy the equity share of the other partner gradually untillthe title of the equity is completely transferred to him.

- The transaction generally consists of three steps:

1. A bank and a customer form a partnership based on the

contract of shirkah al-milk2. The customer agrees to rent the banks undivided share of the

property through the contract of ijarah

3. Throughout the financing period, the customer will gradually

buy the banks share through the contract of bay -the

customer usually sign the purchase of undertaking (waad) for

this purpose


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Home Financing-Parallel Istisna

- Usually offered for property under construction

- Istisna means a request, invitation or inducement to construct or

manufacture something

- Defined as a contract whereby a buyer will place an order to

purchase the asset which will be delivered in the future

- The buyer will require the seller to construct or manufacture the

asset according to the specifications given in the sale and

purchase agreement- Both parties will decide on the price upfront and the settlement will

be arranged based on the schedule of the work completed


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Thank YouWassalam

Mohd Fuad May 2013

Trade and Consumer Financing

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