Post-Mid Assignment 1
SUBMITTED
BY
TAYYIBA SHAHID
MAJOR: ACCOUNTING AND FINANCE
SEMESTER: 6
SUBJECT: Islamic Banking & Finance
DATE: May 13, 2022
SUBMITTED
TO
Ma’am Fareeha Waseem
1
Table of Contents
Contents
Case Scenario: Application Based Financing Mode ................................................................................ 3
Critical Evaluation ...................................................................................................................................... 7
References .................................................................................................................................................. 13
Annexures .................................................................................................................................................. 14
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Case Scenario: Application Based Financing Mode
“Critically discuss in detail the mechanism behind the Faysal Bank Noor Card
OR other Islamic Bank offering the card based on the same mode.”
Faysal Bank Noor Card:
Faysal Bank Noor Card are based on the principles of Islamic Finance i.e. Tawarruq. They are
introduced first time in Pakistan. Faysal Bank uses “Musawamah” sales contract to conduct the
process of Noor Cards. It can satisfy the liquidity needs of clients (merchants) without the charge
of interest (Riba). It is an asset based financing. The process flow is such that on deferred basis
customer purchases the products from bank and sell it to the third party on spot to fulfill their
liquidity needs immediately, while compliance with Shariah. To be eligible to get Faysal Bank
Noor Cards, the person should be above 18. The limit of transaction for the card is Rs. 50,000 to
Rs. 3,000,000.
Types of Noor Card:
As, with conventional bank card types, Faysal Bank has some types of Noor Cards which are:

Noor Velocity Card – to provide flexibility in purchasing process.

Noor Blaze Card – to provide for the major use in times shopping and travelling.

Noor Titanium Card – to provide for offers wither locally or internationally that are not
misleading.

Noor Platinum Card – it also provides for major use in shopping and travelling; but it has
more limit so it provides more ease and good experience.

Noor World Card – it offers discounts and offers for travelers and provides protection from
fraud.
Mechanisms behind Noor Card:
The steps for mechanism are as follows:

Firstly, individual applies for the Noor Cards.

When the individual has applied, they enters into “Musawamah contract” by which he/she
agrees to purchase commodities from the bank on deferred basis.
3

Then when goods are bought on deferred basis and customer has their possession, the
customer appoints agent to sell them to the third party, on spot basis.

When the goods are sold on spot basis, the immediate liquidity needs of customer are
fulfilled as the proceeds are transferred to Modaraba account, and the amount can be
used/withdraw by using the Noor Card.

Transactions are sent to the client through monthly bank statement.

For the use of full limit of card, payment should be made within the required time frame.

Then the bank demands the “Accrued profit” as per the Musawamah agreement, if the
customer doesn’t pay entire amount within the time frame.
Benefits of Noor Card:
Some benefits/ features of these Noor Cards are:

Providence of “DigiMall” service to provide services in case of online shopping.

Protection from fraud in experiences of travelling and shopping.

No payment/fee is deducted on withdrawals.

On some occasions i.e. dining etc., if a card holder pays through these Noor Cards, they
can get 40% discount, which is a great incentive to holders.

On spend, i.e. by using the card, the customers can redeem rewards and on basis of those
rewards, Faysal Bank contributes in the charity, which is a well feature offered.
“Evaluate the financing mode and type of banking under which this facility is
currently offering by Islamic Banks.”
Tawarruq is a commodity Murabaha/Reverse Murabaha contract, which involves Musawamah
sales contract. Faysal Bank provides the Noor Cards facility under the Tawarruq principles and
the contract is based on Musawamah (similar to Murabaha except the different that cost and profit
amounts are not known by the buyer) and the type of banking under which the facility is provided
is personal banking.
4
“Compare the difference between the Conventional Banks credit card and
Tawarruq based card. Also discuss the role of Mutawarriq in this transaction.”
Clauses
Conventional Bank
Tawarruq Based Card
Credit Card
Interest
Interest is charged on loan No
amount and is compounded.
interest
deferred
charged
payment
on
of
commodities
Basis
Process of Working
Conventional Rulings
Shariah Rulings
Customer takes loan from Customer
purchases
bank and uses it through credit commodities on deferred basis
card and has to pay back the by bank and sells to 3rd party
loan amount with the interest.
on spot basis, and the amount
then can be used by credit
cards (like Faysal Bank Noor
Cards)
Zakat
Individual Eligible
Not deducted from account
Deducted from account
Any individual who takes loan Mostly the individuals are
traders/merchants
Insurance
Sometimes
provided
insurance
is Yes. Takaful i.e. Islamic form
of insurance is provided
The role of Mutawarriq (customer) in these transactions is that he buys the commodities from
bank on deferred basis (by the process flow the bank has made) and sells those commodities
himself or by the help of an agent to the 3rd party on spot basis, in order to fulfill his immediate
liquidity needs.
“For the above mentioned Islamic Mode, identify the below mentioned major
clauses of Tawarruq contract.”
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Clauses
Description
Financing Need and Nature of Goods
It is for meeting immediate liquidity needs of
the customer. Any kind of commodity i.e.
liquid can be a subject matter in this mode,
which can be sold to 3rd part easily on spot
basis.
Ownership of Goods and Possession of
Goods
In start, bank will have both physical and
constructive
ownership.
But
when
the
customer buys on deferred and goods are
transferred
to
him,
the
ownership
(constructive) would be with the bank;
however customer would have physical
possession. But when the commodities are sold
to 3rd party on spot, both the ownership and
possession would become of that 3rd party.
Asset side v/s Liability side Financing
Collateral/Security Required
Part of Asset side financing
As, Tawarruq financing mode is to fulfill the
immediate liquidity needs of customer. The
commodities bought om deferred are sold on
spot to 3rd party. So it means if commodities
can be sold easily their value isn’t too much.
So no collateral/security is required by the
bank.
Transfer of Wealth (Maal)
The price of goods is the wealth here. Firstly,
when goods are sold on spot, wealth is
transferred from 3rd party to customer. Then
they are transferred from customer to the bank.
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Critical Evaluation
Part 1: Critically evaluate the difference among the modes of IMPORT
FINANCING. Discuss the practical procedure and process flows of these
financing modes. State one example of these modes that Islamic banks are
currently offering.
Import Financing:
Banks facilitate its customer not only in the form of taking deposits and lending loans, bank helps
the customer to do their business and trade, internationally. In import financing, bank plays a
critical and crucial role, mainly in the form of providing guarantee to the exporter i.e. if bank will
not be there as a body to provide guarantee that in case the importer defaults, the issuing bank will
be liable to make payment, then the exporters will be reluctant to trade internationally. Either it is
conventional bank or Islamic Bank, Letter of Credit is opened. Conventional bank charges interest
for opening it, but the Islamic banks don’t and it charges for other fees related with the account
opening i.e. assessment fee, monitoring fee, documentation and processing fee. Four parties are
involved in import financing i.e. importer, exporter, importer’s bank and exporter’s bank. In
conventional banking, the lender is not faced with any risk; while in Islamic banking, the banks
share both the risk and rewards.
An example of such financing could be that suppose a Pakistani resident customer wants to import
goods from USA and he approaches a conventional bank (Bank al Habib Ltd.) for opening of
Letter of Credit. The bank will charge fee for opening L/C. The customer/importer will get loan
and the customer has to pay back the loan with interest to the bank and if customer faces a loss
bank will not be faced by that loss. If the customer has approached the Islamic window of Bank al
Habib Ltd. Then the importer wouldn’t have to pay back the money with interest and as well as in
case of loss if importer, the bank would be faced by the loss also as Islamic banks are faced by
both risk and rewards in this facility.
Mode of Import Financing offered by Islamic Banks:
Three modes of financing are provided, which are discussed below with their details:
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Clauses
Type of Contract
Murabaha
Musharakah
Sales Contract
Ijarah
Partnership contract
Lease/
rental
contract
Asset v/s Liability
For importer, it is the It is for both i.e. asset For importer, it is
Side of Financing
asset side financing of side and liability side the
bank
Purpose
financing
activities
of working
importer
to
capital finance
are
products
the
selling type
at
form
of
fixed commodities
prices)
needs of importer
of No collateral
In form of rental
Mortgage/Hypothecation
Bank’s Role
is
needs of importers equipment or such
(who
In
side
financing of bank
Purpose is to fulfill the Purpose is to satisfy Purpose
trading
Collateral
asset
payments
Bank (seller)
Bank and importer Bank (Lessor)
Importer (buyer)
are partners.
Importer (Lessee)
The customer is
lessee
until
makes
he
full
payment.
Ownership/Possession Ownership
of Goods
i.e. Both are partners and Ownership
constructive
is own assets in the with
transferred to bank when proportionate
the
lies
bank
until the importer
the goods are delivered (random).
So pays for all rentals
by exporter (supplier) to ownership
doesn’t and payments of
the importer (customer). transfers except in the asset.
Thus at this point when the cases where one
goods are transferred to partner
customer,
he’ll
wants
to
have leave.
physical ownership
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Examples
Import
Murabaha Import Musharakah Riba
financing is provided by financing
Dubai Islamic Bank
is
Free
also Financing
Car
by
provided by Dubai Meezan Bank
Islamic Bank
Practical Procedures and Process Flows:
The practical procedures of these three modes along with their process flow is as follows:
1. Murabaha:

Importer approaches the bank for the funds need for trading

Murabaha agreement between importer and the importer’s will be signed.

Then bank will require the importer to specify the goods that he wants.

Agency agreement between importer and the bank will be signed, in which bank
will appoint importer his agent to buy the goods.

L/C account will be opened and the exporter’s bank will send the goods along with
the related documents.

The cost + profit will be known by the importer as well/

Murabaha contract will be executed when goods are delivered to customer and Bill
of Lading is received by importer/importer’s bank.

Then the importer has to pay the bank at certain date, already decided.
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2. Musharakah:

Importer approaches the bank for the funds need for trading.

Musharakah agreement between importer and the importer’s bank will be signed.

The bank and importer will be partners and profit ratio will be decided among them
by mutual consent.

Importer will make payment of his share.

L/C account will be opened and the exporter’s bank will send the goods along with
the related documents.

Payment will be made by importer’s to exporter’s bank and then the documents will
be released to the importer by the importer’s bank.

Then the selling of those goods in local market will take place and both the
importer’s bank and the importer will receive the profit as per agreed ratio.
3. Ijarah:

Importer approaches the bank for the commodity (equipment etc.) need for trading.

Agency agreement between importer and the importer’s bank will be signed as
importer’s bank will appoint the customer as an agent to import goods on its behalf.

Rental payments of that asset will be determined.
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
L/C account will be opened and the exporter’s bank will send the goods along with
the related documents i.e. Bill of Lading.

Then the delivery of goods will be accepted by importer.

At this point of time, the Ijarah Agreement will be signed because at this time, the
importer will receive the asset and will start using it.

After the use of assets over a specified time and along with paying the rental
payments decided in the contract, the asset will be the sole property of the importer
as it will be sold to him by his bank.
Part 2: SBP ISLAMIC EXPORT REFINANCE SCHEME: Currently State
Bank of Pakistan is providing the Islamic Exports Refinance Scheme by
entering into different agreements with Islamic Banks. Mention this facility
along with this detailed mechanism based on Shariah Compliant products.
SBP launched this new concept of Islamic export refinance scheme, in order to provide smooth
flow of exports in the country under the Shariah rules and regulations. The objective of this scheme
is to increase the number of exports of commodities with high value. Liquidity is also ensured for
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exporters through this scheme. This scheme involves a “negative list” which includes the names
of those commodities against which this scheme will not work.
Mechanism of Export Refinancing Scheme:
The scheme is based on the Musharkah agreement between SBP and Islamic Banks, so there is
profit and loss sharing among the two partners. Musharkah pool is a term used in this scheme,
which is a pool formed by minimum 10 blue chip companies and with maximum exposure of 50%.
The process flow is as follows:

Islamic banks and SBP signs Musharakah agreement, in which both pool funds.

Exporters will get financing through this pool.

Importer will give the Islamic banks and SBP the proceeds, which will be divided as per
agreed ratio.
Parts of Scheme:
The scheme has two parts:
1. Part 1— It is a transaction-based instrument that allows for 100% refinancing of export
contracts through banks. This service is accessible for direct exporters for 180 days and
indirect exporters for 120 days.
2. Part 2—It is a limited based facility which is provided after monitoring the export
performance of exporter for previous financial year. This facility is available for 180 days
and can be rolled over again if it met 70% shipment requirement of financing, the user has
availed.
Eligibility Criteria:
The exporters should have following criteria, to be a part of this scheme:

Should have good track in stock exchange

Credit rating of atleast B+

Should not have adverse Credit Information Bureau report

Should have ROE higher than markup rate which are mentioned in this scheme.
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References

Faysal
Islami
Noor
Card.
(n.d.).
Faysal
Bank.
https://www.faysalbank.com/en/islamic/islami-noor-cards/

SBP’s Incentive Schemes. (n.d.). SBP. https://www.sbp.org.pk/Incen/index.asp

Import Financing. (n.d.). Islamic Markets. https://islamicmarkets.com/education/importfinancing

EXPORT
REFINANCE
SCHEME.
(n.d.).
SBP.
https://www.sbp.org.pk/sbp_bsc/apr/chap_11.pdf
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Annexures
14
15
16
17