Financing under Islamic Export
Refinance Scheme
Muhammad Faisal Shaikh
Head, Product & Business Development
BankIslami Pakistan Limited
Shawwal 24, 1433 A.H
Septemeber 12, 2012
Introduction
 Alhamdolillah
Islamic Banking and Finance has gained
momentum during the last couple of years.
 Product
Developer in Islamic Banking have developed
alternate products for almost all kind of services required
by the businesses.
 Similarly
different products are being used to finance
Exporters under Islamic Export Refinance Scheme (IERS).
Introduction
 The
most common Product is which is being used is
Murabahah.
A
few banks are using Istisna to provide financing under
IERS.
MURABAHAH
Murabahah
 Islam
prohibits charging fixed interest on money, but
obligates to charge fixed profit on trading of goods.
 Islamic
Banks use Murabahah based trade
transactions to finance purchase of assets by their
customers, especially for working capital financing
requirements.
A
large portion of all business volume of Islamic
banks comprises of Murabahah based transactions.
Murabahah
 Murabahah
is a particular kind of sale.
the transaction is done on a “cost plus profit”
basis i.e. the seller discloses the cost to the buyer and
adds a known profit to it to arrive at the final selling
price.
 Where
 The
distinguishing
ordinary sale is
feature
of
Murabahah
 The
seller discloses the cost to the buyer
 And
a known profit is added
from
Murabahah
 As
per the rules of Shariah, the seller cannot sell the
goods unless they come into his ownership.
 However,
since the bank cannot deal in the
commodity markets, the bank may appoint the
customer its agent to procure the goods on its behalf.
Murabahah
 Once
the customer purchases the goods, the risk of
the goods transfers to the Bank. Bank can now sell
these goods to the customer.
 Please
note that the customer plays two different
roles in this transaction. One that of Bank’s agent and
other of purchaser. These roles should be clearly
segregated to make the transaction halal.
 This
process is explained in detail in slides ahead.
Murabahah
Step by Step Murabahah Financing
1. Client and Bank sign Main Murabahah Facility Agreement (an
agreement to enter into Murabahah).
Main Murabahah
Facility Agreement
Bank
Client
Murabahah
Step by Step Murabahah Financing
2. Client appointed as Bank’s agent to purchase goods on Bank’s
behalf.
Main Murabahah
Facility Agreement
Bank
Client
Agency Agreement
Murabahah
Step by Step Murabahah Financing
3. In advance payment Murabahah cases, Bank gives money to
Client for purchase of goods from Supplier.
Main Murabahah
Facility Agreement
Bank
Client
Agency Agreement
Disbursement to the supplier or agent
Supplier
Murabahah
Step by Step Murabahah Financing
4.
Client purchases goods on Bank’s behalf from Supplier and takes
their possession.
Transfer of Risk
Bank
Supplier
Delivery of
goods
Agent
Murabahah
Step by Step Murabahah Financing
5.
Client makes an offer to purchase goods from the Bank.
Bank
Client
Offer to purchase
Murabahah
Step by Step Murabahah Financing
6.
Bank accepts the offer and sale is concluded.
Bank
Client
Murabaha Sale Document
Murabahah
Step by Step Murabahah Financing
7.
Client pays agreed price to Bank according to an agreed
Schedule, usually on a deferred payment basis (Bai Muajjal).
Bank
Client
Payment of Price
Murabahah
Application:
Murabahah can be used to finance purchase of any
asset which is recognized as Mal-e-Mutaqawam
(valuable) as per Shariah and possess tangible form.
ISTISNA'
Istisna'

DEFINITION


It is an order from purchaser (buyer) to a producer (seller) to manufacture a
specific commodity for him (buyer) against mutually agreed price and period
for manufacturing and delivery.
ISTISNA GOODS

Goods are not Agricultural yield instead, they are manufactured products.
Istisna'

CONTRACT PRICE

All business contracts of production (i.e. manufacturing, construction and
assembling etc.) and value addition (i.e. processing and packaging etc.) can
be executed through Istisna transaction.

Istisna contract price can be paid by the buyer in advance, in tranches or at the
time of delivery of goods. Similarly, Istisna goods can be delivered by the
manufacturer in one consignment or in tranches.
Istisna'-Features
SUBJECT MATTER (ISTISNA GOODS)

The subject matter of Istisna transaction should be a thing which requires
production or value addition. For example;
 Manufacturing


Leather jackets
Cement
 Assembling


Assembling of vehicles
Machineries
Istisna'-Features
SUBJECT MATTER (ISTISNA GOODS)
 Construction


Building
Highways
 Value Addition


Packaging Cotton bales for certain specifications i.e. type, kind, quality and
quantity
Subject matter should be identified unambiguously.
Istisna'-Features
CONTRACT PRICE

Contract Price of Istisna may be tied up with the time of delivery.

The price may be decreased by an agreed amount (per day or otherwise) in
case the manufacturer delays the delivery of the subject matter.

Similarly, price may be increased by an agreed amount (per day or otherwise) in
case manufacturer delivers the goods earlier.
NOTE:
Any decrease/increase in the contract price should be agreed upon at the time of
entering into Istisna contract.
Istisna'-Features
CONTRACT PRICE:

Istisna Contract Price can be paid in advance, in installments or at the time of
delivery of goods. Buyer can also connect payment of price with stages of
completion of the work.

The parties agree that the goods would be manufactured against the agreed
contract price.
Istisna'-Applications

Unlike Murabahah, Istisna can fulfill all working capital requirements of the
Corporate/SME clients i.e. for payment of overheads, salaries, utility bills etc.

Istisna transactions should be executed by Islamic Banks only after proper risk
mitigation.
Istisna'-Applications

Following are some of the cases where Istisna is possible:







Short-term financing for manufacturers;
Financing purchase of certain intangible assets, such as electricity and gas;
Manufacturing of plant/ machinery and equipment;
Real Estate Finance (construction of residential and commercial buildings);
Infrastructure financing, construction of buildings, hospitals, highways, bridges,
government projects;
Assembling of machinery/assets;
Development of IT System.
Istisna'-Applications

Istisna may be used as a mode of financing in a case where client requires funds
to meet running cost of its business.

For the purpose of financing using Istisna transaction, Islamic Bank will have to
place an order with the Corporate or SME Client to manufacture specified goods
for itself (Islamic Bank) against agreed Istisna contract price.

This contract price will be the financing amount from Islamic Bank to its client.
Istisna'-Applications

Islamic Bank will be buyer and the client will be seller/manufacturer.

The price may be paid by Islamic Bank completely in advance or in tranches.
Whereas, the client will agree to deliver the goods on agreed Delivery Date(s).

As a result of Istisna transaction, Islamic Bank will receive certain goods rather
than cash amount from the Client.
Murabahah- Istisna
Financing
Murbahah -Istisna' Financing

Customer especially exporters some times needs
financing for processing of raw material.

In Pakistan textile composite units purchase cotton to
manufacture finished cloth, these unit cannot rely on
Murabahah Finance, since their main raw material also
include labor and overhead expenses.

Murabahah alone cannot fulfill their requirements.
Murbahah -Istisna' Financing
These
exporters can be financed using the following
Islamic Financing instruments:
A

Istisna

Murabahah

Wakalah
step by step process in discussed next
Murbahah -Istisna' Financing
Having the LC in hand, the exporter primarily needs funds
to
Purchase
To
raw material
manufacture the finished product
The Bank fulfills the need of the exporter by providing
funding
Murbahah -Istisna' Financing
 This
funding is provided under the following two
agreements:
 Murabahah
 Istisna
 Murabahah
 Istisna
goods
is provided for purchase of Raw Material
is provided to manufacture the required
Murbahah -Istisna' Financing
The process will consist of the following steps
1. The Bank will finance the purchase of Raw Material
through a Murabahah transaction.
2. It will also give funds to the customer under a separate
Istisna agreement to manufacture and deliver the goods
to the bank as per the LC.
3. Once the goods are manufactured they will become
the property of the Bank.
(Contd..)
Murbahah -Istisna' Financing
4. The Bank will appoint the exporter as its agent to
export the goods on its behalf under a Wakalah
agreement.
5. The Wakalah agreement is required because under
Istisna the customer is liable to deliver goods to the
bank.
6. The exporter will now export the goods, acting as the
Bank’s agent.
Murbahah -Istisna' Financing
7. The export proceeds will be remitted to the Bank
8. Which will deduct from the proceeds
 The cost of goods ( Istisna price)
 And profit
9. Client will pay Murabahah price to the Bank.
Graphical flow of the new process is
explained next.
Exporter
Request for financing
Islamic Bank
Exporter
Murabahah Facility for
purchase of Raw Material
Islamic Bank
Exporter
Istisna Facility to
manufacture goods
Islamic Bank
Exporter
Agreement to Wakalah
Islamic Bank
Exporter
Delivery of Goods
manufactured under Istisna
Islamic Bank
Exporter
Wakalah Agreement
Islamic Bank
Exporter
Islamic Bank
Goods Exported
Importer
Exporter
Islamic Bank
Remittance of Export
Price
Importer
Islamic Bank
Islamic Bank will deduct the cost of goods from the
export proceeds and will pay the balance as bonus to
the exporter
Exporter
Payment of Murabahah Price
Islamic Bank
Challenges
Awareness & R&D services
 Skill set of product development team and utilization of tools
Shariah Issues and availability of the structures and collaterals
The Alignment of Business Sense with Shariah Board
Mind set of the management ... Is it Business oriented &
Shariah
IT infrastructure
Product Structuring Issues
47
Challenges-Industry Level
A challenge to move from a Shariah confirming Business to a
Sharia Based Business…
A challenge to move from a Shariah confirming Product to a Shariah Based
Product…
...And whosoever fears Allah and keeps his
duty to Him, He will make his matter easy
for him... (Surah Al Talaq Ayat 04)
.