Presentation Outline€¦ · structured as murabaha. • Being a sale transaction, it is essential...

Presentation Outline

2017 Copyright © Bank Nizwa. All Rights Reserved. 2

Key Products and Services Section 1

Murabaha Section 2

Ijara Section 3

Musharaka Section 4

Islamic Banks VS Conventional Banks Section 5


Flow-chart of Syndicated Financing

MONEY IS A MEDIUM OF EXCHANGENOT COMMODITY!!!


Structuring the FACILITY

IFI

Murabaha

Ijara

Istisna’

Mudaraba

Musharaka

WakalaMuqawala

Qardh

Sukuk

Takaful

Banking Services

Current Account

Financing by Investment

Agency

Procurement Contract

Islamic Fixed

Income

Profit Sharing Loss

Bearing Financing

Lease Financing

Manufacturing Financing

Sale at Profit

Profit-and-Loss

sharing Financing

Sharia-Compliant

Insurance

• Suspense Account

• Account with hypothecation


Structuring the SECURITY



Structuring the SECURITY



Pre-documentation Stage



Documentation Stage


Issuance of FOL

Appointment of Counsel /

Solicitor

Drafting Facility &

Security Docs

Finalizing & Execution of the Facility

Stamping, Registering

and Perfecting the Security

Compliance to Covenant / Conditions Precedent


Common type of Agreement for Syndication


Term Sheet

Common Terms Agreement

Inter-Financier Agreement

Agency Agreement

Security Agreement

Novation Agreement


• Murabahah is a cost-plus sale / mark-up sale / credit sale.

• It refers to the sale and purchase transaction for the financing ofan asset whereby the cost and profit margin (mark-up) are madeknown and agreed by all parties involved.

• The settlement for the purchase can be either on a cash basis, adeferred lump sum basis or on an installment basis, which will bespecified in the agreement.

• Majority of transactions in Islamic banks (> 60%), globally arestructured as murabaha.

• Being a sale transaction, it is essential that the goods / assetswhich are the subject of sale in a Murabaha transaction, must beexisting, owned by the seller and in his/her physical orconstructive possession.

What it is?

Murabaha


• It is necessary that the seller must have assumed the risks ofownership before selling the commodities to the buyer/customer.

• Murabahah, like any other sale, requires an offer and acceptancewhich will include certainty of price, place of delivery, and date onwhich the price, if deferred, will be paid.

• Cost and profit both are disclosed.

• Goods to be traded should be real goods and not creditdocuments

Cont’d

Murabaha

Steps:

1. Client request for financing and declare the cost as per the invoice of the asset obtained from the Supplier / Vendor.

2. The Supplier / Vendor to provide offer to sell the asset to the Bank.

3. Instantaneously, the Client will provide Promise to Purchase the asset from the bank.

4. The Supplier / Vendor will execute Sale Agreement with the Bank evidencing the transfer of ownership & title of theasset to the Bank.

5. The Bank will pay the purchase / cost price of the asset to the Supplier / Vendor.

6. The Bank will sells the asset to the Client on a mark-up sale (cost plus profit) as per the Murabaha Agreement.

7. The Client will pay the Murabaha price for certain period (such as on monthly installment basis) as per the Murabahaagreement.

Sample of Murabaha Plain Structure


Client

Bank Nizwa

Step 3Step 4

Step 5Step 7

Step 6Goods / Assets

Step 2

Supplier / VendorStep 1

Ownership, Title & Possession to the asset


Common Murabaha Agreement


Master Facility Agreement

Agency Agreement

Purchase Agreement

Murabaha Sale Agreement


• Subject of sale must exist

• It should be in ownership of the seller at the time of sale

• Subject of sale should be in physical or constructive possession of

the seller

• The sale should be instant and absolute

• Subject matter should be assets having value

• Subject of sale should not be used for un-Islamic purpose

• It should be specific and identifiable

• Delivery should be certain

• Price certainty

• Sale must be unconditional

• Cost must be revealed to buyers

Key Issue

Rules to be Observed in Drafting

Sample of Murabaha Hybrid Structure


Bank Customer

Cotton

Supplier

Agreement for Mark-up Sale

(1)

Agency Agreement to

source iron-ore supplier

(2)

Payment of OMR 6 Mio

(3)

Delivery of iron-ore

(4)

Offer to Purchase iron-ore at OMR 10 Mio in 6 months

(5)

Acceptance of Sale + Transfer of Title

(6)

Differed payment of OMR 10 Mio

(7)


• Ijara is leasing or renting.

• It refers to a manfaah (usufruct) type of contract whereby a lessor(owner) leases out an asset or an equipment to its client at anagreed rental amount and pre-determined lease period.

• It can also be referred to a Sub-Lease transaction.

• The LEGAL ownership of the leased assets remains in the hands ofthe lessor.

What it is?

Ijara

Sample of Ijara Structure


Client

Bank Nizwa

Step 2Step 3

Step 4

Title & Possession to

the Property

Step 6

Step 5Usufruct of the Property

Step 1

Vendor / Owner

Steps:

1. The Vendor / Owner to provide offer to sell the asset to the Bank.

2. Instantaneously, the client will provide Promise to lease the asset from the bank.

3. The Vendor / Owner will execute Sale Agreement with the Bank evidencing the transfer of ownership &title of the asset to the Bank.

4. The Bank will pay the purchase price to the Vendor / Owner.

5. The Bank will lease the asset to the Client under the Ijara Agreement.

6. The Client will pay the rental for certain period as per the Ijara agreement.

Ownership, Title & Possession to the asset


Financial Lease vs Operating Lease


Finance Lease Operating Lease

▪ Is a lease where the lessor has transferredthe risks and rewards of ownership to the

lessee.

▪ This includes maintenance of the asset andthe risk of obsolescence. The lessee wouldhave to bear these risks of ownership of the

asset.

▪ In a finance lease, the lessee would pay anamount of lease payments which covers allor most of the cost of the asset to the lessor.The lessee would also have use of the assetfor most of its useful life.

▪ Is a lease where the lessor retainsownership of the asset.

▪ This means that the risk and rewardsof ownership has not beentransferred to the lessee. The lessor isliable for maintenance payments onthe asset.

▪ After the lease period, the assetwould still have a substantial residualvalue left. The lease period is alsousually a minor part of the asset’suseful life.


Classification Under Accounting Standards


• Criteria for the classification of finance and operating leases :

1. Whether the ownership of the asset is transferred to the lessee at the

end of the lease period?

2. Whether the lessee has an option to purchase the asset at a discount

after the lease period

3. Whether the lease term covers more than 75% of the asset’s useful life

4. Whether the present value of lease payments exceeds 90% of the cost

of the asset


Common Ijara Agreement



Purchase Agreement

Ijara Agreement

Agency Agreement


• Subject of sale and lease (or lease-back) must exist

• Ownership of the leased asset remains with the Lessor

• All rights and liabilities relating to ownership are borne by the Lessor.

• Subject matter of Lease should be Valuable, Identified and Quantified.

• The period of Lease must be determined in clear terms.

• The Lessor cannot increase the rent unilateral

• The Lessee is responsible for damage to the asset caused by fraud or

negligence.

• Normal Operational maintenance is Lessee’s responsibility

• If the leased asset is destroyed, the lease will terminate.

• Lease rentals for the entire lease period can be fixed or adjusted variably.

Key Issue



Addendum to The Ijara Agreement


Description of the Ijara Asset

Schedule of Rental Payment

Receipt of Asset

Demand Promissory Note

Undertaking to Purchase


• This document shall be signed after Delivery of asset to the Lessee and not

earlier.

• It contains the detailed description about the Leased Asset agreed

between the parties;

1. Legal Name

2. Year Made

3. Model

4. Engine No.

5. Chassis No.

6. Registration No. etc.

Key Issue

Description of Ijara Asset


• This schedule contains a table which shows:

1. Amount of rental (Monthly/Quarterly/Half Yearly/Yearly)2. Date of Payment of each rental.3. Whether moratorium is granted or otherwise.

• It must also includes the date on which the first rental is due.

• This document shall be signed after Delivery of asset to the Lessee and not earlier with the exception of Forward Ijara.

Key Issue

Schedule of Ijara Rentals


• This document confirms that customer has taken the possession of Leased

Asset as described in the “Description of Ijara Asset”.

• This document is only signed by the Lessee on receipt of Asset, as an

acknowledgement of receipt of described asset under Ijara Contact

Key Issue

Receipt of Assets


• After signing an Ijara Agreement, the amount of rentals become Debt

(Dayn) to the Lessor.

• Promissory Note is Lessee’s acknowledgement on the future Debt amount

and its promise to pay.

Key Issue

Promissory Note


• This document contains an Undertaking from the Lessee that it will

purchase the Leased asset on the purchase Price corresponding to the

Purchase Date.

• This document contains a schedule which shows Purchase Price(s) during

the Ijara term on which the Lessee can purchase the asset by making lump

sum payment.

Key Issue

Undertaking to Purchase Leased Asset


• The word Musharaka literally means sharing or to share.

• Also known as Shirkah.

• Musharakah is a sharing contract between two or more parties on:

1. Capital (cash or in-kind);

2. Profit and loss.

• Profit and loss sharing:

1. Profit sharing – on mutual basis.

2. Loss – is divided in the proportion of investment

Maxim: “profits are shared according to what has been agreed upon

by the parties at the time of contract, and losses are to be borne

according to the ratio of capital”

• No guarantee for the loss unless by 3rd party (independent)

What it is?

Musharaka

Pays lease rental

Provide Capital

Gradual transfer of ownership of the asset

3

1

1

2

Lease ownership share of the asset

Sample of Musharaka Structure

February 12, 2014 Copyright © Bank Nizwa. All Rights Reserved. 33

Bank Nizwa

Musharaka Financing Agreement

Partner / Client

80%

20%

80%

20%

Provide Capital

4


Common Musharaka Agreement



Musharaka Agreement

Purchase Agreement

Ijara Agreement

Agency Agreement

Undertaking to Purchase EOS


• Capability of Partners: Must be of a good credit standing and be able of

entering into a contract (HC / Sub Co). The contract must take place with

free consent of the parties without any fraud or misrepresentation.

• If one or more partners choose to become non-working or silent partners.

The ratio of their profit cannot exceed the ratio which their capital

investment bears so the total capital investment in Musharaka.

• It is not allowed to fix a lump sum amount for any of the partners, or any

rate of profit tied up with the original capital. A management fee however,

can be paid to the partner managing the Musharaka provided the

agreement for the payment of such fee is independent of the Musharaka

agreement.

• Losses are shared by all partners in proportion to their capital.

Key Issue



• All assets of Musharaka are jointly owned in proportion to the capital of

each partner.

• All partners must contribute their capital in terms of money (or in kind) at

an agreed valuation.

• Share capital in a Musharaka can be contributed either in cash or in the

form of assets. In the latter case, the market value of the assets shall

determine the share of the partner in the capital.

• The rate of profit sharing should be determined: The share of each partner

in the profit earned should be identified at the time of the contract. If

however, the ratio is not determined before hand the contract becomes

void (Fasid).

Cont’d



• Each partner has a right to take part in Musharaka management.

• The partners may appoint a managing partner by mutual consent

• One or more of the partners may decide not to work for the Musharaka

and work as a passive non-management participation partner.

Cont’d



Musharaka is deemed to be terminated in any one of the following events:

1. Every partner has a right to terminate the Musharaka at any time aftergiving his partner a notice to this effect, whereby the Musharaka willcome to an end.

2. In this case, if the asset of the musharaka is in the cash form, all of themwill be distributed pro rata between the partners. But if the assets arenot liquidated, the partners may agree either on the liquidation of theassets, or on their distribution or partition between the partners as theyare.

Cont’d

Termination of Musharaka


Islamic Banking (IB) vs Conventional Banking (CVB)

No IB CVB

1 Its functions and operations follow Shariaon top of the regulatory requirements.

FUNCTIONS & OPERATIONS

Its functions and operations arebased fully on man-made law.

2 In its investment product, an Islamic bankpromotes the sharing of risk and profit withinvestor. There is no fixed profit promised.Distribution of profit is based on real profit.

INVESTMENT PRODUCTS

In its fixed deposit or placementproduct, the investor is assigned afixed rate. In reality, it is aninterest-based loan activity.

3 Profit-driven Institutions based on Shariaguidelines.

AIM Aiming for revenue withoutethical or moral boundaries.

4 Pays zakat as obliged by Shariarequirements over and above the CSRfulfilled by Islamic banks.

ZAKAT Only focusing on normal CSR.


Cont’d

No IB CVB

5 Its corporate product utilizes the trading orrenting of an asset, and not the loancontract.

CORPORATE FINANCING /

LOAN

The corporate loan productapplies the system of giving outloans with multiplied interest.

6 Charges compensation for any latepayment, but it does not go towards thebank’s earnings. Instead, it ischanneled directly to charity.

PENALTY Charging a compounding penaltyon a loan if there is late paymentand it is part of the bank’searnings.

7 Emphasize projects that benefit society. Themain aim is to ensure real andsustainable development apart fromensuring the shareholders interest ispreserve.

PRIORITY The main priority is to protect thebank’s shareholders interest.

8 Profit is generated from income-generatingasset.

REQUIREMENT OF ASSET

Loans are given straightforwardby conventional banks whereasset is not required. The conceptis “money breeds money.”


Cont’d

No IB CVB

9 Evaluation stresses on the potential orviability, performance and prospect of theproject that is being financed on top ofcustomer’s payment ability.

EVALUATION Evaluation stresses on the abilityof the borrower to pay off theloan. Not much attention is givento the progress of thecustomer’s project.

10 Profit according to the concept of profit-losssharing; the bank gives more attention oninvesting in development of the project.

REVENUE EARNED

Earn revenue from fixed interestcharged from loan amount tothe customer.

11 The bank-customer relationship:1) Seller / buyer.2) Lessor / Lessee.3) Co-owner / Partner.4) Investor / Fund Manager.5) Agency

RELATIONSHIP The bank-customer relationship:loan lender and borrower.


The Dos and the Don’ts of Terminologies

No IB CVB

1 PROFIT RATE / RENTAL RATE / INDICATIVE PROFIT RATE INTEREST RATE / PRICING

2 FINANCE / FINANCING LOAN / BORROW / BORROWING

3 LATE PAYMENT CHARGES LATE PAYMENT INTEREST

4 TENURE / RENTAL PERIOD / INVESTMENT PERIOD TENURE

5 TAKAFUL INSURANCE

6 HOME FINANCING / CAR FINANCING HOME-LOAN / CAR LOAN

7 BANK’S FINANCING BANK’S CREDIT / BANK’S LOAN

8 INVESTMENT ACCOUNT TIME DEPOSIT / FIXED DEPOSIT

9 SUKUK BOND


Prepared By:Mohamad Noranuar bin SajariHead, Sharia [email protected] / [email protected]+96894106258

Date post:	06-Apr-2020
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Presentation Outline€¦ · structured as murabaha. • Being a sale transaction, it is essential...

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