Credit system for import/export: Import Business: The import business is broadly divided into the following three categories:-
i) Import of Commercial goods.
ii) Import of raw materials for production purpose.
iii) Import of capital/machinery.
The importer’s avail of investment facilities against all kinds of imports. But in case of imports under category (i) and (ii), investments are made under the Shariah approved Bai-Murabaha and Mai-Muajjal modes and in case of import under category (iii), investment is made under the Shariah-compliant mode of Hire Purchase under Shirkatul Melk (HPSM). Investment facilities are also provided for import business through Bai-Salam, Musharaka and Mudaraba modes. Besides, the Islamic banks will fully abide by the national and international norms and guidelines relating to export/import business.
Credit system for import/export: Import under the Bai-Murabaha system:
Definition of the Bai-Murabaha: Mai-Murabaha is a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and law of the land to the buyer at a price determined by charging agreed profit, margin or mark-up over the cost price. In this case, the buyer either makes cash payment to receive the goods or is allowed to make payment by installments or on a fixed future date. The profit mark-up may be fixed in lump sum or in percentage over the cost price of the goods.
Some important features of the Bai-Murabaha mode of investment:
• The client (buyer) requests the bank to purchase particular goods and promises to purchase the same from the bank at a price fixed by charging profit over the cost price.
• Under the Bai-Murabaha mode of investment there is no scope to increase the price once it is fixed.
• After buying the goods, the Bank has to bear all the risk until goods are actually delivered to the client.
Import of goods under Bai-Murabaha mode of investment:
In the import business, the importer provides an irrevocable letter of authority to the Bank to import specific goods on behalf of him (the client) from the foreign seller and promises to buy the same from the Bank. In this case, the Bank is designated as a consignee in the Bill of lading and later on the Bank hands over the same to the importer through endorsement i.e. the ownership of the goods is transferred to the importer. As per uniform customs and practices, the seller lodges his claim or places claim for dues to the buyer’s Bank through the bill of exchange and the buyer’s bank discharge the claim on behalf of the buyer. The above import system is fully approved/ supported by the Islamic Shariah.
| Investment in imports by Islamic Banks: |
Credit system for import/export, In the import business, Bai-Murabaha investment is accomplished through a single deal at the time of opening L/C, Bills and Shipment. For example:
a) Murabaha Import L/C
b) Murabaha Import Bills (MIB)
c) Murabaha Post Import (MPI)
Murabaha Import Bill (MIB): Payment made by the Bank against lodgement of shipping documents of goods imported through L/C is called MIB. It is an interim investment for a maximum period of 21 days connected with import and is generally liquidated against payment usually made by the party for retirement of the documents for release of imported goods from the customs authority. In conventional banking this type of investment is called PAD (Payment against Document).
Mudaraba Post Import (MPI): The importers apply for investment facility against imported goods after shipment for payment of the invoice values of the goods to the seller/supplier including custom duty, VAT and other expenses. In such a case, Islamic banks allow a Bai-Murabaha investment facility under single deal concept. It is so called as the Letter of Credit. Bills and the handling of Post-shipment are settled under one agreement while opening the letter of credit for importing the goods.
Normally importers pay the duty & sales tax of the imported goods after arrival at the port. Due to shortage of fund, sometimes importer approach the L/C opener bank to assist him for retirement of the imported goods. In some cases importer do not come forward to retire the goods. In these cases the L/C opener bank themselves arrange to retire the goods through their clearing agent after making all payments and the bank took affective control over the goods by pledge in Godown under Bank’s lock & key. This type of payment (forced investment/loan) is called MPI. This is a temporary arrangement for maximum period of 90 days. Within this time limit, the importer borrower will release the goods at a time or gradually after making payment to the Bank. In traditional banking, this type of investment is called LAM (Investment/loan against Merchandise) or IIM/LIM (Investment/Loan against Imported Merchandise).
Mudaraba Trust Receipt (MTR): It is a type of investment allowed by a bank on trust to his experienced, reliable & reputed Importer for retirement of Shipping documents and release the goods imported. Under this arrangement, the importer borrower will deposit the sale proceeds of imported goods, which are under his control at a time or gradually within a maximum period of one year. In traditional banking this type of investment facility is called TR (Trust Receipt).
Import under the Bai-Muajjal mode of investment:
The term Mai-Muajjal means “deffered payment sale” or “Sale on Credit”. Under this mode of investment a contract is made between the buyer and seller for buying and selling of goods approved by Islamic Shariah and law of the land on the stipulation to pay the agreed price at a specific future date or by fixed installments.
Credit system for import/export, Some important features of the Bai-Muajjal mode of investment:
Most of the features of Bai-Murabaha and Bai-Muajjal are alike excepting the following:
• Bai-Muajjal sale is executed completely on deferred payment system.
• The sale price is determined adding the profit with cost price. It is not necessary to disclose the cost price and the profit mark-up separately to the client. But in Bai-Murabaha, the cost price and the profit mark-up ratios are to be disclosed separately to the client.
• The accounting procedure for imported goods under both the Bai-Muajjal and Bai-Murabaha mode are alike. But so far as contract is concerned they are different. Bai-Murabaha contract and Bai-Muajjal contarct are executed for imports under Bai-Murabaha and Bai-Muajjal modes respectively.
Import under diminishing proprietorship method (Hire Purchase under Shirkatul Melk-HPSM):
Capital machineries and other re-usable goods are imported under this mode. It combines three modes: rent (Ijara), partnership (Shirkat) and buying and selling.
• The Bank and the client invest their capital jointly through a contract called partnership (Shirkat).
• The bank leases its portion at a certain rent.
• The Bank sells its portion to the client on receipt of the price under this system.
Import under Musharaka mode of investment:
Definition of Musharaka: Musharaka is a Shariah compliant mode of investment wherein the bank and the client jointly provide the capital. Here no pre-fixed profit is earmarked like in Bai-Murabaha or Bai-Muajjal. Profit, if any, is distributed as per agreement between the client and the bank while the loss, if any, is shared according to capital ratio.
Some general features of Musharaka mode of investment:
• The Musharaka agreement shall clearly laid down the amount of capital investment to be provided by the bank and the client and the profit/ loss sharing ratio as agreed between them.
• The actual profit of the business is to be distributed between the bank and the client as per the agreed ratio. But loss, if any, is to be borne by them as per ratio of the capital.
• The client shall properly maintain ledger, register, books of accounts etc. and have to show those to any authorized person of the bank on demand.
• For the success of the client’s business the bank shall have the right to give any decision and supervise the business activities.
Before establishing Letter of Credit, the bank shall receive an application from the client in prescribed form which shall include the following aspects:
(i) The price of goods to be imported, C&F price as per quotation/indent.
(ii) Wholesale/retail price of every unit/ton/bag/carton.
(iii) Import cost including estimated import expenditures.
(iv) Expected sale price of imported goods.
(v) Per unit/ton/bag/carton expected sale price of the imported goods.
(vi) Particulars of any other expenditure in addition to the import cost.
(vii) Estimated net profit.
The Bank shall, thereafter, receive the equity portion of the client and after completion of documentation shall make payment against the import liability and all expenses related to it as per the Musharaka agreement. If there is profit, bank shall receive its share of profit as per agreement and in case of loss, shall bear the same according to capital ratio.
Fixation of liability in case of loss:
If loss is incurred after performing all duties and responsibilities as per agreement, then the loss would be borne by the bank and the client according to capital ratio. But if the loss is incurred due to carelessness, negligence or breach of any condition by the client, then the client would be liable to bear the loss.
Import under Mudaraba mode of investment:
Definition of Mudaraba: Under the Mudaraba mode of investment, the client or businessman or capital user does not invest any capital. In this case, the bank alone invests all the required capital and the entrepreneur (the client) directly manages and looks after the business.
Under this mode, the bank bears all the expenditures related to imports. In this case, the Bank supervises the use of capital, system of business operation and income of the business etc. The client maintains all the registers, documents and accounts concerning buying & selling of the goods.
In this case, profit, if any, is distributed between the bank and the client as per the agreed ratio and loss is fully borne by the Bank.
| Credit system for import/export : Investment in exports: |
To accomplish export process/ order as per the terms and conditions of the letter of credit (L/C) and the agreement executed between the seller and buyer, an exporter needs financial and other banking facilities on urgent basis. So, it is one of the important functions of a bank to provide investment and banking facilities to the exporter at different stages of export business.
Credit system for import/export, An exporter needs financial facilities at two stages of export process. Such as:
(i) At a pre-shipment stage, and
(ii) At post-shipment stage.
Hence, financial facilities to export sector may be classified as:
(i) Pre-shipment Finance.
(ii) Post-shipment Finance.
Financial assistance/ facilities complying Shariah principles are provided at both the stages of export process.
Investment at Pre-Shipment stage as per Islamic Shariah:
An exporter needs various financial facilities till shipment of goods. Finance is needed for procurement of raw materials and to meet transportation and other related cost upto shipment.
Pre-shipment facilities are generally provided for the following purposes:
i) To procure raw materials.
ii) To process the exportable goods.
iii) For transportation and packaging.
iv) For payment of insurance premium.
v) For payment of water, electricity and gas bills etc.
vi) For payment of wages and salary/bonus to employees.
vii) For payment of freight of the ship.
Credit system for import/export: Shariah compliant modes for Pre-shipment Finance:
Back to Back Letter of Credit (Back to Back L/C): Bank extends Back to Back letter of credit (L/C) facility to exporters to procure/import raw-materials for producing/manufacturing exportable goods at pre-shipment stage under the mode of Bai-Muajjal. Initially, no financial facility from the Bank is required when the back to back L/C is opened. But if the exporter fails to pay the L/C value at maturity or on due date, the bank provides financial facilities to the client under Bai-Muajjal mode.
Bai-Murabaha TR (Trust Receipt): To procure/purchase raw-materials for executing export order the bank provides investment facilities to the client under the mode of Murabaha TR. In this case, the bank obtains Trust Receipt signed by the client and handover the imported goods to the exporter.
Bai-Salam:
• Under the Bai-Salam mode of investment, payment is made in advance to purchase the goods and the supplier makes promise to deliver the goods at a future date.
• Investment under Bai-Salam mode is made to meet other expenses of the exporter expecting the manufacturing cost of exportable goods. The Bank purchases a portion of the exportable goods under the Bai-Salam mode and makes advance payment for the same on the condition that arrangements will be made by the exporter to export the goods purchased by the bank along with other goods of the exporter.
Investment or credit in Islamic shariah and its various modes
Fixing purchase price of the goods and recovery of bank’s investment:
The purchase price is determined by deducting estimated profit of Bank’s purchased portion of the exportable goods. The bank recovers its dues after realization of export proceeds.
Musharaka Pre-Shipment (ECC): It is a type of investment provided by a Bank to an exporter for purchase of raw materials, cost of processing the same to finished goods against specific L/C / firm contract. It is categorized as ‘Investment on export’. This investment must be liquidated out of export proceeds within 180 days.
Musharaka Pre-shipment (PC): Investment allowed to a customer against specific L/C or firm contract for packing and despatching of goods to be exported is called Musharaka Pre-shipment (PC) and falls under the category ‘Investment on export’. These investments must be adjusted from proceeds of the relevant exports within 180 days.
Musharaka: Pre-shipment investment may be made under Musharaka mode of investment if there is any pre-determined investment arrangement.
Post-Shipment Investment: Bank provides post-shipment investment facilities through Negotiation (FBN) and purchase of export bills. It normally negotiates or purchases the export documents if the documents/bills prepared by the exporter are found in order/correct in all respect. The bank adjusts the liabilities against FBN/FBP after receiving the export proceeds and earns exchange income from this. This mode of investment is in compliance with the Islamic Shariah.
Bai-As-Sarf (Foreign Documentary Bill Purchased – FDBP): Payment made to a customer through purchase/negotiation of a foreign documentary bills is Bai-As-Sarf or FDBP. This temporary investment is adjustable from the proceeds of the shipping/export documents. It falls under the category ‘Investment on export’.
Musharaka Documentary Bills (MDB) Inland (Local Documentary Bill Purchased – LDBP): Credit system for import/export, Payment made against documents representing sell of goods to export oriented industries that are deemed as exports and which are denominated in local currency/foreign currency falls under this head. This temporary liability is adjustable from the proceeds of the bill.
Under this “Musharaka Documentary Bills (MDB) Inland” investment mode, after shipment of the goods, the client will submit their proposal for Musharaka Finance in the prescribed format declaring his / their equity portion and anticipated profit of the deal and the ratio at which profit to be shared with the Bank accompanying the required documents as per L/C / Contract. Branch will complete appraisal of the proposal (as per prescribed format) to see the profitability of the proposal. If the proposal is found profitable & satisfactory (keeping in view the anticipated minimum profit / Rate of Return (RR) of the bank), branch will issue sanction advice favoring the client & will enter into a Musharaka Agreement with the client and then will send the documents to the L/C issuing Bank for Acceptance. Upon receipt of the Acceptance letter & after completing proper documentation, Branch may / will disburse the Musharaka investment taking into consideration the equity of the client and anticipated profit of the deal.
Mentionable that, if the client availed any pre-shipment finance i.e Bai-Salam investment against the related export L/C / Contract or any other investment in the form of MPI, Bai-Murabaha or HPSM under project/working Capital investment, Branch will adjust the said liability from the disbursed amount of Musharaka finance proportionately.
Bai-As-Sarf (Foreign Bill Purchased – FBP): Payment made to a customer through purchase of foreign currency cheques/drafts fall under this head. This temporary investment is adjustable from the proceeds of the cheque/draft.
