Export Financing Products of IBBL
The procedures of Islamic Bank Finance at these stages are discussed below:
A: Musharaka Mode
Pre-shipment investment covers credit facilities extended to the exporters by IBBL prior to the actual shipment of goods. The purpose of such investment is to meet working capital requirements starting from the point of purchasing the raw materials to transportation of goods for export to foreign countries. Before extending a loan to an exporter, the bank takes into consideration the credit worthiness; export performance of the exporter together with all the other necessary information required for sanctioning the Investment in accordance with existing rules and regulations of the bank. Financing at the pre-shipment stage is generally called ‘Packing Credit’. It is also referred to as Pre-shipment Investment (PSI) or Pre-shipment finance (PSF). Islamic Banks follow the Musharaka mode of Investment to sanction this kind of finance.
Generally, Islamic banks extend pre-shipment investment against irrevocable and unrestricted L/Cs in favor of its clients after ascertaining their credit worthiness and reputation. As per existing laws of the land, the bank may invest as much as 90% (including BB L/C) of FOB value of the credit (Export L/C).
A-1: Pre Shipment Investment under Musharaka
In this case, the bank finances an export trade normally by opening a L/C on behalf of the exporter/export houses or Agency who has received an Export L/C from an overseas buyer. Since the L/C is opened on the strength of, and backed by the export L/C, it is technically called a ‘Back to Back Letter of Credit’.
A-2: Post Shipment Investment under Musharaka
Exporters may require post-shipment financing to cover operation expenses. This is the case because they have to wait a long time to receive payment from abroad for the exported goods, depending on the terms of payment stipulated in the respective Export L/C. Islamic banks also utilize the Musharaka agreement to provide for these types of financing:
Negotiation of documents under L/Cs
Purchase of D.P. and D.A. Bills
Bai-Salam is defined as an advance purchase of a commodity or product by the bank on execution of a written contract wherein it is clearly mentioned that the commodity shall be delivered as per specification, size, quality, and quantity at a fixed future time in a particular place. The burden of the cost of transportation and storage is also specifically mentioned in the contract to avoid confusion. Generally, industrial and agricultural products are purchased in advance under the Bai-Salam mode to provide the capital necessary to produce the purchased goods.
Financing of the import of raw-materials for the manufacturing, processing, is done under a Back to Back L/C for ultimate export under a deferred payment through a L/C. Furthermore, the payment under the L/C is obligatory on the bank for making payment if the documents are drawn strictly in accordance with the terms of L/C. As such the ownership of raw materials in fact lies with the bank. Moreover, the Bill of Lading and bill of exchange are made to the order of the bank. The L/C application and agreement should also contain the clause regarding ownership of goods by the bank.
Immediately after opening a L/C, the consignment should be sold to the client under a Bai-Muajjal arrangement for a period of some years by executing the necessary charge forms including the Bai-Muajjal agreement. The accounting effects of said Bai-Muajjal investment should be recorded when the bank’s funds are involved. In addition, an adjustment for rebates due to early payment should be made to the profit calculation.
Since the client is the owner of the consignment by way of executing a Bai-Muajjal agreement, and will sell the finished goods to the bank, this transaction is considered a violation of the Shariah principles. It is not permissible by the Shariah to extend financing under a Bai-Salam arrangement, without an executed agreement. The sale or export should be done through the client. This should be clearly mentioned in the Bai-Salam agreement unless otherwise settled and prescribed. The purchase price should include/ the bank’s profit as per the rate prescribed from time to time.
In the Bai-Salam agreement, the description, specification, quality, size, time and place of delivery of goods should be mentioned in the schedule keeping in mind the requirements mentioned in L/C contract. Normally the client should be authorized as per the terms of the Bai-Salam agreement to deliver and receive the goods to and from the other party as per the L/C contract on behalf of the bank. In the event payment is delayed for whatever reason, compensation should be imposed.