Understanding Islamic Finance - Doha Academy of Tertiary Studies

260 Understanding Islamic FinanceBox 10.4:(Continued)1. Farmer A or a grain dealer executes a Salam contract on 1st January to sell 5000tons of wheat in advance for Rs. 100 million to bank B.2. Bank B pays Rs. 100 million on the spot on 1st January to A and also stipulatesfrom where to take delivery on 1st May.3. B enters into a promise with C–Cundertakes that he will purchase wheat from Bfor Rs. 115 million on 1st May against Hamish Jiddiyah of Rs. 15 million.4. A supplies 5000 tons of wheat to B on 1st May; B informs C to execute sale andtake delivery.5. C executes the sale and takes delivery from B and signs a promissory note forRs. 100 million.Box 10.5:Salam – Preshipment Export Financing1. Customer A gets a purchase order from abroad for the export of rice costing Rs. 1.1million.2. A approaches Islamic bank B to get finance on the basis of Salam.3. The foreign importer opens an L/C in favour of B to the amount of Rs. 1.1 millionand sends it through a negotiating bank to B. (an L/C can also be opened in the nameof A under an agency agreement.)4. The bank enters into a Salam agreement with A; pays Rs. 1 million in advance forpurchase of 1000 tons of defined quality rice to be delivered on 1st January, 2007.B also signs an agency agreement with A to export rice as the bank’s agent.5. A supplies 1000 tons of rice to the bank on 1st January, 2007. Henceforth, B is theowner of the risk and reward of the rice.6. A arranges shipment of the rice, as agent of B under the L/C.7. The bank gets the proceeds of the L/C as per its terms and conditions.8. As B is the owner of the rice, it will be responsible if the order is cancelled for any reason,or the consignment is damaged. The Takaful expense, if any, will be borne by B.Box 10.6:Salam and Refinance by the Central Banks (CBs)The process flow will be as below:1. The CB and an Islamic bank B will create a Musharakah investment pool; the bank’spart of the capital will consist of mutually decided assets of B, like its investment instocks fulfilling the Sharī´ah compliance criteria, Ijarah assets/contracts and Murabahareceivables (less than 33 %), etc.2. B will provide export finance to exporters under Salam and inform the CB, alongwith its proof.3. The CB will invest in the pool the amount equivalent to the export finance givenby B.