Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 335and other requirements. A possible procedure for trade financing under Musharakahand Mudarabah is given below:1. The exporter receives an order from abroad to export a specific commodity/goodat a known price. He prepares estimates of cost and his expected profit.2. He needs financing for manufacturing/procurement of the goods and asks the bankto provide finance on the basis of Shirkah. The bank enters into an agreement,according to which profit will be shared on a pre-agreed percentage.3. The bank can get a guarantee/security to protect itself from misconduct, breachof contract or negligence on the part of the client. However, being a partner ofthe exporter, the bank will be liable to bear any loss which may be caused dueto any reason other than the negligence of the exporter.A practical application of a similar transaction of import finance is discussed in thefollowing case study.A huge utility organization awards a contract to a local supplier (ABC & Co) forthe supply of equipment that has to be imported. ABC & Co is interested in financingthe transaction through a Musharakah arrangement with an Islamic bank. The structureof the product is developed on a partnership by creditworthiness basis (ShirkatulWujooh), in which the partners have no investment at all. They purchase goods oncredit and sell them at spot. The profit so earned is distributed between them at anagreed ratio. The process of the transaction consists of the following steps:1. ABC & Co opens a Usance L/C of Rs. 10 million, which is issued by an Islamic bank(bank financing on a participation basis) in favour of M/s XYZ Machines, Italy.2. XYZ Machines agrees to give a credit period of 180 days.3. Equipment is shipped to the importing country through air cargo due to thesensitivity of the equipment.4. ABC & Co inspects the goods and confirms its satisfaction to the bank, uponwhich the Islamic bank conveys its acceptance of the documents to the negotiatingbank.5. Customs take 30 days for the clearing of the equipment.6. ABC & Co take around 50 days to install the equipment.7. After the installation, the utility organization inspects and tests the equipment forits performance.8. As soon as the satisfaction certificate is issued, a bill is lodged for payment.9. Payment is received within 150 days of shipment.10. Profit is distributed among the partners as per the agreed ratio.11. The Islamic bank settles the L/C on the due date.Box 12.3:Musharakah-based TFCs Issued by Sitara Industries, PakistanAn excellent example of Musharakah-based financing through the issuance of participatoryinstruments is that of the 5-year term finance certificates (TFCs) worth PakRupees 360 million issued by Sitara Chemical Industries, a public limited company inPakistan, in June 2002. The amount raised through the TFC issue was utilized to meet