Understanding Islamic Finance - Doha Academy of Tertiary Studies

370 Understanding Islamic Finance3. The customer will manufacture and deliver the goods to the bank as per the L/C. Oncethe goods are manufactured, the same will become the property of the bank.4. The exporter can be appointed as agent to export the goods on behalf of the bank. Theexport proceeds will be remitted to the bank, which will deduct from the proceeds thecost of goods (Istisna‘a price) and profit; the client will pay the Murabaha price to thebank as per the agreed schedule.The Musharakah mode can also be adopted for working capital requirements by usingthe concept of daily product, subject to fulfilment of the relevant Sharī´ah essentials. Thebank and the client can also agree that they will share the gross profits, so that indirectexpenses like depreciation of fixed assets, salaries of administrative staff, etc. shall notbe deducted from the distributable profits, meaning that the client will voluntarily bear allindirect expenses. This aspect may be kept in mind while fixing the sharing ratio betweenthe bank and the client, by allocating a larger share to the latter. Expenses like those relatedto raw materials, labour directly involved in production, electricity, etc. should be bornejointly by the Musharakah.Salam can also be used to finance the working capital needs of customers. It can be veryeffectively used to finance the sugar, fertilizer and cement industries. The process in thecase of a sugar mill, for example, will consist of the following steps:1. An Islamic bank enters into a Salam agreement with the sugar mill, under which the bankwill purchase sugar from the mill by paying the full price in advance. The mill is liableto deliver the sugar on the agreed date. The bank may take a charge on the mill’s assetagainst the payment made under the Salam agreement.2. The bank enters into an agency agreement with the mill, under which the mill will sellthe sugar in the market at a mutually agreed solidus/advised price. It can also be providedin the agency agreement that if the mill sells the sugar at a price higher than the agreedprice, it may keep the extra amount as a bonus.3. On the delivery date, the mill informs the bank to take delivery from its godowns; thebank takes delivery and authorizes the mill to sell the sugar on its behalf.4. The sugar mill sells the sugar and pays the price to the bank; if the price is higher thanthe agreed price, the bank may pay the extra amount to the mill, if so promised in theagency agreement. However, if the market price falls below the agreed price, the bankwill suffer the loss.14.4.2 Trade Financing by Islamic BanksTrade finance operations of banks play an important role in the overall economic developmentof any country, through facilitating imports and exports. Since it usually involves assets,the conversion of the trade finance operation to Islamic modes is relatively easier. Islamicbanks can use Musharakah/Mudarabah in trade finance to build a profitable and secureportfolio. So far, Musharakah use in this sector is minimal, but Islamic banks need to realizethe potential in trade financing through Shirkah arrangements, which can safely be usedon a consignment basis or for single transactions in financing of foreign trade, as alreadyexplained in Chapter 12.Banks should take service charges for opening L/Cs. Funds may be provided for imports onthe basis of profit/loss sharing or Murabaha. Similarly, banks can charge fees as negotiatingbanks in exports. They can provide preshipment export financing on the basis of PLS or