Understanding Islamic Finance - Doha Academy of Tertiary Studies

Financing Principles and Practices 373documents, the Islamic bank will contact the customer and inform him of the availability ofthe documents. The customer will negotiate the FX rate for the required foreign currencyamount. The bill may be settled in the following ways:• Normal payment: the Islamic bank will discuss the payment date with the customer andif the customer wishes to settle the transaction, it will issue a Musawamah declaration tothe customer and sell the goods to the customer at the following price: L/C cost + allother charges/expenses. After receiving the payment, the bank will release the shippingdocuments to the customer. However, the bank’s risk on the goods will end only afterthe asset is delivered to the customer.If the customer requires financing, it will enter into a sub-Murabaha, which meansgiving declaration and offer by the customer and its acceptance by the bank. Profit willbe charged from the day the bank’s Nostro is debited to the Murabaha settlement date,according to the agreed profit rate. The bank will release the shipping documents to thecustomer and record a Murabaha receivable.• Settlement – payment against documents (PAD): sub-Murabaha will be booked on theday the customer can arrange funds and shipping documents will be released on the sameday. The price will include profit from the day the bank’s Nostro account is debited untilthe sub-Murabaha settlement date.• Settlement – trust receipt (TR) Murabaha: TR Murabaha is the same as the case of normalpayment. The only difference is that the financing by the bank is done for a relativelylonger period, such as 120 days or more.• Shipping guarantees or delivery orders (DO): if the goods have arrived prior to theshipping documents, which is possible in the case of air cargo, the customer may requestthe Islamic bank to issue a shipping guarantee or delivery order. The bank may take,for example, 110 % margin from the customer and execute a sub-Murabaha based on theFX rate prevailing on that date. The selling price will be fixed at that stage. If, however,upon arrival of the documents, the final cost of the goods turns out to be higher orlower than the cost price of the sub-Murabaha, the bank will settle the difference withthe customer by paying or receiving the differential amount. This adjustment in priceafter the execution of Murabaha is permissible because Murabaha is a cost-plus-profittransaction and it can be mutually stipulated that if the seller discovers after executionof the Murabaha that the cost was higher or lower, he can settle the difference with thebuyer. However, only the cost portion may be adjusted, the profit portion should not beadjusted.14.4.3 Project FinancingProject financing can be provided through various modes of financing. Currently, Ijarah isa popular mode of finance for undertaking project finance. However, if the project needs tobe installed or constructed, Ijarah cannot be used effectively. Some alternate products arediscussed below.Construction/Erection of a Cement Plant (for example)A bank can provide finance on Musharakah basis and enter into an Istisna‘a contract withany industrial concern by appointing the customer its agent for supervision of the erection ofthe plant. The bank will enter into a Musharakah contract with the client to operate the plant