Interest Free Microfinance -Bangladesh Perspective

Top 20 FREQUENT WORDS

financing 137 islamic 118 sme 102 banking 71 risk 66 murabaha 62 contract 61 goods 55 price 53 asset 52 customer 46 istisna 46 salam 44 department 43 handbook 42 banks 39 client 36 purchase 36 payment 35 sector 34

DOCUMENT KEY POINTS

• the team name designation contact mister pervez said director pervez
• pk miss fatima javaid regulating officer fatima

• no particulars page no

• globally this sector is the major growing force behind the fastest growing economy of china in terms of contribution to the national gdp scale of assets diversification of products and the creation of employment

• the major reasons for this haphazard distribution remain following factors i smes lack of capital for inventory and day to day operations i lack of objectively defined plans amongst most of the smes for the future expansion of capacity

• n group of banks amount outstanding million rupees loans to small medium enterprises as of november public sector banks private sector banks specialized banks foreign banks total of banks dfis grand total islamic banking department page

• r source and capacity of repayment and cash flow backed lending banks shall specifically identify the sources of repayment and assess the repayment capacity of the borrower on the basis of assets conversion cycle and expected future cash flows

• state bank of pakistan shall continue to exercise its powers for fixation reinstatement of margin requirements on financing facilities being provided by banks dfis for various purposes including import letter of credit on a particular item s as and when required
• the total facilities including leased assets availed by a single sme from the financial institutions should not exceed rs million provided that the facilities excluding leased assets shall not exceed rs million

• handbook on islamic sme financing r aggregate exposure of a bank on sme sector the aggregate exposure of a bank dfi on sme sector shall not exceed the limits as specified below age of classified sme financing to total maximum limit portfolio of sme financing below no limit below times of the equity below times of the equity upto and above upto the equity r minimum conditions for taking exposure i cib report for exposure exceeding rs
• r restriction on facilities to related parties the bank shall not take any exposure on a sme in which any of its director major shareholder holding or more of the share capital of the bank its chief executive or an employee or any family member of these persons is interested

• moreover where banks wish to avail the benefit of collateral held against loans advances they can consider the value determined in accordance with the guidelines mentioned in prs of assets mortgaged pledged with them for deduction from the outstanding principal amount of loan advance against which such assets are mortgaged pledged before making any provision
• restructuring of financing i restructuring of bad debts i restructuring of bad debts can be done with cash i behavior for year has to be positive to qualify for declassification i restructuring of regular debts i banks can restructure loans without the above conditionalities however this will provide a subjective base for classification

• handbook on islamic sme financing other requirements i there is no debt equity and current ratio for smes i an sme who is willing to fulfill the requirements laid down in prudential regulations for corporate commercial banking may be allowed higher exposure limit as allowed for corporate entities
• verification by auditors the external auditors as a part of their annual audits of banks dfis shall verify that all requirements of regulation r for classification and provisioning for assets have been complied with

• according to strategic plan for islamic banking industry of pakistan a targeted market share of is achievable through increasing the coverage of the existing banking segments and through entering into new segments of microfinance agriculture infrastructure and sme finance
• entrepreneurs in sme sector are more inclined towards using shariah compliant products and services provided that required products are available with competitive features and pricing

• the extension in outreach will ensure that the targeted volumes are met and that such a growth rate is achieved which is comparable to the best in class jurisdictions
• however this growth has to be backed with a strong shariah compliance mechanism and a strong regulatory framework in order to make it sustainable on the long term basis

• handbook on islamic sme financing scope of islamic banking over conventional banking in current financial crises the most prominent benefit of preferring islamic banking ib over conventional banking is the elimination of risk of misuse of banks funds

• handbook on islamic sme financing proposed products for islamic sme finaning according to strategic plan for islamic banking industry we are committed to develop the sme sector for achieving higher growth leading to extend the outreach of the shariah compliant products
• in pakistan following the main priority sector for sme i sports goods i dairy industry i textile industry i livestock and cattle farming i fisheries i light engineering i medical equipment i auto financing i bio gas plants i fishing boats engines i furniture industry i housing sector i carpets i metal products i leather industry i edibles all above mentioned sectors can be financed by providing shariah compliant alternatives

• the main purpose of risk management is to ensure that that all contracts credit documentation comply with shariah operationa market l rules and principles particularly with regard to formation termination and elements possibly affecting contract foreign shariah exchange compliance performance such as fraud risk misrepresentation duress or any other rights and obligations
• bank shall solvency reputatio n risk undertake a shariah compliance liquidity review at least annually performed rate of equity investmen either by a separate shariah audit return t risk department or as part of the existing internal audit function by persons having the required knowledge and expertise for the purpose

• these islamic modes are also defined in instructions and guidelines on shariah compliance vide ibd circular no

• as the bank does not have the expertise to identify the goods and negotiate an efficient price this is done by execution of agency agreement between the bank and the customer
• handbook on islamic sme financing murabaha financing islam prohibits charging interest on money but permits charging profit on sale of goods

• bank can obtain any of the following securities from its client depending upon the kind of financing amount of facility and credibility of the customer i hypothecation charge on assets i pledge of goods and or marketable securities i lien on deposits i mortgage charge on movable and immovable properties i bank guarantees i personal guarantees in addition to above the bank may obtain any other security mutually agreed between bank and client
• rise in prices i if there is a rise in prices and the amount escalates for which financing is availed then the transaction can only be executed if the bank has been informed and the bank subsequently accepts the same

• i if the bank has appointed an agent the purchase of goods by or for and on behalf of the bank and the ultimate sale of such goods to the customer shall all be independent of each other and shall be separately documented
• in case of breach of promise hamish jiddiyyah can be used to recover actual damage however it cannot be used for covering the cost of funds opportunity cost

• i it is not permissible to extend the date of payment of murabaha price in exchange for an additional payment in case of rescheduling
• bullet payment if murabaha price is paid in one bullet payment price can simply be calculated as following murabaha price principal principal x profit rate x no

• of days days per period accounting treatment for murabaha under ifas in case of bullet payment payment to the customer for the purchase of goods on behalf of bank or directly to the supplier vendor by the bank advance against murabaha dr customer a c cr at the time of sale of goods to the customers with signing of declaration by the bank and the client murabaha dr murabaha profit receivable dr advance against murabaha cr deferred murabaha income cr at the time of booking of accrual profit rate each month the following entry would be passed
• unequal installments in such a way profit part of the selling price is paid over the total tenor of the transaction whereas the principle amount is paid at maturity

• handbook on islamic sme financing on maturity of murabaha transaction and at the time of receiving of final payment following entry would be passed customer a c dr murabaha cr murabaha profit receivable cr h

• i period of lease must be determined in clear terms at the time of contract i lease for specific purpose only be done if no specific purpose is identified in the agreement then it can be used for any purpose for which it is used in normal course i the lessee is liable to compensate the lessor for any harm to the leased asset caused by any misuse or negligence

• handbook on islamic sme financing expenses consequent to ownership to the lessor as the lessor is the owner of the asset he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor for example expenses of freight and customs duty etc

• these are characterized based on the method by which the ownership transfers to the user i for no consideration through a gift i for token consideration i for price specified in the lease i for remaining amount if lease is terminated before period i gradual transfer b

• accounting treatment of ijarah transactions rental calculation rent asset cost paid by the bank x rate rate n rentals are to be recognized as income on accrual basis in a systematic manner over the lease period whereas carrying costs including depreciation incurred in earning the ijarah income are recognized as an expense in the income statement
• i insurance claim undertaking i undertaking to purchase leased i authorization to take possession asset i personal guarantee i lease agreement i post dated cheques i letter of continuity i promise to sell d

• risk management risks solution repayment default risk risk can be mitigated by market value of ijarah asset which may be reposed collaterized
• at the time of receiving of rental following entry would be passed customer a c dr ijarah rental receivable cr

• parallel salam i the bank being the purchaser of salam commodity can further sell on parallel salam in a similar manner as it has previously purchased on first salam without making one contract dependent on the other

• if it is not known the place where the contract took place shall be considered to be the place of delivery unless it is islamic banking department page
• handbook on islamic sme financing salam based financial products i agriculture financing i working capital financing i commercial and industrial financing i export financing i operations and capital cost financing a

• agency contract i if the bank has no expertise to sell the commodities received under salam contract then the bank can appoint the customer as its agent to sell the commodity in the market third party subject to salam agreement and agency agreement are separate from each other
• salam on existing commodities i salam sale is impermissible on existing commodities or on land and real estates because the description of the land or the real estate entails the location

• replacement of items i if due to any unforeseen reason it is not possible to deliver the commodity on the due date it is permissible to change the commodity with mutual consent except for currency gold or silver
• i the market value of such substituted goods shall not be higher than the market value of the originally agreed commodity at the time of delivery

• risk management of salam risks solution price risk bank can do parallel salam and can also take promise to purchase from the third party
• goods are given to client ii parallel salam parallel salam dr salam goods cr profit loss a c cr c

• it has three components i joint ownership of the bank and customer i customer as a lessee uses the share of the bank i redemption of the share of the bank by the customer mode of fixed asset financing diminishing musharakah is commonly used for the purpose of financing of fixed assets by various islamic banks
• bank and client invest funds to purchase an asset land building equipment machinery and will enter into a musharaka agreement and the shares of the bank and client will be established

• adjustment of rental according of share of financier in property diminishing musharakah can be used for financing with the following conditions a c the agreements of joint purchase lease and selling of units should not be tied up together a c at the time of purchase sale should be effected through offer and acceptance a c preferable to purchase each unit on market value but permissible to purchase at agreed price capital in musharaka the capital is specific existent and under disposal
• handbook on islamic sme financing joint bank ownership gradual transfer of ownership customer musharak a documents i musharaka agreement i payment agreement i undertaking to purchase musharaka units i undertaking to sell musharaka units i unit sale receipt bank and client will enter into a payment agreement under which the client will make monthly quarterly semi annually payments to the bank for usage of bank s share

• handbook on islamic sme financing merchandize or operating assets on condition that these are valued at the time of contract and the value is agreed upon
• it is not permitted that one contract be entered in to as a condition for concluding the other

• risk management risks solution ownership asset risk this risk can be mitigated through takaful coverage of an asset
• cancellation risk the bank must obtain collateral to reduce this risk

• handbook on islamic sme financing istisna financing there are three basic conditions for validity of a sale in shariah i the purchased commodity must be existing i the seller should have acquired the ownership of that commodity and i the commodity must be in the physical or constructive possession of the seller

• i the specifications demanded by the buyer are the most important as the commodity subject of contract is a liability debt i it cannot be stipulated in an istisna contract that the seller manufacturer will not be responsible for any defects
• it should be in form of cash or in form of tangible goods or usufruct of an asset other than the asset being manufactured

• security deposit i the bank may acting either in the capacity of the manufacturer or of the purchaser give or demand urboun security deposit advance money as a guarantee which may be considered as part of the price and may be forfeited if the contract is rescinded
• amendments and changes orders i amendments and change orders in respect of work with mutual consent are allowed and necessary changes may be agreed in the selling price accordingly

• handbook on islamic sme financing separate contracts for parallel istisna i a clear istisna contract shall be entered into between the bank and the customer whereby on the other hand the bank may enter into a parallel istisna with the third party contractor but this contract shall not be tied up with the first contract

• non performance risk the bank can terminate the istisna agreement and can demand the price back from the manufacturer
• risk management risks solutions delivery risk bank can reduce the istisna price according to the istisna agreement

• it will also give funds to the customer under a separate istisna agreement to manufacture and deliver the goods to the bank as per istisna agreement
• handbook on islamic sme financing project financing project financing can be done through various modes of finance

• the only thing required is the considerable research and analysis into the credit management methods by which bank can assess and monitor business financing manage business financing risks and price their products
• banks have traditionally relied on a combination of documentary sources of information interviews and visits and the personal knowledge and expertise of managers in assessing and monitoring sme financing

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic micro

KeyWords

islam finance fund mfis institute developed agricultural financial bankable oper credit rate client econometric mfi loan program beneficiarie imfi sustain

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Number of Pages

44

Published Date

2009-08-26 08:56:49

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