Islamic Banking and Finance Business Review - Ethiopia

Coming Back Soon!

noreply@blogger.com (Mukerem) — Sat, 18 Jan 2025 16:25:00 +0000

👉 what are the major challenges in obtaining finance with interest free scheme in Ethiopia?

👉what are the major challenges for the smooth operation of interest free banking in Ethiopia?

"Practical Challenges"

"How to overcome them?"

Permissibility of Online Financial Dealings with its various aspects

noreply@blogger.com (Mukerem) — Mon, 10 Apr 2023 07:51:00 +0000

The Shari’ah rulings on Online Financial Dealings has discussed in details in the sharia standard[1] for Islamic Financial Institutions developed by AAOIFI. This standard covers the Shari’ah rulings relating to conclusion of financial contracts online, either by launching commercial websites, or by provision of online access services. The standard also indicated the various aspects pertaining to this subject such as the Shari’ah status of the contracts concluded in this manner, determination of the time of contract inception, permissible procedures of possession after signing the contract, and Shari’ah rulings relating to protection of online financial dealings.

According to the standard, it is permissible in Shari’ah to:

1) Launching Commercial Websites for Contractual Dealings and and to conclude online contracts
2) Provide online access services to users on the basis of subscription contracts or any other similar arrangement, and against a specific fee.

The Launching the commercial websites do not involve any impermissible act, such as promotion of impermissible goods and services, or using impermissible means to promote permissible goods and services. Moreover, the online contracts concluded between the institution and its clients should observe the general rules of financial transactions as prescribed by the Shari’ah, regarding for instance, opening of the accounts, performing remittances and signing commercial contracts.

The contract for provision of online access service by the institution is a shared-hiring contract “Ijarah Mushtarakah” signed between the institution and the beneficiary. Therefore, it should become subject to the conditions and rulings of the contract for hiring of persons in general, and those of the contract for hiring of a shared employee in particular. Moreover, the institution which provides online access service should take all necessary precautions and measures to prevent impermissible use of the internet by the beneficiaries to whom the Institution provides the access service.

The various aspects pertaining to Online Financial Dealings

1) Contract Signing Session (Majlis al-’Aqd) for Concluding Online Financial Contracts

When the contract is concluded through audio or audiovisual communication between the two parties, it should become subject to the same Shari’ah rulings on contracts signed in the presence of the two parties. Consequently it should satisfy the rulings relating to this type of contracts which include, for instance: simultaneous presence of the two parties (Itihad al-Majlis), non-existence of any indication of disinterest from any of the two parties, succession of offer and acceptance (as per normal practice), and all the other rulings. The contract signing session in this case is the time of communication between the two parties if the conversation relates to the contract. If the conversation is over or disconnected, or the two parties shifted to another subject, the contract signing session is considered to have stopped (unless disconnection of the conversation is for a reasonably short while).

When the contract is concluded through written communication, by e-mail, or through access to site, it shall become subject to the rulings applicable to contracts signed in the absence of the two parties, because such deal is similar to message contracting. The contract signing session in this case starts from the moment of communicating the offer to the concerned party up to issuance of acceptance. The contract signing session may also be discontinued when the offering party retreats from his offer before an acceptance decision is made by the other party. When the offering party specifies a certain period for validity of his offer, the time allowed for acceptance should cover the whole period. The offering party has no right to withdraw from his offer during that period.

When the contract is concluded through online bidding the highest bidder should not retreat from his bid until the bidding process is over. The highest bidder should also not retreat from his offer after finalization of the bidding process if the seller had made a condition that the offer should remain binding for a certain period, or if the normal practice necessitates validity of the offer for such period.

2) Expressing Offer and Acceptance in Online Financial Contracts

Expression of offer and acceptance in online contracts can be in any form that indicates the consent of the two parties to conclude the contract.

When the offering party sends through website or e-mail a message containing all the rights and commitments pertaining to the contract in question without retaining the right of withdrawal if the message is accepted, that message is considered as an offer.

When the offering party sends the electronic message through website or e-mail without indicating all the rights and commitments relating to the contract in question, or when he stipulates a condition that he should have the right of withdrawal even if the message is accepted, the message is considered to be an announcement or an invitation for contracting rather than an offer. In this case a process of offer and acceptance has to be done.

When the contract is concluded through website, clicking on the acceptance icon is considered as acceptance in the strict Shari’ah sense if the system in the website does not require confirmation of acceptance. If the system in the website requires confirmation of acceptance in any way, acceptance does not take place without making such confirmation. The Institution which provides its services on website should include in the system a step for acceptance confirmation as a precautionary measure against dealers’ mistakes.

3) Time of Commencement of an Online Contract

Irrespective of the method of contracting, an online contract is considered to be valid since the time when the other party accepts the offer and whether the offering party has come to know that or not.

4) Possession (Qabd) in Online Financial Contracts

Regarding online contracts, possession in the strict Shari’ah sense takes place through all accepted methods of actual and constructive possession.
If the sold commodity is computer software or the like, possession in the strict Shari’ah sense takes place when the purchaser, after signing the contract, downloads the software or the data or any good of this type from the website to his personal computer.

When the sold commodity is a currency, gold, silver or any other commodity in which instant exchange (Taqabud) is required, instant exchange of the two objects of the contract should be ascertained during the contract’s signing session.

5) Protection of Online Financial Dealings

1) Protection of commercial sites and dealers data against being trespassed. Commercial websites are considered as private properties of their owners, and therefore their trespassing could necessitate compensation.

The institution should use all possible measures of website protection, so as to safeguard its own rights as well as the rights of its clients.

Trespassing of dealers’ online data is impermissible. It is strictly prohibited to sell such data or transmit it to others without the permission of its owners

Verification of trespassing of commercial sites and data stealing should be done by referring to the prevailing traditions and regulating rules which do not encounter the rules and principles of Shari’ah.

The compensation due in case of trespassing should comprise direct financial loss as well as actual loss of earnings. Expert advice for assessment of compensation can also be sought when need arises.

Compensation shall become due only when it is claimed, whereas claiming compensation does not have a specific time limit after the incident of trespassing is known. In this regard relevant rules and regulations should be observed provided that they do not contradict with the rules and principles of Shariah.

In case of stealing money or confidential data from a protected website the responsibility should rest with the person who committed the theft directly. If it is not possible, for a permissible reason, to charge the person who committed the act of theft directly, the responsibility should rest with the one who facilitated the act. The owner of the site is by no means chargeable for such act, if he has taken all possible measures to protect his site, and unless he has pledged to shoulder such responsibility under all circumstances.

2) Verification of dealers’ identities

In order to safeguard its own interests, the Institution should take all possible precautions and measures to verify the identities of its website dealers, and make sure that they are legally competent for concluding valid contracts.
It is acceptable in Shari’ah to adopt the electronic signature as a means of verifying the identities of dealers, provided that such means is adoptable by virtue of the prevailing rules and regulations.
When forgery or an error is committed with regard to the personality or characteristics of one of the two parties, the other party has the right to terminate the contract.
For verification of forgery or error recourse should be to the general rules of evidence.

3) Protection of dealers from adhesion contracts (’Uqud al-Iz’an)

It can be noticed that in a big part of the online contracts the offer is addressed to the public in general and the contract has uniform details. In such contracts also the offering party alone has the right of stipulating the terms and conditions of the contract, while the other party does not have the right to change such terms and conditions. A contract of this type is considered as an “adhesion contract” when it relates to a commodity or usufruct that nobody can do without, and the offering party assumes actual and legal monopoly or face only meager degree of competition in its supplying.

According to Shari’ah, online adhesion contracts should be subject to state control so as to protect dealers by endorsement of what is equitable and elimination of what is inequitable in these contracts, before launching them to dealers.

If the price in the online adhesion contract is fair, and the terms and conditions of the contract do not entail any injustice for the adhering party, the contract is considered to be permissible and binding to its two parties.

If the price in the online adhesion contract is unfair (comprises excessive injustice), or the contract includes an unjust condition for the adhering party, the latter has the right to resort to law for nullification of the contract or amending its conditions for the sake of relieving him from the consequent injustice.

4) If the online contract is concluded on the basis of describing the sold object, or depending on the fact that the buyer has previously seen the object, or on presentation of a model resembling the object,

Some of the Shari’ah Basis for the Standard

i. The basis for permissibility of launching commercial websites if such sites are free from impermissible practices is the fact that in principle, transactions in any form are allowed, unless they lead to commitment of an impermissible act. Moreover, launching of such sites serves the interests of a large number of people in this era, and thus, conforms to the underlying mission of Shariah.

ii. Permissibility of concluding online financial contracts is due to the fact that such contracts do not involve any impermissible aspect. They carry no difference from traditional contracts except in that the means used for their conclusion is different. If, in principle, contracts as such are allowed as long as they observe the rules of transactions in Shariah, it is only natural that the means whereby these contracts are concluded become allowed as long as they conform to permissible rules of contracting.

iii. Concluding online contracts through audio or audio-visual communication between the two parties is classified under the category of contracts concluded in the presence of the two parties, because in such online contracts both parties are in fact present at the same time, although not in the same place. Therefore, simultaneous presence of the two parties in terms of time, which constitutes the prerequisite meant by coincidence of presence^,[2] is fulfilled at the time of exchanging offer and acceptance.

In this connection the International Islamic Fiqh Academy issued a resolution about the Shariah ruling on concluding contracts through the modern means of communication. The text of the resolution is as follows:

“If any two parties enter into a contract at the same time while they are in different places – this includes contracting through telephone and wireless devices – contracting between these two parties is considered as contracting between two present parties”[3]. Needless to say, there is no difference between contracting through a telephone call, and contracting through online voice communication.

iv. When the contract is concluded through written communication, by e-mail, or through access to site, it shall be classified as a contract signed in the absence of the two parties. This ruling is based on the fact that exchange of offer and acceptance in this case takes place without simultaneous presence of the two parties. In this regard the Al Baraka Seminar on Islamic Economics issued a resolution stating that

“According to Shari’ah, when an online contract is signed between two parties who are not in the same place, it is considered as a contract between two absent parties if neither of the two parties can hear the voice of the other. Consequently such contract should become subject to the Shari’ah rulings on message contracting”[4].

v. The ruling that the offering party does not have the right to retreat from his offer within the period specified by the seller for validity of the offer is based on the viewpoint of some Maliki scholars who believe that if an offer is announced to be valid for a specific period it should remain valid throughout that period. This viewpoint has been emphasized by Al- Hattab quoting Abu Bakar Al-Arabi.[5]In this regard also The International Islamic Fiqh Academy issued a resolution emphasizing the following:

“When the offering party issues a term-offer through these devices, he is committed to keep his offer during the specified period. He does not have the right to retreat from it.”⁽⁶⁾

vi. When the offering party sends the electronic message through website or e-mail without indicating all the rights and commitments relating to the contract in question, or when he stipulates a condition that he should have the right of withdrawal even if the message is accepted, the message is not considered as an offer, because from a Shari’ah point of view an offer should be categorically obvious and cannot bear any other meaning^.(7)

vii. The ruling that irrespective of the method of contracting an online contract is considered to be valid since the time when the other party accepts the offer and whether the offering party has come to know that or not, is based on the fact that Shari’ah scholars define contract as “the concordance of two wills”. Therefore as soon as the accepting party declares his consent concordance between the two wills takes place and the contract becomes valid[6].A resolution issued in this regard by the International Islamic Fiqh Academy states: “When a contract is to be signed, through a written message or a messenger, between two absent parties who are not in the same place and neither of them can see or hear the other - a case which includes contracting through telex, fax and PC screens - the validity of such contract starts as soon as the concerned party receives and accepts the offer”[7].

viii. The ruling that possession in the strict Shari’ah sense takes place when the purchaser, after signing the contract, downloads the computer software or the data or any other good of this type from the website to his pc, is based on the fact that possession takes place actually and constructively when the sold object is released and disposition is facilitated for the buyer. Possession of objects differs according to the type of the object in question and how its possession is normally perceived. In this respect a resolution has been issued by the International Islamic Fiqh Academy regarding possession and its forms, especially the recent ones.(10)

ix. Prohibition of trespassing commercial websites and data theft is derived from prohibition of all forms of encroaching upon rights of others because Allah, the Almighty, says: {“…but transgress not the limits. Truly, Allah likes not the transgressors.”}.[8] Moreover, websites have financial worth, and are considered as private rights of their owners. Trespassing of such sites may result in financial harm for their owners. In this regard the International Islamic Fiqh Academy issued a resolution emphasizing prohibition of transgression against trade name, trade address, trademark and all other similar rights.[9]

x. Acceptability of adopting the electronic signature as a means of verifying the identities of dealers if such means is recognizable by the prevailing rules and regulations is based on the need to avoid the harm that could arise from online forgery in the dealers’ identities. In addition to that, adopting electronic signature does not constitute an impermissible practice. In fact Shari’ah encourages the use of technological means to preserve peoples’ wealth, because preservation of wealth constitutes one of the main five aims (Maqasid) of Shari’ah.

[1] Shari’ah Standard No. (38): Online Financial Dealings, page 943

[2] See: “Fath Al-Qadir” [3: 190–192]; “Hashiyat Al-Dusuqi ’Ala Al-Sharh Al-Kabir” [3: 5]; “Mughni

Al-Muhtaj” [2: 5]; “Al-Mughni” [3: 481]; and see “Al-Madkhal Al-Fiqhi Al-’Am” [1: 348].

[3] Resolution No. 52 (3/6).

[4] The 19th Al Baraka Seminar on Islamic Economics, held in Makkah Al-Mukarramah, on 6–7 Ramadan 1420 A.H., corresponding to 2-3 December 2000 A.D.

[5] (5) See: “Mawahib Al-Jalil” by Al-Hattab [4: 241]. This viewpoint has been adopted by a number of civil laws, and is known as “Term Offer”. See article (98) of the Jordanian Civil Law and article (93) of the Syrian Civil Law.

[6] (8) See: “Bada`i’ Al-Sana`i’” [6: 2994] and “Hashiyat Ibn ’Abidin” [7: 26].

[7] (9) Resolution No. 52 (3/6).

[8] (11) [Al-Baqarah (The Cow):190].

[9] (12) Resolution No. (5), 5th Session 1408 A.H. – 1988 A.D.

Shari'ah Standard (5): Guarantee (Revised)

noreply@blogger.com (Mukerem) — Tue, 05 Oct 2021 11:33:00 +0000

This standard covers securities (Guarantees) intended to secure obligations and protect debts against procrastination and default. Such securities may take the form of written documents, attestations, per
sonal guarantees, mortgages, cheques and promissory notes. The permissible and prohibited forms of securities. It also intends to distinguish between liabilities and the assets held on trust.

Shari’ah ruling and basis for the standard on Guarantees

1. Permissibility of guarantees and their relevance to contracts

The basis of the permissibility of stipulating guarantees in contracts is that it protects property, which is one of the objectives of Shari’ah. The other authorities mentioned in the standard in support of each kind of guarantee can be cited as authority for the permissibility of guarantees in contracts.

1.1. A contract of guarantee is permissible in contracts of exchange, e.g. a contract of sale, or contract of rights, e.g. right of intellectual property. Such a guarantee contract does not affect the permissibility of the original contract in which it is required. It is, moreover, permissible to stipulate a guarantee into the body of an original at one time, because guarantee is appropriate to, or relevant in, contracts.

1.2. There is no objection in Shari’ah to include a number of guarantees in one contract, such as incorporating a personal guarantee together with a mortgage of security in the same contract.

2. Guarantees in trust (fiduciary) contracts

Assets held on trust must be returned to their owners in the manner in which they were received and in their original physical state promptly after the owners demand their return. Allah, the Almighty, says: {“Allah doth command you to render back your trusts to those to whom they are due”}.⁽²⁾ Since such assets are not subject to exchange, they are purposely meant either for custody with permission to use them, such as assets on deposit, or for charitable acts, such as a loan of tangible assets. Therefore, the persons holding such assets are considered by the owners from the beginning as capable of returning them to their owners on demand, making them trustees, and as a principle of Shari’ah, a trustee is not held liable (for loss of, or damage to, an asset held on trust), except in circumstances of misconduct, negligence or violation of the conditions agreed upon, because in other circumstances it is inconsistent with the fundamental principle of trusts for a trustee to be held liable.

2.1. It is not permissible to stipulate in trust (fiduciary) contracts, e.g. agency contracts or contracts of deposits, that a personal guarantee or mortgage of security be produced, because such a stipulation is against the nature of trust (fiduciary) contracts, unless such a stipulation is intended to cover cases of misconduct, negligence or breach of conditions or stipulations. The prohibition against seeking a guarantee in trust contracts is more stringent in Musharakah and Mudarabah contracts, since it is not permitted to require from a manager in the Mudarabah or the Musharakah contract or an investment agent or one of the partners in these contracts to guarantee the capital, or to promise a guaranteed profit. Moreover, it is not permissible for these contracts to be marketed or operated as a guaranteed investment.

2.2. It is not permissible to combine agency and personal guarantees in one contract at the same time (i.e. the same party acting in the capacity of an agent on one hand and acting as a guarantor on the other hand), because such a combination conflicts with the nature of these contracts. In addition, a guarantee given by a party acting as an agent in respect of an investment turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment, (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to Riba). But if a guarantee is not stipulated in the agency contract and the agent voluntarily provides a guarantee to his clients independently of the agency contract, the agent becomes a guarantor in a different capacity from that of agent. In this case, such an agent will remain liable as guarantor even if he is discharged from acting as agent.

3. Guaranteeing existing leased properties

The lessor bears the risk associated with the leased property and the lessee holds it on a trust basis. Hence, it is not permissible for the lessor to stipulate in the lease contract that the lessee provide a guarantee or mortgage of security, etc., so that he may use it to recover the amount of the lease rental if the leased property is damaged, unless such a stipulation is restricted to cases of misconduct, negligence or breach of contract. Therefore, the lessor is liable for the consequences of any damage to the leased property that is not caused by the misconduct or negligence of the lessee, and is responsible for any related insurance expenses. The lessor also bears the expense of any major maintenance work required to keep the leased property in the condition necessary to provide the contractual benefits under the lease.

4. Written documentation and attestation

Written documentation is recommended by Shari’ah. This is the opinion of the majority of Fuqaha, in contrast to Ibn Hazm who argued that written documentation is an obligation (i.e. if one did not put his financial[1] transactions in writing he has committed a sin) relying on the literal meaning of the Qura'nic verse: {“O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing”}[2] and the Quranic Verse: {“Disdain not to reduce to writing your contract for a future period, whether it be small or big”[3] The majority of Fuqaha have also inferred that this verse itself excluded written documentation in the cases of trustworthiness, as the last part of the following verse says: {“And if one of you deposits a thing on trust with another, let the trustee (faithfully) discharge his trust and left him fear Allah his Lord.”}

It must be noted that customary practice is the basis in determining the form and evidential value of written documentation, because Shari’ah did not specify a particular manner of writing to be considered. As for the permissibility of attestation as documentation, the authority for that is the
following Qura'nic verse: {“And get out two witnesses, out of your own men. And if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her”}.[4]

The evidential value of attestation according to traditional Fuqaha is stronger than that of written documentation. But in modern times, things have changed so that some laws rely on witnesses only in a very limited number of cases and paramount importance is given to written documentary evidence.

4.1. Documentation in writing is recommended by Shari’ah, whether such documentation is in the form of ordinary (private) or official documents. However, customary practice is applicable in the drawing up of such documents and in determining the documents that are relevant as proof (or have evidential value). It is prohibited to forge documents or to conceal their contents or to destroy them so as to bring about the loss of other peoples’ rights.

4.2. Attestation in financial transactions is recommended by Shari’ah. It is also commendable, and in case of necessity it is obligatory, to give testimony. On the other hand, perjury is prohibited and is one of the major sins.

4.3. It is not permitted to scribe or witness acts prohibited by Shari’ah, such as certifying or witnessing borrowing on the basis of interest.

5. Personal Guarantees

Personal guarantees derive their permissibility from the Qura'n, Sunnah,consensus and reasoning. In the Qura'n, Allah, the Almighty, says: {“They said: ‘We miss the great beaker of the king; for him who produces it, is (the reward of) a camel load; I will be bound by if”}.[5] In Sunnah, there is the Hadith narrated by Salamah Ibn Al-Akwa, who said: “We were with the Prophet (peace be upon him) when a deceased person was brought. They said, ‘O Prophet of Allah, perform prayers on him.’ He (peace be upon him) said, ‘Has the deceased left anything?’ They said, ‘No’ He (peace be upon him) said, ‘Is he in debt?’ They said, ‘Three dinars’ He said, ‘Perform prayers on your companion’ Abu Qatadah said, ‘O Messenger of Allah, perform prayer on him, and I am responsible for his debt’ Then the Prophet (peace be upon him) performed prayers on him.”[6] In another text of the Hadith, he (Qatadah) said: “I guarantee (to pay) his debt”[7]

The Fuqaha are unanimous on the permissibility of personal guarantees. Moreover, the need of people for personal guarantees to facilitate dealings with each other had also made them legitimate, particularly in the case of customers who lack a good credit record. In addition, personal guarantees encourage performance and prevent the contract from being breached and this security also justifies their permissibility.

The objection to taking consideration for personal guarantees is that giving a guarantee is one of the charitable acts that should be offered without consideration, and this ruling has generated consensus among the Fuqaha. Moreover, a personal guarantee indicates a readiness to give away the amount of a loan, which means that the guarantor will pay the loan (if the principal debtor fails to pay) and have recourse to the guaranteed person for fulfilment. Hence, it is not permissible to take consideration for a guarantee, because it is not permissible to take consideration for giving away the amount of the loan itself, since such consideration is considered to be Riba.

5.1. Permissibility and types of personal guarantee

5.1.1. It is permissible for an Institution to stipulate that a customer should provide one or more guarantors to secure the debts owed by the customer.

5.1.2. Personal guarantees are divided into two types. One type is a guarantee where the guarantor has a right of recourse to the debtor, and this guarantee is offered at the request or with the consent of the debtor. The other type is a non-recourse guarantee, which is offered voluntarily by a third party without the debtor’s request or consent (voluntary guarantee).

5.1.3. An Institution is not entitled to guarantee financial commitments without a right of recourse to the debtor, i.e. to be a non-recourse guarantor, unless the Institution is already
authorised by its shareholders and investors to make donations or to perform acts of benevolence.

5.1.4. It is permissible to fix the duration of a personal guarantee. It is also permissible to set a ceiling on the amount to be guaranteed and it is permissible that the personal guarantee be restricted by, or be contingent upon, a condition. In addition, it is permissible that such a guarantee be made contingent upon a future event, for example, by fixing a future date at which liability will commence and, in this case, the guarantor may validly withdraw the guarantee, by notifying the creditor, before the prospective obligation to be guaranteed arises.

5.1.5. It is not permissible to take any remuneration whatsoever for providing a personal guarantee per se, or to pay commission for obtaining such a guarantee. The guarantor is, however, entitled to claim any expenses actually incurred during the period of a personal guarantee, and the Institution is not obliged to inquire as to how the guarantee produced has been obtained by the customer. [see item 7/1/1 and 7/1/2)]

6. Guaranteeing unknown (Majhul) and future debts

The Shariah basis for the permissibility of guaranteeing the unknown is the general meaning of the Hadith: “The guarantor is liable"[8] because this Hadith makes no distinction between guaranteeing the known and the unknown since there is no harm or element of dispute arising due to uncertainty here, because the unknown transaction guaranteed will become certain and known, and the guarantor will know, after the debt is incurred, the actual obligation he undertakes. Another authority for the permissibility of guaranteeing what is not known is the Quranic verse: {“...for him who produces it, is (the reward of) a camel load and I will be bound by it”.[9]Here, the guarantor guaranteed a camel load although it was not yet a debt.

The evidence for the creditor’s right to demand payment from either the debtor or the guarantor is that the debt is established as liability of both of them, hence the right to demand payment from either of them. The permissibility for stipulating that the creditor has first to ask for payment from the principal debtor and that he may ask the guarantor for payment only if the debtor fails to pay, is based on an opinion in the Maliki School of law[10] and it is also an opinion of the Hanafis.[11] These opinions argued that if the debtor is solvent then demanding payment from the guarantor is pointless, unless the debtor refuses to pay. So, the requirement that payment be first sought from the debtor has a Shari’ah basis as well as being a case of adherence to a principle of natural justice.

A valid guarantee may be given for debts, the exact amount of which is unknown. Similarly, a valid guarantee may be given for a debt that will arise in the future. However, it is permissible for the guarantor to withdraw such a guarantee before a future debt is actually created, after notifying the person having interest in the guarantee. This is called a “market (business) guarantee" or a “guarantee of contractual obligation.” An example of this type is a third party’s guarantee to refund the price to the buyer if it appears that the sold commodity belongs to a person other than the seller and this guarantee is known as Daman al-Dark (dealers/business misrepresentation guarantee).

7. The effect of a personal guarantee

7.1. The creditor is entitled to claim the amount of his debt from either the debtor or the guarantor and he has the choice of claiming his right from either of them. However, the guarantor is entitled to arrange the order of liability, for example, by stipulating (at the conclusion of the contract of guarantee) that the creditor shall first claim payment from the principal debtor and that the creditor is entitled to recourse to the guarantor for payment only if the principal debtor refuses to fulfil his obligation.

7.2. If the creditor discharges the debtor from the debt, the guarantor is also discharged automatically from his liability. However, if the creditor discharges the guarantor from liability, the debtor remains in debt. If the guarantor secures a discount that results in paying an amount less than the original debt, the guarantor is entitled to recover only the amount he has actually paid to the creditor; he cannot demand that the debtor pay the debt in full ignoring the discount. This rule is intended to prevent a procedure being used that potentially leads to Riba. However, if the guarantor reaches an agreement with the creditor to settle the debt using as consideration a commodity of a different type from that in which the original debt was designated, the guarantor is entitled to recover the exact amount of the commodity provided as consideration for the debt, or the exact amount of the debt, whichever is less.

7.3. It is permissible for a personal guarantee contract to be designated in a separate contract. It can also be concluded together with, or before, or after, the conclusion of the contract of a credit transaction.

7.4. If an Institution manages transactions on the basis of Mudarabah or Musharakah or investment agency, it is not permitted for it to guarantee the fluctuations of currency exchange rates so that the investors will recover their investment shares irrespective of the behaviour of the currency market. Such a guarantee is prohibited because it is tantamount to the Mudarib or partner or investment agent guaranteeing the capital of other partners or investors, which is prohibited by Shariah. [see items 2.1 and 2.2]

7.5. If the contract of a credit transaction stipulates that the debtor shall provide a guarantor and the debtor fails to provide one, the Institution is entitled to initiate legal action to force him to provide a guarantor or to terminate the contract.

8. Mortgage (Rahn)

It is to make a financial asset or so tied to a debt so that the asset or its value is used for repayment of the debt in case of default. [see Shari’ahStandard No. (39) on Mortgage]

9. Cases of Achieving the Objectives of Securities

9.1. Bringing forward future instalments in case of default on payment

It is permissible to include a term in a debt contract to the effect that, if the debtor defaults on the payment of one or more instalments, some or all of the future instalments shall fall due immediately, provided the default was not caused by unforeseeable intervening events or force majeure. However, this term shall not be effective until the debtor has been served with a reminder notice and after a reasonable period of time has elapsed.

9.2. Termination of a sale on deferred payment terms in case of failure to pay

The seller is entitled, in a contract of sale on a deferred payment basis, to stipulate that if the buyer fails to pay the price within a certain period of time, the seller is entitled to revoke the contract and repossess the sold asset without recourse to the courts.

10. Some Contemporary Applications of Securities

10.1. Letters of guarantee

10.1.1. It is not permissible to take remuneration for issuing a letter of guarantee, whether it is with cover or without cover, if the remuneration is intended as consideration for the guarantee per se, since the amount guaranteed and the duration of the guarantee are usually taken into consideration in computing remuneration.

10.1.2. Asking an applicant for a letter of guarantee to bear administrative expenses incurred in issuing a letter of guarantee of either type (i.e. preliminary or final) is permissible in Shari’ah, provided the remuneration for such expenses do not exceed the commission that others would charge for such services. Where full or partial cover is provided, it is permissible, in estimating the expenses for issuing a letter of guarantee, to take into account anything
that will reflect the actual service to be rendered in providing a cover for the transaction.

10.1.3. It is not permitted for the Institution to issue a letter of guarantee in favour of an applicant who will use it to acquire an interest based loan or to conclude a prohibited transaction.

10.2. Documentary credit

It is a written undertaking by a bank (known as the issuer) given to the seller (the beneficiary) as per the buyer’s (applicant’s or orderer’s) instruction or is issued by the bank for its own use, undertaking
to pay up to a specified amount (in cash or through acceptance or discounting of a bill of exchange), within a certain period of time, provided that the seller present documents for the goods conforming
to the instructions.

In brief, a documentary credit is an undertaking by a bank to pay subject to conformity of the documents to the contractual instructions. [see Shari’ah Standard on Documentary Credit]

10.3. Use of cheques or promissory notes

There is no Shari’ah objection to obtaining cheques or promissory notes from the debtor (unless not allowed by law) as a means to force the debtor to make timely payment of instalments in cash, whereby
if the debtor pays on time such cheques or promissory notes shall be returned to him, and in the event of default on payment they may be produced for recovery. The party providing these cheques or promissory notes as security is entitled to obtain an undertaking from the Institution that they will be used only for timely recovery of its due debts without any addition.

10.4. Insurance for doubtful or bad debts

It is permissible to subscribe to an Islamic insurance coverage as security for debt obligations and it is not permissible that debts be insured on a conventional insurance basis.

10.5. Freezing cash deposits (blocking withdrawals)

10.5.1. In order to secure the future payment of debts on a single payment or an instalment basis, it is permissible for the Institution to stipulate, that it is entitled to freeze the customer’s investment account, or to revoke his right to withdraw money from such an account entirely or to block an amount in the account equivalent to the debt, which is the preferred option. Nevertheless, the customer remains entitled to share profits on the whole balance of the investment account after deducting the Institution’s share for acting as a Mudarib.

10.5.2. In a credit transaction, it is not permitted for the Institution to stipulate a right to freeze the customer’s current account. However, a stipulation of this kind is allowed where the customer has freely, willingly and absolutely agreed to his current account to be frozen.

10.6. Third party guarantees (voluntary undertakings to compensate an investment loss)

It is permissible for a third party, other than the Mudarib or investment agent or one of the partners, to undertake voluntarily that he will compensate the investment losses of the party to whom the undertaking is given, provided this guarantee is not linked in any manner to the Mudarabah financing contract or investment agency contract.

10.7. Underwriting the subscription of shares issued (subscription guarantee)

10.7.1. It is permissible for the Institution to undertake that it will underwrite the remaining shares offered for subscription after the expiry of the offer period, provided the shares are under-written at the offer value without any consideration for the underwriting per se.

10.7.2. The underwriter is entitled to receive consideration for a service it provides other than the guarantee, such as conducting a feasibility study or marketing the shares.

10.8. Guarantees in tenders, security deposits in Murabahah transactions and Arboun (Earnest Money)

10.8.1. It is permissible to obtain guarantees for tenders and this includes both the amounts paid for participating in the bid (primary cash security for participating in the bid) and the amounts paid when the contract is awarded to the successful bidder (final cash security providing evidence of ability to complete the project). Such amounts shall be considered as being held on trust by the offeror of the bid on behalf of the successful bidder, and are not viewed as Arboun (Earnest Money). Hence, such amounts are recoverable if they are intermingled with other amounts of money (i.e. irrespective of any unwanted circumstances). Moreover, it is not permissible to confiscate such amounts of money, except in compensation for an equivalent amount of financial damage actually sustained in the tendering process. Such amounts may be invested in the benefit of the customer with his consent, unless he requests it to be credited to his current account.

10.8.2. It is permissible for the Institution, in the case of a unilateral binding promise, to take a sum of money called Hamish Jiddiyyah (security deposit) from the purchase orderer (customer) as security for his promise. This sum of money is held on trust, not as ‘Arboun, because no contract has been established. The rules set out in item 6/8/1 apply here. Where the customer fails to honour his binding promise, the Institution is not permitted to retain the security deposit as such. Instead, the Institution’s rights are limited to deducting the amount of any damage actually incurred as a result of the breach, namely the difference between the cost of the item to the Institution and its selling price to a third party.

10.8.3. It is permissible to take Arboun from a buyer or lessee when a sale or lease contract is concluded, on condition that, if the contract is not terminated within the specified period during which the option to terminate the contract remains valid, such an amount will be considered as part of the consideration for the contract and, if the buyer or lessee fails to perform the contract within this period, the seller or lessor is entitled to retain the amount. It is, however, preferable that the Institution should refund to the customer any balance remaining after deducting from the Arboun the amount of any damage actually sustained by it.

10.9. Priority right of recovery and the right to follow up

10.9.1. The Institution is entitled to recover first its tangible items that were sold to or manufactured for a customer and have not been paid for and can be identified among the assets of the customer.

10.9.2. The Institution is entitled to protect the integrity of the subject of a guarantee, such as a mortgaged asset, and pursue a legal action against misusing it if it is established that the person holding it is using it in a manner that may lead to losses to be borne by the Institution.

10.9.3. The rights of the parties holding mortgages of security shall be given priority over the rights of the parties who are unsecured. [see Shariah Standard No. (39)]

10.9.4. In the event of bankruptcy or liquidation, the parties in charge of the liquidation have a preferential right or priority over other creditors in recovering their rights; i.e. the cost of any services provided in the process of liquidation. [see Shari’ah Standard No. (43) on Insolvency]

⃟ ⃟ ⃟

Definitions of Terms

Payables:

Debts that are absolutely payable and liabilities held on trust basis, either because of being contractually created, or because unjust enrichment has given rise to a liability for restitution.

Liabilities:

Liabilities held on trust basis, i.e., obligations that are not subject to compensation for any loss suffered except in circumstances of misconduct, negligence or violation of the conditions agreed upon.

⃟ ⃟ ⃟

SOURCE: SHARI'AH STANDARDS (ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS)

[1] [Al-Nisa' (Women): 58].

[2] [Al Baqarah (The Cow): 282].

[3] [Al Baqarah (The Cow): 282].

[4] [Al Baqarah (The Cow): 282].

[5] [Yusuf (Joseph): 72].

[6] Related by Al-Bukhari in his “Sahih” [2: 800], Dar Ibn Kathir and Yamamah

[7] “Sunan Al-Nasa`i” [7: 317]; “Sunan Ibn Majah”, [2: 804]; and Al-Bayhaqi in “Al-Sunan

Al-Kubra” [4: 95].

[8] The Hadith has been related by Ahmad, Abu Dawud, and Al-Tirmidhi: “Al-Darari AlMudiyyah” [1: 399], Dar Al-Jil; Ibn Majah in his “Sunan Ibn Majah” [2: 804], Dar AlFikr; and Al-Bayhaqi in “Al-Sunan Al-Kubra” [6: 72], Maktabat Dar Al-Baz.

[9] [Yusuf (Joseph): 72]. “I will be bound by if’ means being a guarantor.

[10] Ibn Rushd, “Al-Bayan Wa Al-Tahsil” [11: 291].

[11] “Bada'i’Al-Sana'i’” [7: 2423].

Shari’ah Standard (3): Procrastinating Debtor (Revised)

noreply@blogger.com (Mukerem) — Wed, 24 Feb 2021 11:49:00 +0000

Shari’ah Standard (No.3): Procrastinating Debtor (Revised)

The purpose of this standard is to explain the Shariah rulings applicable to the transactions of Islamic financial Institutions relating to solvent debtors and/or guarantors procrastinating in settling their obligations and contractors delaying in fulfilment of their obligations, which invokes penalty stipulated in the contract.

1. Shari’ah Ruling on Procrastinating Debtor

1.1. Default in payment by a debtor

1.1.1. Default in payment by a debtor who is capable of paying the debt is Haram (prohibited).

1.1.2. It is not permitted to stipulate any financial compensation, either in cash or in other consideration, as a penalty clause in respect of a delay by a debtor in settling his debt, whether or not the amount of such compensation is pre-determined; this applies both to compensation in respect of loss of income (opportunity loss) and in respect of a loss due to a change in the value of the currency of the debt.

1.1.3. It is not permitted to make a judicial demand on a debtor in default to pay financial compensation, in the form either of cash or of other consideration, for a delay in settling his debt.

1.1.4. The procrastinating debtor is liable for legal and other expenses incurred by the creditor in order to recover his debt.

1.1.5. The creditor is entitled to apply for the sale of any asset mortgaged as collateral for the debt, for the liquidation of the debt. He is equally entitled to stipulate that the debtor must give a mandate to the creditor to sell the mortgaged asset without recourse to the courts.

1.1.6. Unless failure to pay was caused by force majeure, it is permissible to stipulate that all outstanding instalments become due once the procrastinating debtor fails to pay an instalment. It is preferable that this clause is implemented only after notifying the debtor and after the lapse of a reasonable period of time. [See Shari’ah Standard No. (5) on Guarantees (item 5/1)]

1.1.7. 2/1/7 In the case of a Murabahah sale, if the asset that was sold is still available in the condition in which it was sold, and the buyer has defaulted in the settlement of the price and has later become bankrupt, then the seller (the Institution) is entitled to repossess the asset instead of initiating procedures to obtain a bankruptcy order.

1.1.8. It is permissible in contracts involving indebtedness (such as Murabahah) to stipulate an undertaking by the debtor, that in case of procrastinating in payment, the latter will donate an amount or a percentage of the debt to be spent for charitable causes through the Institution.

1.2. Guarantor

a) It is permissible for a creditor to demand that a debt be settled by the debtor or the guarantor of the debtor, unless the guarantor stipulated that the settlement must first be sought from the debtor.

b) All rulings applicable to debtors in default are equally applicable to guarantors in default.

1.3. Contractor

It is permissible to include penalty clauses in contracts for construction, Istisna’a and supply contracts. In case of a refusal to pay the amount due under a penalty clause, the rulings relating to default by a debtor would be applicable. It is permitted to deduct the amount from outstanding amounts due to the contractor.

1.4. Non-material punishments for default in payment

The Institution is entitled to include the name of a debtor in default in a list of undesirable customers (black list) and to send a warning admonition to other companies about the defaulting debtor, either when there is an inquiry from other companies about the debtor or when such ‘black lists’ are exchanged between companies directly.

1.5. General rulings

1.5.1. The Institution is entitled to [monitor and] investigate [the financial status and activities] of a defaulting debtor through all permissible and legitimate means.

1.5.2. The Institution may accept a payment from a debtor who is in default that is in excess of the amount of the debt, provided there is no contractual condition whether written or verbal, or custom or mutual agreement relating to this additional amount.

1.5.3. It is permissible for the Institution to stipulate in a contract dealing with indebtedness that, if the debtor is late in making payment, the Institution is entitled to recoup the amount due from any of the accounts of the customer with the Institution, whether current accounts or investment accounts. This may be done without getting any further consent of the debtor provided the balance in the account is of the same currency as that of the debt. If, however, the currency is different, then the rate of exchange to be used must be the then prevailing rate of
exchange.

1.6. Establishment of default in payment

Default in payment is established when, following a normal demand for payment, a debtor who has not proved that he is insolvent fails to settle the debt on its due date.

Shari’ah Standard (2): Debit Card, Charge Card and Credit Card

noreply@blogger.com (Mukerem) — Tue, 23 Feb 2021 11:21:00 +0000

Shari’ah Standard on Debit Card, Charge Card and Credit Card

The purpose of the standard on debit card, charge card and credit card is to explain their types and characteristics, and to lay down the Shariah principles for dealing with the three types of card by both Islamic financial Institutions(1) and their customers who hold their cards and use them. The standard also explains the Shari'ah rulings on the use of the cards in various circumstances.

1. Shari’ah Rulings for Different Types of Card

1.1. Debit card

It is permissible for Institutions to issue debit cards, as long as the cardholder does not exceed the balance available on his account and no interest charge arises out of the transaction.

1.2. Charge card

It is permissible for Institutions to issue charge cards on the following conditions:

1.2.1. The cardholder is not obliged to pay interest in the case of delay in paying the amount due.

1.2.2. If the Institution obliges the cardholder to deposit a sum of money as a guarantee and this amount is not available for the use of the card holder, then it must be made clear that the Institution will invest the money for the benefit of the cardholder on the basis of Mudarabah and that any profit accruing on this amount will be shared between the cardholder and the Institution according to a specified percentage.

1.2.3. The Institution must stipulate that the cardholder may not use the card for purposes prohibited by the Shari’ah and that the Institution has the right to withdraw the card in case such a condition is violated.

1.3. Credit card

It is not permissible for an Institution to issue credit cards that provide an interest-bearing revolving credit facility, whereby the cardholder pays interest for being allowed to pay off the debt in instalments.

2. General Provisions

2.1. The affiliation of the Institution to membership of international card regulatory organizations

2.1.1. It is permissible for Institutions to join the membership of international card regulatory organizations, provided the Institutions avoid any infringements of Shari’ah that may be prescribed by those organizations.

2.1.2. It is permissible for the Institutions to pay membership fees, service charges and other fees to international card regulatory organizations, so long as these do not include interest payments, even in an indirect way, such as in the case of increasing the service charge to cater for the granted credit.

2.2. Commission to the card issuer payable by merchants accepting
the card

It is permissible for the Institution issuing the card to charge a commission to the party accepting the card, at a percentage of the purchase price of the items and services purchased using the card.

2.3. Fees charged by the Institution to the cardholder

It is permissible for the Institution issuing the card to charge the cardholder membership fees, renewal fees and replacement fees.

2.4. Purchasing gold, silver and currency with cards

It is permissible to purchase gold, silver or currency with a debit card or a charge card, in cases where the issuing Institution is able to settle the amount due to the party accepting the card without any delay.

2.5. Cash withdrawal using a card

2.5.1. It is permissible for the cardholder to withdraw an amount of cash within the limit of his available funds, or more with the agreement of the Institution issuing the card, provided no interest is charged.

2.5.2. It is permissible for the Institution issuing the card to charge a flat service fee for cash withdrawal, proportionate to the service offered, but not a fee that varies with the amount withdrawn.

2.6. Privileges granted by card issuing parties

2.6.1. It is not permissible for Institutions to grant the cardholder privileges prohibited by the Shari’ah, such as conventional life insurance, entrance to prohibited places or prohibited gifts.

2.6.2. It is permissible to grant privileges to the cardholder that are not prohibited by the Shari’ah, such as a priority right to services or discounts on hotel, airline or restaurant reservations and the like.

Shari’ah Standard (1): Trading in Currencies

noreply@blogger.com (Mukerem) — Tue, 23 Feb 2021 07:52:00 +0000

Shariáh standard on Trade in Currencies

The purpose of this standard is to explain the Shari’ah rulings relating to trading in currencies, as well as the conditions and precepts laid down by the Shari’ah as to what is permissible in currency trading and what is not. The standard also explains some of the practices being applied by Islamic financial Institutions

1. Shari’ah Ruling on Trading in Currencies

1.1. It is permissible to trade in currencies, provided that it is done in compliance with the following Shari’ah rules and precepts:

1.1.1. Both parties must take possession of the counter values before dispersing, such possession being either actual or constructive.

1.1.2. The counter values of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound.

1.1.3. The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values.

1.1.4. The dealing in currencies shall not aim at establishing a monopoly position, nor should it entail any evil consequences to the interest of individuals or societies.

1.1.5. Currency transactions shall not be carried out on the forward or futures market.

1.2. It is prohibited to enter into forward currency contracts[1]. This rule applies whether such contracts are effected through the exchange of deferred transfers of debt or through the execution of a deferred contract in which the concurrent possession of both of the countervalues by both parties does not take place.

1.3. It is also prohibited to deal in the forward currency market even if the purpose is hedging to avoid a loss of profit on a particular transaction effected in a currency whose value is expected to decline.

1.4. It is permissible for the Institution to hedge against the future devaluation of the currency by recourse to the following:

1.4.1. To execute back to back interest free loans using different currencies without receiving or giving any extra benefit, provided these two loans are not contractually connected to each other.

1.4.2. Where the exposure is in respect of an account payable, to sell goods on credit or by Murabahah in the currency of the exposure.

1.5. It is permissible for the Institution and the customer to agree, at the time of settlement of the instalments of a credit transaction (such as a Murabahah), that the payment shall be made in another currency applying the spot exchange rate on the day of payment.

1.6. Possession in sales of currencies

1.6.1. When a contract is concluded for the sale of an amount of
currency, possession must be taken for the whole amount that is the subject matter of the contract at the closing of the transaction.

1.6.2. Taking possession of one of the counter values by one party without taking possession of the other is not enough to make a currency dealing transaction permissible. Likewise, taking partial possession is not sufficient. Taking possession of part of a counter value is valid only in respect of the part, possession of which is complete, whereas the remaining part of the transaction remains invalid.

1.6.3. Possession may take place either physically or constructively. The form of taking possession of assets differs according to their nature and customary business practices.

1.6.4. Physical possession takes place by means of simultaneous
delivery by hand.

1.6.5. Constructive possession of an asset is deemed to have taken place by the seller enabling the other party to take its delivery and dispose of it, even if there is no physical taking of possession. Among other forms of constructive possession that are approved by both Shari’ah and business customary practices are the following:

a) To credit a sum of money to the account of the customer in the following situations:

1. When the Institution deposits to the credit of a customer’s account a sum of money directly or through a bank transfer.

2. When the customer enters into a spot contract of currency exchange between himself and the Institution, in the case of the purchase of a currency against another currency already deposited in the account of the customer.

3. When the Institution debits - by the order of the customer - a sum of money to the latter’s account and credits it to another account in a different currency, either in the same Institution or another Institution, for the benefit of the customer or any other payee. In following such a procedure, the Institution shall adhere to the principles of Islamic law regarding currency exchange. A delay in making the transfer is allowed to the Institution, consistent with the practice whereby a payee may obtain actual receipt according to prevailing business practices in currency markets. However, the payee is not entitled to dispose of the currency during the transfer period, unless and until the effect of the bank transfer has taken effect so that the payee is able to make an actual delivery of the currency to a third party.

b) Receipt of a cheque constitutes constructive possession, provided the balance payable is available in the account of the issuer in the currency of the cheque and the Institution has blocked such a balance for payment.

c) The receipt of a voucher by a merchant, signed by the credit card holder (buyer), is constructive possession of the amount of currency entered as payable on the coupon provided that the card issuing Institution pays the amount without deferment to the merchant accepting the card.

1.7. Agency in trading in currencies

1.7.1. It is permissible to appoint an agent to execute a contract of sale of a currency with authorisation to take possession of and deliver the counter value.

1.7.2. It is permissible to appoint an agent to sell currencies without authorizing him to take possession of the amount sold, provided the principal or another agent takes possession at the closing of the transaction, before the principal parties are dispersed.

1.7.3. It is permissible to authorise taking possession of the countervalues after the execution of a contract of currency exchange, provided such possession is completed by the authorised agents at the closing of the transaction, before the principal parties are dispersed.

1.8. Use of modern means of communication for currency trading

1.8.1. Bilateral contracting between two parties at different remote places using modern communication means has the same juristic consequences as execution of the contract in one and ame place.

1.8.2. An offer made for a stated period, which is transmitted by one of the prescribed means of communication, remains binding on the offer or during that period. The contract is not completed until acceptance by the offeree, and taking possession of the countervalues (either actual or constructive) by both parties, has taken place.

1.9. Bilateral promise to purchase and sell currencies

1.9.1. A bilateral promise to purchase and sell currencies is forbidden if the promise is binding, even for the purpose of hedging against currency devaluation risk. However, a promise from one party is permissible even if the promise is binding.

1.9.2. Parallel purchase and sale of currencies is not permissible, as it incorporates one of the following invalidating factors:

a. There is no delivery and receipt of the two currencies bought and sold, and thus the contract amounts to a deferred sale of currency.

b. Making a contract of currency exchange conditional on
another contract of currency exchange.

c. A bilateral promise that is binding on both parties to the
contract of currency exchange, and this is not permissible.

1.9.3. It is not permissible for one of the partners in Musharakah or Mudarabah to be a guarantor for the other partner, to protect the latter from the risks of dealing in currencies. However, it is permissible for a third party to volunteer being a guarantor for that purpose, provided this guarantee is not stated in the contract.

1.10. Exchange of currencies that are debts owed by the parties

An exchange of amounts denominated in currencies that are debts
established as an obligation on the debtor is permissible, if this results
in the settlement of the two debts in place of a bilateral exchange of
currencies, and in the fulfilment of the obligations in respect of these
debts. This covers the following cases:

1.10.1. Discharge of two debts when one party owes an amount from another party denominated in (say) dinar and the other party owes an amount from the first party denominated in (say) dirham. In this context, both may agree on the rate of exchange between the dinar and the dirham in order to extinguish the debts, wholly or partially. This type of
transaction is known as al-Muqassah (set-off).

1.10.2. The creditor’s making payment of a debt due to him in a currency different from that in which the debt was incurred, provided the settlement is effected as a spot transaction at the spot exchange rate on the day of settlement.

1.11. Combination of currency exchange and transfer of money

It is permissible to execute a financial transfer of money (remittances) in a currency different from that presented by the applicant for the transfer. This transaction consists of a currency exchange effected through actual or constructive possession by delivering an amount of currency that is evidenced by a bank draft, followed by the transfer of the amount using currency that is bought by the applicant for the transfer of money. It is permissible for the Institution to charge a fee for the transfer.

1.12. Forms of dealing in currencies via Institutions

1.12.1. Among the forms that are not permitted is the customer of an Institution entering into currency trading for an amount of money exceeding the amount of money he owns, using credit facilities granted by the Institution which handles the currency trading, thus enabling the customer to enter into a transaction for an amount in excess of what he would
otherwise be able to pay for.

1.12.2. It is not permitted for the Institution to lend the customer a sum of money on the condition that currency dealing must be effected with that Institution and not with any other. If there is no such condition, then there is no Shari’ah prohibition.

[1] A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment

Islamic Microfinance: A Missing Component in Ethiopia's National Strategy of Financial Inclusion

noreply@blogger.com (Mukerem) — Wed, 26 Aug 2020 08:15:00 +0000

Islamic Microfinance: A Missing Component in Ethiopia's National Strategy of Financial Inclusion

Microfinance means a program that extend small loans to very poor people for self-employment projects that generate income in allowing them to take care of themselves and their families” (Microcredit Summit, 1997). The World Bank has recognized microfinance program as an approach to address income inequalities and poverty. Hence, microfinance can be used as a means for financial inclusions.
On the other hand financial inclusion has defined as ‘the process of promoting affordable, timely and adequate access to a wide range of regulated financial products and services and broadening their use by all segments of society through the implementation of tailored existing and innovative approaches including financial awareness and education with a view to promote financial well-being as well as economic and social inclusion’ (OECD/INFE). Simply, financial inclusion refers to ensuring tailored access to financial products and services needed by low income individuals in particular and society in general at fair, transparent and equitable mode.

The Relationship between Financial Inclusion and Microfinance

Financial inclusion is gaining momentum worldwide (Oji, 2015). In the developed nations, the concern grew after the 2008 financial crisis. In the developing regions, such as Africa, financial inclusion is one of the discourses in the development agenda. The G-20 summit in Seoul in 2010 decided that financial inclusion must be a global development agenda. Even 11 out of the 17 SDGs are supported by financial inclusion (UNSGSA, 2016).

Microfinance drives financial inclusion by helping the poor increasing access to savings and credit facilities.Many African countries, including Ethiopia, are using Microfinance as a means for financial inclusion as one of their national strategies. however, this does not work always. In a multi-cultural and multi- religious countries, adopting such strategies requires extra parameters.

Islamic Microfinance

By 2020, around 1.9 Billiom Muslims live around the world. These population would require financial services tailored to their specific needs. Ethiopia’s financial inclusion strategy should be reviewed in this perspectives. That is Ethiopia should adopt interest free/Islamic microfinance, because the national financial inclusion strategy has missed this big opportunity that help the country to address income inequalities and poverty, thereby facilitate the national development.

So what is interest free/Islamic micro-finance?

Islamic finance law is based on Shari’ah law. The Shari’ah law provides rules and guidelines for social, political, and economic undertakings in Muslim societies. The degree to which an individual Muslim adheres to Shari’ah law, led the introduction of Shari’ah-compliant banking and finance in many countries across the globe.

Given the failure of conventional microfinance to alleviate poverty, interest free/Islamic microfinance or charity based microfinance models have gained popularity in developing countries and especially in Islamic countries where the concept of interest free Islamic finance products appeals to the public, in general (Europe Economics, n/a ).

Interest free/Islamic microfinance provides a good alternative to conventional microfinance by providing collateral free and interest free loans to the lender. Microfinance has a higher potential than charity to make a long lasting impact on poverty alleviation and to enable people to be self-reliant, as it involves an element of trust in the potential and capabilities of people to help push themselves out of poverty. Islamic finance has an important role for furthering socioeconomic development of the poor and small (micro) entrepreneurs without charging interest (read: Riba’). Furthermore, Islamic financing schemes have moral and ethical attributes that can effectively motivate micro entrepreneurs to thrive.

The specific terms and conditions that make Islamic microfinance products more favorable and accessible to the most vulnerable populations:

• Risk-sharing: By sharing potential risks between investors and clients, Islamic microfinance becomes more attractive for borrowers who will not carry the full risk as compared to many conventional products.

• Profit-sharing: In Islamic microfinance, the lending institution is no longer a sole financier but becomes a co-owner of the business with a strong interest in its success.

• Fixed repayment rate: In line with the sharia, which prohibits any rate of return on financial transactions, Islamic microfinance products have a fixed repayment rate with no possibility of making profit through interest.

• Transparency: Islamic microfinance stipulates contracts with a fixed liability that is known to the customer upfront.

• Social welfare and justice: The ultimate goal of Islamic microfinance modalities is to ensure growth with equity for social welfare and justice. In line with this principle, sharia-compliant financing foresees that, in a context of default, the penalty is limited to no more than 1 per cent of the outstanding instalment.

So, Ethiopia is missing this oportunity simply because of lack of due consideration for the sector. Infact, if Ethiopia, with half of its Muslim population, is to attain middle income country in the fastest way possible, hence, should rethink about its financial inclusion policy with respect to "Islamic Microfinance" or "Interest Free Microfinance".

Murabahah Revolving Financing Facility: Major Features and Criteria - Ethiopian Case

noreply@blogger.com (Mukerem) — Wed, 29 May 2019 06:26:00 +0000

Murabahah Revolving Financing facility is a short term financing facility by which the customer may use the financing for the purchase of merchandise, raw materials, consumables, etc to overcome the applicant's working capital constraint. Murabahah Revolving Financing Facility is similar with Murabahah Term Financing, but in case of the former limit is set and it has a revolving nature.

Major Features of Murabahah Revolving Financing

Maximum Period

Murabahah Revolving Financing Facility shall be availed for a maximum period of one year and reviewed every year unless the Bank demands it to be reviewed in less than this period by the Financing Approval Team for any remedial action when the performance of the account is deteriorating. The financing officer shall strictly follow the general financing processing stages of Murabahah.

Payment

While selling, the Bank debits the facility with the agreed selling price until it reaches the facility limit. The purchase price is directly paid to the suppliers. On the other hand, the customer credits the sales proceeds into the account periodically.

Renewal of the Contract

The customer or his/her legal agent must submit renewal request one month prior to the expiry date, and the concerned manager should advice the customer accordingly.

Accrued Profit

Daily accrued profit rate of the facility shall be recognized at the end of each month.

Specific Eligibility Criteria for Murabahah Revolving Financing

Fresh Murabahah Revolving Financing Request

A fresh Murabahah Revolving Financing Facility may be extended to an applicant who has established at least a one-year banking relationship with the bank as a trade partner/debtor/borrower or depositor. However, depending on bank's procedure and the nature and type of business, the bank may entertain customers with less than one year relationship and/or no relationship with the bank at all.

Financial Statements

All Banks require customers applying for financing at least to present provisional financial statements.

Multiple Murabahah Revolving Financing Facility and Collateral

Many banks in the country encourage customers to have a single Murabahah Revolving Financing Facility in one bank for the purpose of evaluating proper utilization.

Murabahah Pre-Shipment Export Financing Facility in Interest Free Banking Service Providers in Ethiopia

noreply@blogger.com (Mukerem) — Fri, 10 May 2019 06:40:00 +0000

Murabahah pre-shipment export financing is a facility extended for the purchase of raw materials and/or exportable goods. The Bank shall purchase goods that are to be exported at price that is less than the price agreed between the exporter and the importer. The exporter then exports goods at the value of foreign sales contract and thus earns profit.

Murabahah financing requires bank and exporter to sign at least two agreements separately, one for the purchase of goods to be exported and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are signed, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank. Murabahah pre-shipment export financing against sales contract can be one-time or revolving.

Major phases/procedures

The customer approaches the bank with the request to financing his/her/its specific export requirement;
The customer shall present a document which shows the specifications of the exportable goods, information about the price, nature and availability of the goods in the market. Moreover, the customer shall simultaneously present sales contract from the foreign buyer;
The customer endorses a Master Murabahah Financing Agreement. The cost of the goods and the conditions of delivery are negotiated.
If the customer, acting as an agent of the Bank, purchases commodities from ECX, all advances shall be channeled through ECX pay-in account, and if the customer fails to buy the intended goods, all the advances shall be credited back to the financing account unless the customer prefers to retain the money in the pay-in account for the next auction. And in this regard the customer shall give a written undertaking letter.
If the commodity is not traded on ECX floor, the customer purchases the goods on behalf of the bank,
The bank pays the supplier directly on cash basis;
At this stage a contract of Murabahah sale is signed between the bank and the customer;
The bank shall settle the facility (cost plus profit) from the export proceeds of a valid sales contract.

Unique Features		Specific Eligibility Criteria
The sum of each advances (cost plus profit amount) shall not exceed the limit approved. The export proceed has to be channeled to the exporter's account only through the CBE's IFB window service that maintains the pre shipment facility account The foreign sales contract price should at least cover the advanced amount (cost plus mark-up) The Pre-Shipment Export Credit Facility shall be reviewed every year unless the Bank demands it to be reviewed in less than this period by the Financing Approval Team for any remedial action when the performance of the account is deteriorating. The advance shall be settled from the proceeds of the respective irrevocable Letter of Credit or Cash against Document (CAD). This shall be attentively followed up by IFB-Customer Relationship Manager/IFB-Customer Relationship Officer/Branch Manager to avoid diversion of fund and timely settlement of the advance.		The customer shall present valid Export trade license. The facility to be availed against sales contract (Confirmed on appropriate receipts.) The customer should have been engaged in any viable business at least for two years or the customer shall offer collateral i.e. a minimum of 75% of the financing amount for Grade 1 & 2, 85% of the financing amount for grade 3 and 100% of the financing amount for grade 4 and above (fore new exporter). The applicant shall present valid sales contract/a bona-fide purchase order from a foreign buyer and the method of payment indicated in the sales contract shall be irrevocable letter of credit and/or cash against document (CAD), The selling price of the exportable item shall be within acceptable range and it shall be confirmed from National Bank of Ethiopia (NBE) or ECX (Ethiopian Commodity Exchange) or the Trade Service process team of the customer's bank or any other sources. Depending on the nature of the business and the level of risk, the bank may request and/or accept third party personal or corporate guarantee.

______________________________________________________________________________

General Requirements for Murabahah Import Letter of Credit Settlement Financing by IFB Service Providers in Ethiopia

noreply@blogger.com (Mukerem) — Tue, 07 May 2019 08:39:00 +0000

Murabahah Import Letter of Credit Settlement Financing is a form of financing extended to trade partners/debtors/borrowers by converting the outstanding import letter of credit document's value to a Murabahah term financing for a maximum period of one year when a customer is unable to clear the L/C documents due to shortage of working capital.

It is granted to existing high value customers of the Bank having financing risk rate-1 or 2 or 3 who encounter temporary cash flow problem to settle the import L/C document value. Accrued service charge/commission/profit rate on advance account if any shall be fully paid in cash at the time of request.

Unique features of Mudarabah Import Letter of Credit Settlement Financing

Before releasing the import L/C document, the Bank should conclude a Murabahah term financing and mortgage (if any) contracts with the applicant and make collateral registration (if any) with appropriate registrar office.

The customer can enjoy this facility twice during a fiscal year of the Bank.

Specific Eligibility Criteria

The customer Financing risk rate shall be grade 1 or 2 or 3.

The Bank shall finance only import letter of credits opened at its end.

______________________________________________________________________________

Bai Salam Financing Process in Interest Free Banking Service Providers in Ethiopian

noreply@blogger.com (Mukerem) — Tue, 30 Apr 2019 07:58:00 +0000

Bai Salam Financing/Advance Payment against Deferred Delivery of Goods /

The seller/customer undertakes to supply specific goods to the buyer/bank at a future date in exchange of an advance price fully paid at the spot, but the supply of purchased goods is deferred to a fixed date. The seller/customer gets in advance the money he/she/it wants in exchange for his/her/its obligation to deliver the commodity later. The bank buys the farm output to be produced in the future against the full spot payment of the price which may be utilized by the farmer to meet his/her/its financing needs. The Purposes of Salam Financing are to meet the need of farmers who need money for working capital purposes and to meet the need of traders/bank. Under Salam, it was beneficial to the bank also because normally the price in Salam is lower than the price in spot sales.This type of financing is used to meet short-term working capital requirements of farmers during the farming process of both seasonal crops and permanent plantations.

The major purposes of the financing include the purchase of seeds, fertilizers, pesticides, insecticides, herbicides, weedicides, manual sprayers, Maintenance of farm/plantation, machinery, and other working capital! needs in terms of labor charges, water charges, utility charges, transport etc. The minimum/floor pricing of a specific financing product shall be set by the bank. And the duration of Bai Salam transaction is usually a production cycle or eighteen months, whichever is shorter. After purchasing a commodity by way of Salam, the bank can sell it through a parallel contract of Salam for the same date of delivery. The period of Salam in the second parallel contract is shorter and the price is higher than the first contract. The difference between the two prices shall be the profit earned by the Bank. The bank can obtain a promise to purchase the yield from a third party. This promise should be unilateral from the expected buyer. The buyer does not have to pay the price in advance. When the bank receives the commodity, it can sell it at a pre-determined price to a third party according to the terms of the promise.

In an arrangement of parallel Salam there must be two different and independent contracts; one where the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on the other. Therefore, even if the farmer did not deliver the commodity on a due date, the bank is duty bound to deliver the same. The bank can seek whatever recourse he has against the farmer, but he cannot rid himself from his liability to deliver the commodity parallel Selam contractors. Similarly, if seller/farmer has delivered defective goods, which do not conform to the agreed specifications, the bank is still obligated to deliver the goods to parallel Selam contractors according to the specifications agreed with them. A Salam arrangement cannot be used as a buyback facility where the seller in the first contract is also the purchaser in the second. Even if the purchaser in the second contract is a separate legal entity, but owned by the seller in the first contract; it would not tantamount to a valid parallel Salam agreement

Conditions of Bai Salam Financing Mode of Financing by Most Ethiopian Banks

It is necessary for the validity of Salam that the bank pays the price in full to the seller at the time of effecting the sale. The basic wisdom for allowing Salam is to fulfill the “instant working capital need” of the farmer. If it is not paid in full, the basic purpose will not be achieved.
Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified.

Salam cannot be effected on a particular commodity or on a product of a particular field or farm. E.g. Agreement to supply wheat of a particular field or the fruit of a particular tree is impermissible since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain.
All details with respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute.
It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only, meaning what is normally weighed cannot be quantified and vice versa.
The exact date and place of delivery must be specified in the contract.
Salam cannot be effected in respect of things, which must be delivered at the spot.
The time of delivery should be at least fifteen days or one month from the date of the agreement. Price in Salam is generally lower than the price in spot sale. The period should be long enough to affect prices.
Since price in Salam is generally lower than the price in spot sate; the difference in the two prices may be a valid profit for the Bank.
The marketability and price stability of the agricultural crops to be financed should be identified at first hand.
Before delivery, goods will remain at the risk of seller/customer and after delivery risk will be transferred to the purchaser/bank
Possession of goods can be physical or constructive.
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 to the third party.
A price must be determined in agency agreement on which the agent will sell the commodity but if the price is increased, the benefit can be given to the agent.
Once agreed upon, a Salam contract cannot be revoked unilaterally by any party. But it can be canceled or partially canceled with mutual consent by returning the actual or proportionate amount of price paid.
If due to any unforeseen reason, it is not possible to deliver the commodity on the due date, the bank and the customer could change the commodity with mutual consent.
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.
If the customer offers better quality goods by his/her/its own consent, the bank shall preferably accept the same. However, in case of inferior quality of goods, it has an option to accept or reject the goods.
In case of default, the customer shall pay an agreed amount of penalty.
If the seller fails to perform his/her/its obligation, due to insolvency or genuine reasons, he/she/it shall be given an extension of a maximum of 90 days. However, the bank shall charge expenses incurred in relation to financing administration, and
If the total or partial quantity is not available on the due date, the bank has an option to wait until the time when the commodity becomes available or it could demand its money back.

Eligibility Criteria for Bai Salam Financing Mode of Financing set by most banks

The applicant shall provide Land Holding Certificate and/or Land Lease Agreement, as the case may be.
The applicant shall provide a supporting letter that confirms his/her/its past performance from Woreda Agricultural Bureau, Association, Cooperative, Organizing Agency, or other appropriate government bodies as deemed necessary.
The applicant shall provide its/his/her business plan.
The applicant should have been in the business for at least one year and with a good business track record.
Applicants shall provide provisional or audited financial statements (as the case may be)
If the applicants are Associations, Cooperatives, Unions, or Commercial Farms, they shall provide a document that confirms acquiring or renting basic infrastructure, such as appropriate office and store (working premises).
If the applicants are Associations, Cooperatives, or Unions Minutes of a resolution acknowledging and authorizing to get the financing passed by three-fourths of the members of the General Assembly of their Association/Cooperative or as per their memorandum and/or articles of association.
The Bank may finance both rain fed, semi-irrigated or irrigated farming.
Applicants shall present a letter from Woreda or Zone Agricultural and Rural Development Bureau regarding favorability of the weather and soil for production of the intended crop.
The bank shall demand a security in the form of a guarantee or mortgage in order to ensure that the seller/farmer delivers the products timely.
The customer should buy crop insurance from appropriate insurance companies including yield reduction, price fluctuation, and quality deterioration policies, (if the policy exists)
The Bank may demand acceptable collateral to secure the finance.

Murabahah Post Shipment (Revolving Export) Facility

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 12:07:00 +0000

Murabahah Post Shipment (Revolving Export Facility) is an advance extended to exporters upon presentation of acceptable export documents, except a bill of lading. The facility should be advanced against valid export documents. In case of post-shipment, Murabahah cannot be executed for goods already exported. However, Murabahah can be executed for fresh purchase required for the next shipment against the assignment of proceeds that are not yet collected from the earlier shipments.

The exporter/customer appoints the bank as his/her/its agent to collect the proceeds on his/her/its behalf. This financing requires bank and exporter to sign at least two agreements separately. One the applicant will authorize the bank to collect the proceeds on his/her/its behalf as an agent. The second agreement will provide Murabahah financing to the exporter, and authorize the bank for keeping proceeds for the payment of Murabahah financing.

Unique Features

Eligibility	Most banks in Ethiopia consider exporters with clean track of record as eligibility criteria for the advancement of the Murabaha post shipment /revolving export facility
Facility Amount	The Murabaha post shipment amount (cost plus profit) to be advanced to the customer is up to a maximum of 90% depending upon the financial strength and truck record of the customer.
Double Financing	The customer (exporter) shall not be provided with a Pre-Shipment Export Financing Facility on the same sales contracts to avoid double financing.
Facility Period	The facility shall be availed for one year and shall be reviewed every year unless the Bank demands it to be reviewed in less than this period by the Financing Approval Team for any remedial action when the performance of the account is deteriorating.

Murabahah Post Shipment Facility Process

Murabahah Mode of Financing Practices in Major Ethiopian Banks

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:47:00 +0000

Murabahah (Markup/Cost-Plus Pricing) is a particular kind of sales where the bank expressly mentions the cost it has incurred on purchase of the Asset(s) and sells it to a customer, by adding some profit.

Terms and Conditions of Murabahah Mode of Financing

The following terms and conditions were set in almost all major Commercial Banks that started the Murabahah mode of financing in their Interest Free Banking Service in Ethiopia while processing the product,

i. The price of goods and Bank's profit on Murabahah Transaction should be fixed and known to both parties at the time of contract. The cost (all direct expenses in acquisition of goods such as invoice price, transportation, L/C charges, marine/in-transit insurance, sales tax etc.) and profit element of the selling price must be separately identified.

ii. In kind exchange/transaction of items of gold, silver or currencies cannot be carried out in Murabahah (markup).

iii. If the bank has appointed the customer as 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.

iv. The purchase invoice issued by the supplier will be in the name of the Bank for Account of XY customer.

v. Immediately after the CRM provided Acknowledgment Letter, the customer shall pay all expenses (Financing Processing and Collateral Estimation Fee and Credit Information Inquiry fee) incurred by the Bank in connection with the negotiation, preparation and execution of the Principal Documents, amendment or extension, granting of any waiver or consent as stated under item 5.4 of this procedure.

vi. A Murabahah contract shall not be rolled-over because the goods once sold by the bank become property of the customer, and, hence, cannot be resold to the same or other banks for the purpose of obtaining further financing.

vii. Early payments by the customer would not result rebate or discount of total profit to be paid as per the original agreement unless the bank allows offering the discount.

viii. If the customer is not able to pay its obligation as per the agreement, the bank may wait a maximum of ninety without charging any extra amount over the original contract price. However, the bank shall charge expenses incurred in relation with financing administration.

ix. For all financing/loans and advances classified as non-performing, the Customer shall initially undertake in a separate agreement to pay a penalty rate of 3% per annum for the entire period of default, calculated on the total amount of the obligations remaining un-discharged

x. The penalty shall not constitute income of the bank. However, the bank has the right to give the penalty to the selected charitable organizations.

xi. Providing insurance cover while acquiring ownership of the goods is the responsibility of Bank. However, the customer may be appointed as agent for this purpose

xii. The customer shall offer acceptable collateral depending on the extent of the risk involved in such financing.

xiii. The mortgagee/bank shall not derive any financial benefit from security offered by the customer unless the security is acquired by the bank.

xiv. In case of a binding promise by the customer, the bank shall take a security deposit /Hamish Jiddiyah/ in form of cash. This security amount is kept in blocked account for confirmation of the financial capacity of the customer and/or to compensate the bank in case of any breach of the customer's binding promise. However, in case of default by the customer, the bank is allowed to adjust the security deposit to extent of the customer's liability.

xv. Any evidence of indebtedness cannot be assigned or transferred on the price different from its face value.

xvi. The settlement of each Murabahah advance shall not exceed a maximum period of 180 days.

xvii. The minimum/floor pricing of a specific financing product shall be set by the bank.

Major Islamic Banking Products and Services Currently Available in Ethiopia

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:44:00 +0000

Following the issuance of the Interest Free Banking Directives (SBB/51/2011) by the National Bank of Ethiopia, the Commercial Banks in Ethiopia were conceived of the potential of this market, and thus interested in launching interest-free banking window service that operates in line with the National Bank of Ethiopia Directives. Today most of Ethiopia’s big commercial banks offer a narrow range of Islamic financial products, but to few customers. Islamic finance in Ethiopia was stillborn. The narrow range of Islamic financial products currently available in major commercial banks of Ethiopia are presented as follows

I) Saving and Current Account Deposits/ Interest Free Deposit Account Services

Generally, the services under this category can be summarized as follows.

1.1. Saving Al Wadiah /Wadiah Amanah (saving with guarantee)

This type of account is opened for unspecified length of time by customers who own the funds in the Bank for safekeeping. Depositors give their consent to the Bank to deal with the whole or any part of their monies in the manner that it deems fit, so long as it is not against sharia. The Bank will guarantee repayment of the whole sum or any outstanding part in the depositor account without any interest when demanded.

1.2. Current Al Wadiah /Amanah (current account)/ Wadiah special Accounts

This is interest-free current account opened for unspecified length of time and managed through checks until the depositor demands payment and is paid promptly/right away. It is an account which is regarded as trusts or safekeeping and offers the depositors’ safety of their money against the bank’s guarantee to return their funds on demand and is a non-interest bearing account.

1.3. Mudharabah (profit sharing saving account)/ Mudharabah Unrestricted Investment Account

This is a type of investment partnership where a customer deposits money for unspecified length of time and the Bank shares both the profit and loss with her/him. The customer may withdraw his/her deposit at any time, but the Bank may impose some restrictions on the amount to be taken out as this arrangement is both profit and loss sharing partnership. It is a fund that will be placed in the Bank general pool of Shariah compliant banking activities. In return, the account holder will be entitled to an agreed percentage share of investment income or proportionally bears the loss of capital.

1.4. Mudharabah (fixed-time deposit)

Mudharabah is a profit sharing fixed time deposit. To benefit from this service the depositor (customer) should not withdraw the deposited amount before the agreed date in the contract. If the customer, however, demands the money deposited before the stated date, the Bank may not share the profit.

1.5. Mudharabah Restricted Investment Account

is a fund that will be specifically utilized to a particular project of the account holder choice. In return, the account holder will be entitled to an agreed percentage share of the investments income or proportionally bears the loss of capital.

1.6. Labbaik Saving Account

is a safekeeping account to be deposited regularly for Hajj and Umrah. The purpose of traveling to Meca Medina, the deposited amount to be available on demand.

II) Financing

2.1. Murabah

This service involves a request from a customer to the Bank or by the initiative of the Bank to purchase and then on sell to the customer certain goods and/or assets not banned by sharia. The sale by the Bank to the customer is at cost plus on an agreed margin. Payment by the customer is in one or more predetermined installments at agreed points in time. Ownership of the goods passes to the customer upon delivery by the Bank. Such a sale contract is valid on condition that the price, other cost and the profit margins of the seller are stated at the time of the agreement of sale. The asset/good remains as a mortgage with the Bank until the default is settled. The Bank may ask for collateral, if necessary, for this financial service. Among the services included in Murabaha are the following:

Murabaha fixed-time financing ---- For production inputs, purchase of machinery or short-term project;
Murabaha revolving financing --- For purchase of production inputs;
Murabaha LC financing --- For purchase of production inputs from abroad or for buying machinery;
Murabaha pre-shipment and Murabaha post-shipment financing for purchase of goods to be exported.
A contract of promise to sell and to buy commodity, machinery, vehicle etc on agreed profit added to the cost (mark-up).

2.2 Salam

This is a financing service that would be made available in cash for operating costs to customers engaged in agriculture as per the agreement to be reached between the Bank and the customer. It is an arrangement whereby the customer delivers the type of product s/he produces in accordance with the type, quality, quantity, price and time agreed upon with the Bank or to the agent/body the Bank has entered salam finance agreement. The Bank may ask for collateral, if necessary. It is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Salam is used to finance agricultural like goods.

2.3 Istisna

Istisna is a contract of sales and purchase of assets by specification or order where the price is paid in advance but the assets are manufactured or produced and delivered at a later date. In line with this, the Bank will deliver industrially produced goods or assembled and constructed items as per the orders/specifications of the customers when they are finalized by the producers. Sales transaction concluded before the commodity came into existence. the bank shall act as a manufacturer or constructor to undertake house construction, plant, power station, roads projects etc as per specification.

2.4 The Bank, based on the job order/specifications of the customer and making a separate agreement with the builders/producers, may make payments to the institutions at once or in installments by assessing the progress of the work. The Bank may ask for guarantee from the customer and producer/builder.

2.5 Ijara

This is a leasing agreement where the Bank buys agricultural vehicles or industrial machinery for lease/rent in its own initiative or by the order of a customer/client and then leases it back over to him/her/it for a fixed period. Depending on the promise given earlier, the Bank can sell the asset or transfer it freely to the lessee customer on or before the last day of the lease agreement. The Bank may ask guarantee to provide this service. It is a form of financing applicable to financing and operating leases of properties. By making use of these a customer can obtain money for:

Running costs;
Purchase of goods/assets;
Export and import trade;
Project finance;
Lease; and
Operating cost for agricultural works/activities.

2.6 Mudarabah,

Mudarabah is a contractual relationship executed between two parties, one supplying the capital (rabbulmal) and the other supplying the labor and skill as agent or manager (mudarib), for investing in a pre-determined activity, which grants each party a share of the earnings as determined at the time of the investment. This practice existed in the pre-Islamic period and Muslim jurists of all the major legal schools are agreed on the legitimacy of Mudarabah transactions. Mudarabah business can be of two types: restricted, if the capital-provider specifies any particular business in which the capital is to be invested, and un-restricted if the capital-provider authorizes the mudarib to invest the funds in any business he deems fit.

2.7 Musharakah

Musharakah is a joint enterprise or partnership structure in Islamic finance in which partners share in the profits and losses of an enterprise. Since Islamic law (or Sharia) does not permit the concept of interest in lending, musharakah allows for the financier of a project or company to achieve a return in the form of a portion of the actual profits earned according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses should they occur, also on a pro rata basis. Musharakah is a type of Shirkah al-Amwal (or partnership), which in Arabic means "sharing."

2.8 Free - Cost Loans/ Qard Al - Hasan

Therefore, al-qard al-hasan is a gratuitous loan extended to needy people for a specified period of time. At the end of that period, the face value of the loan (asl al-qard) is to be paid off. In other words, shari’a prohibits the stipulation of an excess for the lender, as it amounts to riba, whether the excess is expressed in terms of quality or quantity, or whether it is a tangible item or a benefit. However, it is permitted that the repayment of qardh (loan extinguishing) is made with an excess (tangible item, benefit, service, etc), provided that such an excess is neither expressly stipulated nor implicitly pre-arranged (through collusion or tawatu’) in the contract of loan. Islamic shari’a doesn’t recognize any types of loan other than al-qard al-hasan.

III) International Trade Support Financing/Import and Export

The service is provided for customers engaged in export and import trade, and it is an arrangement where customers delegate the Bank or collaborate with it. This service is similar to the international trade support service given regularly interest free. These include:

3.1 Wakalah Letter of Credit

Written undertaking by a bank given to the seller at a request and/ or the instructions of the buyer under wakala contract, to make payment or to accept and pay bills of exchange (Draft) drawn by the seller up to a stated sum of money within a prescribed time limit and against stipulated documents provided that the terms and conditions of the credit are complied with.

3.2 Murabaha Import Letter of Credit

Is a contract whereby the bank buys goods for the customer (applicant) and the customer agrees to later buy the goods from the the bank through a resale at a mark-up price.

3.3 Musharaka Letter of Credit

Is a contract whereby the value of the letter of credit issued by the bank and the profits of the partnership transaction are shared between the bank and the customer based on an agreed ratio.

3.4 Wakala Export Letter of Credit

Is a condition where the exporter appoints the bank as his/her agent to collect receivables on his/her behalf.

3.4 Wakala Documentary Collection (Wakala Cash Against Document - CAD)

It is type of transaction by which importer and exporter conclude a contract, accordingly the exporter deliver documents to the importer through his/her bank to buyer bank through which, the title for purchased goods is released to the buyer after the total sale price is collected in full.

3.5 Wakala Advance Payment

A transaction in which an importer makes payment for items to be imported prior to the shipment of goods. The importer must trust that the supplier will ship the product on time and that the goods will be as their agreement because it creates a lot of risk factors for the importers.

3.6 Wakala Consignment Basis Payment (for Export)

It is a transaction method in which the local exporter (a consignor) exports the goods to the foreign importer (a trustee) who pays (remit) the exporter only as and when the goods are sold.

IV) Letter of Guarantee Facility/ Kafala

The Bank makes available guarantees such as advance payment guarantee, bid bond and performance bond; and it may request collateral for the services. A written promises by the bank as compensation to the beneficiary in the event that the obligatory fails to honor his/her/its obligations, in accordance with the terms and conditions of the guarantee/agreement/contract. Types of Letters of Guarantee rendered by major commercial banks in the country include:

4.1 Kafala

Is a written promise by the bank to compensate (pay sum of money) to the beneficiary (local or foreign) in the event that the obligor fails to honour his/her/its obligations in accordance with the terms and conditions of the guarantee/agreement/contract. Types of Kafala/Letters of Guarantee offered by most of the commercial banks include:

Bid Bond
Performance Bond
Advance Payment Guarantee
Retention Payment Guarantee
Letters of Indemnity for Missing Documents
Customs Duty Guarantee

V) Investment

5.1 Mudharaba Investment

A partnership between the bank and eligible customer (entrepreneur), profit and loss shared as per the agreed profit sharing ratio.

5.2 Musharaka Investment

It is a joint ownership of property or equipment or commercial enterprise. Partner shall share profit as per the agreed ratio while losses are shared in proportion to capital contribution of partner.

5.3 Diminishing Musharakah

Is a form of co-ownership in which two or more persons (i.e., the bank and the client) share the ownership of a tangible asset in an agreed proportion and one of the co-owners/client undertakes to buy in periodic installments the proportionate share of the other co-owner/bank until the title to such tangible asset is completely transferred to the purchasing co-owner/client.

VI) Others

Foreign Exchange Service.

6.1 Hawallah

Local beneficiaries of hawallah can collect money sent to them through branches of the Bank from any part of the country from the closest branch that has interest free banking window and could similarly send money using this service. Besides, customers can similarly utilize the service to receive money sent to them from any corner of the world.

6.2 Foreign Exchange

Customers of international trade support service can trade/exchange foreign currencies according to the spot rate of the day.

List of references

Interest Free Banking products and services 2018, accessed 7 March 2018, < www.combanketh.et>.

Interest Free Banking Services /IFB/ 2018, accessed 7 March 2018, < www.unitedbank.com.et

Interest Free Banking Services 2018, accessed 7 March 2018, < www.orointbank.com

Islamic Banking and Finance: Why it is important for Ethiopia?

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:43:00 +0000

What Is Interest Free Banking?

Interest Free Banking (IFB) or Islamic Banking is banking business in which [mobilizing or] advancing of funds taken in a manner consistent with Islamic Finance (Shari'ah) Principle and mode of operation that avoids receiving or paying interests’, NBE, 2011). Shari'ah means Islamic law: and it has two parts i.e. the Book of Religious worship, Book of Business Transactions.

Motivations to Start IFB in Ethiopia

Access to formal financial service is low in Ethiopia;

Existence of large Potential demand, can be inferred from Request for IFB financing services from target population that represent large population (~27 million; CSA), and authorization IFB directive by the NBE.

Ethiopia's proximity to Middle East where majority of Islamic Financial Market existed.

According to Global Islamic Economy Report of 2016/17, the 57 mostly Muslim-majority member countries of the OIC had a GDP (PPP based) in 2015 of $17 trillion which represented 15 percent of the total global GDP (PPP based) of $113 trillion in 2015.

Of this $2 trillion, Islamic banking was responsible for $1.451 trillion, the Takaful (insurance) sector for $38 billion, sukuk (bonds) outstanding for $342 billion, Islamic funds for $66 billion, and other financial institutions for $106 billion. Islamic funds and sukuk led year-on-year growth at 15 and 14 percent, respectively. Takaful was close behind with a growth rate of 11 percent, while Islamic banking experienced more modest growth of 6 percent.

Total Islamic Finance assets are expected to reach $3.5 trillion by 2021, a CAGR of 12 percent, with Islamic banking responsible for most of this growth, and projected to reach $2.7 trillion in assets by 2021

Benefits of starting IFB in Ethiopia

To mobilize huge financial resources to finance national projects;

Facilitates financial inclusion;

Financial inclusion helps for financing outreach

When and How IFB Started In Ethiopia

Oromia International Bank (OIB), a private financial institution, become the first to

implement interest-free banking [Islamic banking] in Ethiopia after two years the NBE Directives on IFB has came into force in October 2011.

ZemZem, as a prospective new bank, asked to join the banking industry as a full-fledged interest-free bank, but was unable to start operations as the directive requires that interest-free banking to be given alongside conventional banking services.

The biggest state owned bank, Commercial Bank of Ethiopia (CBE), has started interest free banking on Monday, October 28, 2013, in 23 selected branches in Addis Ababa and in other major regional towns

The major services offered under the interest-free banking include deposits, foreign exchange and money transferring services.

The Three Legal Maxims

1. General Permissibility: - everything is allowed unless specifically prohibited by the Shari'ah Law. Consistent with sharia, the following undertakings are not allowed to utilize interest free banking services:

2. Profit and Loss Sharing Principle: - the one who takes the risk has the right to share in profit.

3. Asset Backed Financing: - is an asset-backed security that can be used to finance on investments since the underlying assets generate the return that is not directly linked to a predetermined interest rate.

Types of IFB Financing Contract Modalities.

There are four basic contract types that have 9 sub categories:

Sales/Exchange Contracts:	Partnership Contracts:	Security Contracts:
Markup (Murabaha ) Contract- For Buy and Sale Commodity, Fixed Asset, Working Capital	Profit/Loss Sharing(Mudaraba)-Silent Partnership-for any 'permissible' including deposits;	Guarantee(Kafala) Contracts- performance guarantees;
Forward Sale (Salam) Contract- For produce and Sale;	Profit/Loss Sharing(Musharaka)Joint Venture -for any 'permissible' business.	Transfer of debt(Hawalah- for Local/Foreign Money Transfer;
Leasing (Ijarah) Contract- For Make/buy and lease of durable, fixed assets;		Mortgage/Pledge(Rahn)- for debt collateral
Work-in-Progress-financing (Istisna) Contract-for Construction/Assembly of assets.		Safekeeping (Wadiah) - for safekeeping of money and valueables.

Murabahah Import Letter of Credit Facility: Features and Criteria

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:42:00 +0000

3. Murabahah Import Letter of Credit Facility

Murabahah Import Letter of Credit is a facility that the bank extends for applicants who engaged in the import business or other applicants who import for various purposes using the Bank's own funds, at zero percent margin paid, based on markup agreement. Murabahah financing requires the bank and the customer/importer to sign at least two agreements separately; one for the purchase of to be imported goods, and the other for appointing the importer as the agent of the bank (agency agreement). Once these two agreements are signed, the importer can negotiate and finalize all terms and conditions with the exporter on behalf of the bank.

The Bank extends one-time or revolving Murabahah Import Letter of Credit facilities. A One-Time Murabahah Import Letter of Credit financing is a non-renewable Letter of Credit facility extended to applicants, such as investors, importers, and others that have no import Letter of Credit Facility or who want to import over and above the existing import letter of credit facility limit. Revolving Import Letter of Credit financing is a form of credit facility where the limit is reviewed periodically when the customer fulfills the bank's requirement.

Unique Features

The financing officer shall strictly follow the general financing processing stages of Murabahah.
Moreover, the following specific major phases/procedures shall be observed, while processing Murabahah Import Letter of Credit
The customer requests the bank to open a letter of credit to import goods from abroad through an application enclosing a pro forma invoice and providing all the necessary details and information
After securing the necessary guarantee and scrutinizing the application, the bank opens a letter of credit.
The customer endorses a Master Murabahah Financing Agreement. The cost of the goods and the conditions of delivery are negotiated.
When the shipment of goods takes place and the correspondent bank advices the CBE and sends documents i.e., after the confirmation of the bank's ownership of goods in question through acquisition of related documents, an agreement of sale is signed with the customer.
The customer settles the L/C document at cost plus profit.
All costs/charges (e.g. SWIFT charges, L/C opening commission) shall be included in the cost of Murabahah commodity.
Import Letter of Credit facility shall be reviewed every year unless the bank demands it to be reviewed by the Financing Approval Team before this period for any remedial action when the performance of the account is deteriorating
The sum of each advances (the summation of each sales price) made by the Bank shall not exceed the facility limit.
The Bank shall demand security deposit /Hamish Jiddiyah/ in form of cash at least 30% of the L/C opening amount.
Each advance should be settled within a week from the date of advice.

Qard Al Hassan (Benevolent Loans)

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:40:00 +0000

Qard Al Hassan (Benevolent Loans) is a type of loan provided to a society that is unable to obtain a loan through the formal banking system are participating in the small business. Is a kind of financing that the bank collects only the principal loan with miscellaneous expenses related to it. That is, the bank may set aside part of its fund to grant benevolent Loans to needy persons such as small producers, entrepreneurs, farmers who are not able to secure financing for investment or working capital from other alternative sources. While providing Benevolent Loans for the society at large, the bank shall collect principal amount and any loan processing and administering costs in the form of service fees without any profit or share in the profit or loss of the borrower. The loan shall be given for productive purposes in various fields to enable the beneficiaries to start independent lives or to raise their incomes and standard of living.

Qard Al-Hasan is an interest free loan, the only type of loan that is recognized in the Islamic law, where the borrower only repays the principal amount and the financial institutions are prohibited from charging profit. the Qard-al-Hassan is mostly provided to finance small and micro projects with a direct investment that allowed by Shari’ah/ Islamic contracts. Moreover, Qard-al-Hassan is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on „riba’, since it is the one type of loan that truly does not compensate the creditor for the time value of money

The objective of Qard-al-Hassan / Benevolent Loans

Establish better relationship among poor and the rich.
To help people in need
Mobilize wealth among all people in the society.
To encouraging and doing good deeds
Facilitate the poor to create new jobs and business ventures by using their merits, skills and expertise.
Strengthen the economy
Reduce unemployment and poverty from society, and
To create a concerned community
Reduce social and economical inequality.

Eligibility Criterion (in Ethiopian Banks that Provide Islamic Banking)

The individual should involve in small and micro business trading activities,
The loan shall be given for the account holders of Mudarabah Saving Account, Mudarabah Fixed time deposit Account, Safe keeping deposit Account /Wadiah-Amanah/ and current accounts /Qard/ .
As security for repayment of the loan and/or all other sums payable to the bank the Customer may give acceptable collateral.

Bai Salam Financing: Conditions and Eligibility Criteria

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:39:00 +0000

Bai Salam Financing is an advance payment against deferred delivery of goods. The seller/customer undertakes to supply specific goods to the buyer/bank at a future date in exchange of an advance price fully paid at spot, but the supply of purchased goods is deferred to a fixed date. The seller/customer gets in advance the money he/she/it wants in exchange of his/her/its obligation to deliver the commodity later. The bank buys the farm output to be produced in the future against the full spot payment of the price which may be utilized by the farmer to meet his/her/its financing needs. This finance is developed to meet the need of farmers for working capital purposes to grow their crops up to the time of harvest, it was beneficial to the bank also because normally the price in Salam is lower than the price in spot sales. Generally, this type of financing is used to meet short term working capital requirements of farmers during farming process of both seasonal crops and permanent plantations.

The major purposes of the financing includes purchase of seeds, fertilizers, pesticides, insecticides, herbicides, weedicides, manual sprayers, Maintenance of farm/plantation, machinery, and other working capital needs in terms of labor charges, water charges, utility charges, transport etc.The duration of Bai Salam transaction is usually a production cycle or eighteen months, whichever is shorter. The minimum/floor pricing of a specific financing product shall be set by the bank.

Possession of goods can be physical or constructive. 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 to the third party. A price must be determined in agency agreement on which the agent will sell the commodity but if the price is increased, the benefit can be given to the agent. Once agreed upon, a Salam contract cannot be revoked unilaterally by any party. But it can be cancelled or partially cancelled with mutual consent by returning the actual or proportionate amount of price paid.

In parallel Salam arrangement, there must be two different and independent contracts; one where the bank is a buyer and the other in which it is a seller. The two contracts cannot be tied up and performance of one should not be contingent on the other. Therefore, even if the farmer did not deliver the commodity on due date, the bank is duty bound to deliver the same. The bank can seek whatever recourse he has against the farmer, but he cannot rid himself from his liability to deliver the commodity parallel Selam contractors. If, due to any unforeseen reason, it is not possible to deliver the commodity on the due date, the bank and the customer could change the commodity with mutual consent.

Similarly, if seller/farmer has delivered defective goods, which do not conform to the agreed specifications, the bank is still obligated to deliver the goods to parallel Selam contractors according to the specifications agreed with them. A Salam arrangement cannot be used as a buy back facility where the seller in the first contract is also the purchaser in the second. Even if the purchaser in the second contract is a separate legal entity, but owned by the seller in the first contract; it would not tantamount to a valid parallel Salam agreement

Conditions for Bai Salam Financing

It is necessary for the validity of Salam that the bank pays the price in full to the seller at the time of effecting the sale. The basic wisdom for allowing Salam is to fulfill the "instant working capital need" of the farmer. If it is not paid in full, the basic purpose will not be achieved.

Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified.

Salam cannot be effected on a particular commodity or on a product of a particular field or farm. E.g. Agreement to supply wheat of a particular field or the fruit of a particular tree is impermissible, since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain.

All details in respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute.

It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only, meaning what is normally weighed cannot be quantified and vice versa.

The exact date and place of delivery must be specified in the contract.Salam cannot be effected in respect of things, which must be delivered at spot.The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. The period should be long enough to affect prices.

Since price in Salam is generally lower than the price in spot sale; the difference in the two prices may be a valid profit for the Bank.

The marketability and price stability of the agricultural crops to be financed should be identified at first hand.

Before delivery, goods will remain at the risk of seller/customer and after delivery risk will be transferred to the purchaser/bank.

The market value of substituted goods shall not be higher than the market value of the originally agreed commodity, at the time of delivery.

If the customer offers better quality goods by his/her/its own consent, the bank shall preferably accept the same. However, in case of inferior quality of goods it has an option to accept or reject the goods.

In case of default the customer shall pay an agreed amount of penalty.

If the seller fails to perform his/her/its obligation, due to insolvency or genuine reasons, he/she/it shall be given an extension of a maximum days indicated in the bank policy. However, the bank may charge expenses incurred in relation with financing administration. and

If the total or partial quantity is not available on due date, the bank has an option to wait until the time when the commodity becomes available or it could demand its money back.

After purchasing a commodity by way of Salam, the bank can sell it through a parallel contract of Salam for the same date of delivery. The period of Salam in the second parallel contract is shorter and the price is higher than the first contract. The difference between the two prices shall be the profit earned by the Bank

The bank can obtain a promise to purchase the yield from a third party. This promise should be unilateral from the expected buyer. The buyer does not have to pay the price in advance. When the bank receives the commodity, it can sell it at a pre-determined price to a third party according to the terms of the promise.

Specific Eligibility Criteria for Bai Salam Financing

The applicant shall provide Land Holding Certificate and/or Land Lease Agreement, as the case may be,

The applicant shall provide a supporting letter that confirms his organizing agency, or other appropriate government body as deemed necessary,

The applicant shall provide its/his/her business plan.

The applicant should have been in the business for at least one year and with a good business track record.

Applicants shall provide provisional or audited financial statements (as the case may be)

If the applicants are Associations, Cooperatives, Unions, or Commercial Farms, they shall provide a document that confirms acquiring or renting basic infrastructure, such as appropriate office and store (working premises).

The Bank may financing both rain fed, semi-irrigated or irrigated farming.

The bank shall demand a security in the form of a guarantee or mortgage in order to ensure that the seller/farmer delivers the products timely.

The customer should buy crop insurance from appropriate insurance companies including fluctuation, and quality deterioration policies. (if the policy exists)

Kafala (Letter of Guarantee) Facility

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:38:00 +0000

The Kafala is a letter of guarantee facility issued by a bank, that is, the Kafala is a written promise (irrevocable obligation) by the Bank(Kafil) to compensate (pay a sum of money) to the beneficiary (Makful Lahu), local or foreign, in the event that the obligor (Makful 'anhu) fails to honor his/her/its obligations in accordance with the terms and conditions of the guarantee/agreement/contract.

The object of guarantee should be clear in terms of value, total and specification including the period of guarantee; and in compliance with Shari'ah principles (permissible) The bank shall charge a fee that has been agreed in advance and defined on a fixed nominal value and not in the form of percentage to cover nonadministrative fee for the preparation of the guarantee;

The bank may extend a one-time or renewable Letter of Guarantee Facilities. A one-time Letter of Guarantee Facility is a non-renewable letter of guarantee extended to applicants who have no recurrent requests. Renewable letter of guarantee facility is a form of financing facility where the facility is reviewed periodically. The Bank may avail the facility to customers who have recurrent requests.

Terms of the Kafala/Letters of Guarantee

The facility commonly be availed for one year that will be reviewed every year unless the Bank demands it to be reviewed in less than this period for any remedial action when the performance of the account is deteriorating. The guarantee services provided to both local and foreign customers. The duration (term) of any guarantee instrument will depend on the contractual agreement signed by the parties involved in the guarantee contract.

Issuance of Kafala/Letters of Guarantee

The bank may issue a Letter of Guarantee in favor of beneficiary under any of the following situation:

1. When a local customer requests the bank to issue a letter of guarantee in local currency to a local beneficiary, the Bank shall issue Letter of Guarantee to the beneficiary against cash collateral (for 100% coverage).

2. When a local customer requests the bank to issue a Letter of Guarantee in a foreign currency to a foreign beneficiary, the Bank (the respective department in this case like Trade Service Central Processing Center in case of Commercial Bank of Ethiopia) may issue Letter of Guarantee when a local customer requests the Bank to a foreign beneficiary against cash collateral.

3. When a correspondent bank requests the bank to issue a guarantee in favor of a local beneficiary, the Trade Service Central Processing Centre shall issue the guarantee in favor of the beneficiary.

If the guarantee request is backed by non-cash collateral, the Bank issue a Letter of guarantee in favor of a beneficiary, after formal financing approval process.

Types of Kafala/Letters of Guarantee

i. Bid Bond

Bid/Tender Bonds are guarantees issued by the Bank in favor of a designated beneficiary upon the request of the bidder, representing the commitment of the Bank to meet the claims that may be made by the beneficiary in the event that the bidder who purchased the guarantee from the Bank withdraws from the bid during the bid period or fails to accept the award when he/she/it becomes the winner. The Bank can issue a Bid Bond to either local or foreign beneficiaries. Issuance of Bid bonds by the Bank to foreign beneficiaries shall be done after obtaining a foreign currency permit from the National Bank of Ethiopia (NBE).

ii. Performance Bond

A Performance Bond is a type of guarantee that the Bank issues in favor of a bid organizer (beneficiary) at the request of the bid winner to meet any claims to be made by the beneficiary, in case the bid winner fails to deliver the goods or to perform the services in accordance with the terms and conditions of the contract. The Performance Bond ensures that the bidder will duly perform the contract on the basis of the terms and conditions agreed by the tender organizer or the beneficiary.

iii. Advance Payment Guarantee

The Advance Payment Guarantee is a guarantee issued by the Bank in favor of a buyer who makes the advance, upon the request of the seller or the contractor who received the advance, representing a commitment on the part of the Bank to repay the sum certain in money, in case the seller or the contractor fails to honor the contract terms in their entirety, or in part, and the seller, or the contractor, does not himself/herself/itself return the advance. The Advance Payment Guarantee ensures that the seller, or contractor, will return the advance payment made by the beneficiary, in case of failure to supply the goods or services on time, in part or in their entirety. The guarantee agreement may be constructed to reflect a proportionate reduction of the advance as the contract is performed.

iv. Suppliers' Financing Guarantee

Suppliers' Financing Guarantees are guarantees issued by the Bank to provide security to a local or foreign supplier/beneficiary on behalf of a local customer (debtor), representing a commitment on the part of the Bank to meet any claims to be made by the beneficiary, in case the debtor (local buyer) fails to repay in accordance with the terms and conditions of the contract. Suppliers' Financing Guarantees arise when a local customer enters into a purchase contract with either a local or a foreign supplier agreeing to repay the purchase price, usually on an installment basis over a longer period of time.

v. Retention Guarantee

Retention Guarantees are guarantees issued by the Bank in favor of the party accepting to release the retention (beneficiary), upon the request of a seller or contractor, to provide security to a beneficiary, in the event that the seller or the contractor fails to perform his/her/its obligation as per the terms and conditions of the contract. A Retention Guarantee arises when a seller or a contractor wishes to collect any retention held on a contract by presenting a bank guarantee to the party accepting the release of the retention (beneficiary).

vi. Steamers' Guarantees/Letters of Indemnity for Missing Documents

These guarantees are issued by the Bank at the request of the buyer in favor of a carrier, in circumstances where the bill of lading is missing /delayed but the goods/cargo/ arrive earlier. It shall, however, be handled by the Trade Service Process Team.

vii. Customs Duty Guarantee

These are guarantees issued by the Bank in favor of the Customs Authority (the beneficiary) to meet the requests of the beneficiary in respect of customs duties in circumstances where the goods imported without payment of customs duties are not re-exported and the respective customs duties have not been paid.

Istisna (Work in Progress) Financing

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:37:00 +0000

Istisna Financing is a mode of sale, at an agreed price, whereby the buyer places an order to manufacture. It is a work in progress or advance payment financing. Istisna/work-in-progress assemble or construct, or cause so to do anything to be delivered at a future date. In Istisna financing, a commodity is transacted before it is manufactured. It is an order to a manufacturer to manufacture a specific commodity for a purchaser/customer of the bank. The manufacturer uses its/his/her own material to manufacture the required goods. In this mode of financing, price must be fixed with consent of all parties involved.

Istisna mode of financing may be used for financing manufacturing, construction of buildings, hospitals, schools, universities, farm buildings, manufacturing of various machines, assembling of vehicles and heavy duty machines. However, it is invalid for natural and finished products.

The Majority of Commercial Banks in Ethiopia that provide Islamic finance request the customer to fulfill the following criteria before processing of Istisna Financing

The applicant should have been in the business for at least one year and with a good business track record.
The applicant shall provide its/his/her business plan.
Applicants shall provide provisional or audited financial statements.
Before delivery of asset, the customer shall make a minimum security deposit of 30% of the selling price of to be constructed/manufactured/assembled asset. After delivery, sold asset shall be used as security.

Features of Istisna

Cancellation of the contracts	After giving prior notice, either party can cancel the contract before the manufacturing party has begun its work. Once the work starts, the contract cannot be cancelled unilaterally
Amended of the contracts	The contract price of an Istisna contract could be amended upwards and downwards, as a result of intervening contingencies (Force majeure)
Time of delivery	It is not necessary in Istisna that the time of delivery is fixed. However, a maximum time shall be agreed upon between the parties.
Delay in delivery	If it is agreed between the parties that is case of delay in delivery, the price shall be reduced by a specified amount per day.
Early delivery	If manufactured goods are delivered -*before agreed date, purchaser/customer could accept the same if the goods meet the specifications. She/he/it can refuse to accept the goods earlier than the due date, if he/she/it has a justifiable reason.
Delivery receipt issuance	The customer shall satisfy itself as to the quality and quantity of the goods at the time of delivery and shall issue a delivery receipt.
Subject-matter	It is not permissible that the subject-matter of an Istisna contract be an existing and identified capital asset. For example, it is invalid for the Bank to conclude a contract to sell a particular designated car or factory on the basis of Istisna.
Parallel Istisna	A clear Istisna contract shall be entered between the bank and the customer, whereby on the other hand, the bank may enter into a parallel Istisna with the third party manufacturer/contractor, but this contract shall not be tied up with the first contract.
Title of the goods	The parties (the bank and the customer) can enter into a contract before the seller/manufacturer assumes the title of the goods to be manufactured/ constructed.
Complete specifications	The agreement should describe complete specifications of the goods/assets/services or manufactured items sale price, date and place of delivery.
Responsibility of defects	The parties may agree for a period during which the manufacturer will be responsible for any defects or the maintenance of the subject matter.
The price and mode of payment	The price and mode of payment to the manufacturer must be known at the conclusion of the contract. i.e., the payment of price will be as per mutual agreement e.g. full in advance, fully deferred to delivery, partially advance and partially at delivery, in full payment after delivery. However, all modes of payments are permissible.
Subcontract	The manufacturer may enter subcontract agreement with other manufacturers with the consent of the bank.
Work amendments	Amendments and change orders in respect of work, with mutual consent, are allowed and necessary changes may be agreed in the selling price accordingly.
Price adjustment	Mutually agreed adjustments in work schedule and payment terms are allowed in case of force majeure. But no price adjustment should be made in respect of change in repayment schedule.
Risks	Before delivery, goods will remain at the risk of manufacturer/seller. After delivery, risk will be transferred to the purchaser/customer.
Possession of goods	Possession of goods can be physical or constructive.
Payment	The customer shall pay the installments of the price of the goods manufactured/ constructed to the bank right from the day when the contract of Istisna is signed by the parties or upon receipt of a notice from the bank confirming that the goods are ready for delivery.
Transfer of rights	Upon payment of the price, all rights and claims of the Bank against the Manufacturer/Supplier on account of warranties pertaining to the goods shall be transferred to the customer. In case of any defect in the goods, the customer shall only have a claim against the manufacturer/supplier to the complete exclusion of the bank.

You may also like

______________________________________________

Definitions and Interpretations of General Terms of Islamic Banking and Finance

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:35:00 +0000

The following are definitions and interpretations of terms of Islamic banking and finance used anywhere in this blog.

Account(s) The Interest-Free Account(s) opened and maintained by the Customer with the Bank.

Advance Payment Is a method under which a seller receives payment from a buyer prior to shipment or the agreed upon goods or rendering the agreed upon service.

Agent A person(s), either natural or legal, appointed by the Bank to provide any part of the Service.

ATM An Automated Teller Machine, Cash Handling Machine or any ard Operated Machine or device whether belonging to the Bank or other participating banks or financial institutions nominated from time to time by the Bank, which accepts and/or dispenses cash and cheques in addition to other banking services.

Authorized Person A person authorized by the Customer (whether in the Account Opening Form or otherwise) to act on behalf of the Customer in relation to the Account(s) and any transactions in relation to such Account(s).

Bank Guarantee(BG)/Kafalah Where it is a contract of guarantee or surety given by one party to discharge the liability of a third party in the case of default.

Business Day A day on which the Bank or any of its branches are open for business.

Cash Withdrawal A cash withdrawal from an Account maintained with the Bank through counters, ATMs, a point of sale (POS) and other cash dispensing outlets made available by the Bank/IFB Window.

Conflict of Interest A situation where a staff member or members of his/her immediate family or a close friend personally get the benefit as a result of the decision taken in his/her official capacity.

Consignment Basis Payment-i It is a method of payment in which the title to the goods remains with the seller until an agent (distributor) in the foreign country sells them. Payment is made to the seller if and when the agent (distributor) sells the goods.

Corporate Customer A Customer who is a legal person.

Current Account-i The Interest-Free Current Account(s), structured on the IFB concept of Qard opened and maintained by the Customer with the Interest-Free Bank.

Customer A natural or legal person who is the Account holder named in the Account Opening Form.

Customer’s Instructions Instructions given by the Customer to the Bank.

Deposit Funds deposited in an Account or any other Account maintained with the Bank at any point of deposit made available by the Bank.

Deviation Financing requests which are not covered in this financing process procedure. The nature of the financing or issues raised therein is without or beyond the spirit of this procedure.

Discretionary Financing Limits (DFL) Financing approval authority given to an individual ora team.

Documentary Collection-i /Cash against Document (CAD) Is a method under which banks handle a seller’s commercial documents with or without financial documents in accordance with instructions received from the seller in order to deliver the documents to the buyer (importer) against payment or acceptance or against other terms and conditions.

Documentary Letter of Credit -i (L/C) Is a written undertaking by a bank given to the

Draft or Bill of Exchange A signed order by one party, the drawer, addressed to another, the drawee, directing the drawee to pay a specified sum of money to the order of a third person.

Exceptions The financing and advances approved by variations from the financing process procedure. However, the nature of the financing request or issues raised therein is within the spirit of the financing procedure.

Exposure Limit The aggregate financing/loan or extension of financing by the Bank to an individual/group of trade partner(s)/debtor(s)/borrower(s).

Financing Loan and/or advances, Sales contracts financing.

Financing Approval Form (FAF) The principal financing decision making the document on which relevant information on the financing request; recommendations and the financing decision of the Financing Approval Teams/individuals to be recorded.

Financing Officer The Bank’s performer involved in the financing process: negotiation, evaluation, analysis, recommendation, approval, follow-up and collection.

Financing Risk Rate A system employed by the bank to differentiate the degree of financing risk of the trade partner/debtor/borrower.

Financing Risk The potential loss to the Bank when its trade partner/debtor/borrower fails to meet its obligation with agreed terms and conditions.

Financing/Loan Portfolio Total Financings/loans and advances extended to all trade partners/debtors/borrowers in any sector, any form of business ownership, geographical location or others.

Financing/Loan Pricing Service charges, fees, commissions, and others to be charged on financings/loans, advances and guarantees extended to customers by the Bank.

Franco Valuta-i (Permit) Is issued to importers of goods on which no foreign exchange is payable by the importing country.

Grace period A period during which the trade partner/debtor/borrower relived from either principal, profit or both repayments.

Individual Customer A Customer who is a natural person

Interest-Free Banking Window Separate units within a conventional bank that exclusively offer Interest-Free services.

Investment Period A period of one, three, six, nine or twelve calendar months or more as shall be selected by the Customer in respect of the tenure of a Mudarabah Account.

Joint Account An Account opened in the name of two or more Customers.

Letter of Credit Amendment Alteration of terms and conditions on the letter of credit. According to UCP 600, all documentary credits are irrevocable i.e. that cannot be canceled or amended without the agreement of issuing bank, a confirming bank (if any), and beneficiary. However, if all such parties agree on the change, the applicant submits an application to the issuing bank to make the requested changes to the letter of credit. This can be initiated either by the applicant or by the beneficiary.

Letter of Credit at Sight Under this method, payment is made without recourse to the exporter (beneficiary). Means payment to the beneficiary is to be effected immediately upon presentation of complying documents.

Letter of Credit Deferred Payment The exporter receives an Undertaking, in return for the correct documents, that payment will be made at the date stated in the L/C. There is no draft involved nor is there any recourse to the exporter. Once issued, the undertaking must be honored at the due date.

Letter of Credit on acceptance Under this method of payment, the confirming or issuing bank accepts Draft (bill of exchange). Whosoever accepts the draft, there is no recourse to the exporter and the draft must be paid at maturity.

Letter of Credit-i by Negotiation The negotiating bank may effect Payment with recourse to the exporter (beneficiary) unless the nominated bank confirms the L/C.

Loan Recovery process The collection of impaired financings/loans through negotiation with the customer and legal means.

Major shareholder(s) All shareholder(s) in the case of PLC. And at least top ten major shareholder(s) and/or those shareholder(s) who owned at least 70% of the total share value of the Company in case of Share Company.

Mudarabah Deposit A partnership in which the customer (Rabb-ul-Maal) provides the deposit/capital and the Bank (Mudarib) provides its expertise and skill in relation to the investment of such capital. Profit, if any, is shared between the parties as per an agreed ratio while the loss, if any, is borne solely by the Mudarabah Investor (as the case may be).

Mudarabah Fixed Time Deposit Account The Interest-free Deposit Account based on Mudarabah structure opened and maintained by the Customer with the Bank for a specified term.

Mudarib The Agent (The Bank) in a Mudarabah partnership who provides the expertise and management.

Murabahah Import letter of Credit The request of the client the bank imports the goods for him utilizes its own funds through an LC established to the seller with whom the buyer has a contract. The bank, in turn, sells the goods to their client at the price agreed upon, which includes the bank's profit.

Negotiation The purchase by the nominated bank of drafts(drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank (Art,2 UCP 600)

Non Performing Financings/Loans (NPFs) Bad debts as defined in the Directives of the National Bank of Ethiopia.

Non-Financial Transaction Electronic data consisting of information or sets of information initiated remotely and electronically transmitted via Internet Banking relating to the Account(s) and/or other business activities with the Bank. This will include an e-mail message which will be treated as a Customer's Instruction.

Permissible Permitted and anything allowed by the Shari’ah.

Islamic financing principles

Profit Calculation Period In relation to a Mudarabah Account, a period of one, three, six, nine or twelve calendar months as shall be applicable to the Customer determined by the Bank, for which profits on the Mudarabah Funds are calculated.

Profit Equalization Reserves It is a determined reserve account maintained with the bank by deducting from net profits before appropriations, for the purpose of compensating profit payment deterioration and subsequent depletion of depositors balance due to loss, if any. It is also used to equalize profit payments with agreed upon rate in the case when a prevailing year profit is smaller to cover the profit

Profit Payment Date The date on which the Bank pays the Customer’s share of the Profit Amount seller at a request of the buyer to make payment or to accept and pay Draft (bills of exchange) drawn by the seller up to a stated sum of money within a prescribed time limit and against stipulated documents provided that the terms and conditions of the credit are complied with.

Record of Loss An outstanding record of loss or written-off financings/loans and advances on a specific customer.

Sales Contract The financing contracts of Mark up (Murabahah), Advance payment against Deferred Delivery of Goods (Bai Salam), and Work-in-progress (Istisna).

Shari’ah Advisor/Consultant An independent board or consultant appointed by the Bank to ensure all products and services; related policies and agreements of IFB are in compliance with Shari’ah rules and principles.

Shari’ah A way or path. In Islam, Shariah refers to the divine guidance and laws of rules and principles supplemented by the juristic interpretations of Islamic scholars.

Shipping Guarantee-i An undertaking issued by the Bank to secure any claims by the shipping lines on the buyer as a result of the release of goods without presentation of the original bills of lading(due to delays in transit or goods arrive before shipping documents are presented to the bank). Similar to BG-i, it is based on the Islamic concept of kafalah

Small Export Items (Permit) A small export items sent abroad for a sample, gift, repair, replacement, exhibition and trade fair and personal effects and belongings.

SWIFT Means Society for Worldwide Interbank Financial Telecommunications, a computer network which provides Inter-bank communication facilities worldwide.

The Sales Contract It is a legal contract for the exchange of goods, services or property to be exchanged from seller to buyer for an agreed upon value paid or promise to pay the sum.

Trade partner/Debtor Borrower/Customer of the Bank.

Value Date The date on which a transaction entry to an Account becomes subject to profit, if applicable.

Wakalah Import Letter of Credit Is an agency relationship between the bank and its client. The bank will act on behalf of its client and the client will authorize the bank to represent him in issuing the L/C using the client’s own fund, checking for compliance of documents when a payment claim is made. The bank receives payment/commission or Ujra for the service provided.

________________________________________

The Shari’ah Supervisory Board and the Practices of Islamic Banking Services Providers in Ethiopia

The Most Frequently Asked Questions (FAQs) about Islamic Banking and Finance

The Start and growth of Interest Free (Islamic) Banking Service in Ethiopia: Does the sector going well?

General Requirements for Murabahah Term Financing by IFB Providers in Ethiopia

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:31:00 +0000

Murabahah Term Financing is a financing granted for working capital and/or for acquisition of fixed business assets to be repaid within a specific period of time with profit. The financing is repaid in a lump sum on maturity, or in periodic installments (i.e. monthly, quarterly, semi-annually, or annually), depending on the nature of the business and its cash flow.

The Bank extends Short-Term Murabahah Financing, Medium-Term Murabahah Financing and Long-Term Murabahah Financing. Depending on the nature and cash flow of the business, the Bank may provide a maximum grace period of three months for short-term Murabahah financings, two years for medium term Murabahah financings, and three years for long-term Murabahah financings. Grace period is a period during which the trade partner is relieved from principal and/or profit margin/markup repayments.

Types and Unique Features of Murabahah Term Financing

Short-Term Financing	Is a loan extended by the Bank to financing the working capital needs and/or to address other short-term financial constraints of the trade partner's business. Short-Term Financing could be granted up to a maximum of three years.
Medium-Term Financing	Is a financing which has a maturity period longer than three years, but not exceeding a maximum period of seven years, with periodic installments. The Bank may extend Medium for projects/businesses whose nature justify, or require, such periods of time for implementation and repayment of the financing. This kind of Financing are intended for the financing of the acquisition of fixed business assets (leased land, buildings, machinery, equipment, public transport vehicles, trucks and trailers, etc
Long-Term Financing,	on the other hand, is a financing which has a maturity period longer than seven years but not exceeding a maximum period of 15 years, with periodic installments. This kind of Financing may extended for projects/businesses whose nature justify, or require, such periods of time for implementation and repayment of the financing. This kind of Financing are intended for the financing of the acquisition of fixed business assets (leased land, buildings, machinery, equipment, public transport vehicles, trucks and trailers, etc

Murabahah Financing Eligibility Criteria

Murabahah Financing

Eligibility Criteria

The applicant(s) for short term Murabahah Financing shall present business plan, cash flow statements and other supporting documents which justify the existence of readily available market and the repayment capacity of the business at least for the financing period.
The applicant for a Medium- or a Long-Term Murabahah Financing must be able to submit a detailed study of the capital investment or a business plan made by authorized professionals, which justify the existence of readily available market and the repayment capacity of the business at least for the financing period.
The applicant(s) shall present a pro-forma invoice from known suppliers, and
The applicant(s) may present acceptable collateral to secure the financing.

-------------------------------------------------------------------------------------------------------------

Types of Murabaha Mode of Financing:

1. Murabahah Term Financing,
2. Murabahah Revolving financing facility,
3. Murabahah Import Letter of Credit Facility,
4. Murabahah Pre-shipment Export,
5. Murabahah Post-shipment Export Facilities, and
6. Murabahah Import Letter of Credit Settlement facilities

Interest Free Banking Marketing Principles

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:15:00 +0000

Marketing is the activity of finding out what the customer wants to buy or consume and is a support function for sales. The aim of marketing is to know and understand the customer so well that the product or service fits the customer’s needs. Thus, Interest Free Banking is a new business initiative that accepts deposits and offer financing on the basis of Shariah modes.

Such as

Value-maximization is through justice, equity, fairness, honesty, etc,

Actions both positive or negative are in the context of its effects on the community as a whole,

Brotherhood and Equality is expected from all employees, your smile to a 10 million depositor and 10,000 must be one and the same,

However, the bank can segment the customer based upon their profile and usefulness.

Islamic Marketing Product

Lawful, Asset-backed, deliverable, transparent, good faith
Reputational risk if misrepresented as a Shariah compliant product

Price

Prices must be fair & cannot be unfair
Self-operating price mechanism
Shariah does not allow prices to be fixed
Prices are based up on supply and demand
Prohibition of false prices, artificially increasing prices,

Promotion

All false assertions, unfounded accusation, false testimony is prohibited
Reputational risk in false promotion
Prohibition of misleading advertising and/or misleading sales tactics
No sexual appeal, use of women as objects, pseudo (artificial) research, etc.

Place

Branch location must be permissible
Branches must be in legitimate areas : don’t position a branch next to a liquor store

People

Free & independent judgment emphasized,
Pressure is prohibited – coercion or force
Trustworthiness and attitude, a reflection of core principles of Islam
Customer Relationship Consultant (CRC) or Marketing Officers are the face of Islamic bank ethics
Competence:- possess the required skill and knowledge
Courtesy:- friendly, respectful and considerate
Credibility:- the employee must exhibit trustworthy
Reliability:- perform consistently & accurately
Responsiveness:- the employee must respond quickly to customers’ requests and problems
Communication:- the employee shall make an effort to understand the customer and communicate clearly.

Consequences of Interest Free Ethical Sales Behavior

The responsible interest free banking officers shall play a greater attention in customer satisfaction,
Customer satisfaction and rendering repeated support may be determined by the quality of the personal meet,
Customer satisfaction leads to customer loyalty,
Customer loyalty allows banks to focus on marketing,
Spend more time in building the customer base rather than just pleasing the existing ones.

Customer Trust in the Interest Free/Islamic Bank

Relates to belief on the part of the customer that obligations will be fulfilled,
Customer trust in the Marketing Officers can be earned by honest actions.

Customer loyalty

Significantly cheaper to retain customers than find a new one,
Long-term relationships with customers can only be established by trust,
The greater the ethical behavior as perceived by the customer, the greater the customer loyalty.

Unethical sales behavior

Lying or exaggerating about the benefits of a product or service, (monthly Mudaraba profit rate is highly exaggerated)
Lying about the competition,
Giving answers when the answer is not known,
Releasing information about the customers’ that is deemed private,
Disclosing any customer information without legitimate cause,
Using incorrect terminology in a sale
Loans, interest rate, lending, etc.

Better trained employee exhibit these characteristics.

Criteria for Import/Export Services set by Interest Free Banking Service Providers in Ethiopia

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 11:12:00 +0000

Eligibility Criteria for Islamic Banking Import/Export Service Facility

Customers that require for import/export services should fulfill the following criterions (for all payment methods):

Should be in possession of valid foreign trade /Investment /Industry license,
Should have Tax Identification Number (TIN),
Should not be reported as delinquent by National Bank of Ethiopia (NBE),
Should have NBE account number,
Should maintain a checking (current) account with the bank.

Product Restrictions set by Interest Free Banking Service

Importor/Exportor are not allowed to imort/exprt some products inorder to be eligible for the IFB import/export financing services as per IFB Principles.

Import Restrictions	Export Restrictions
a) Alcohol, b) pork, c) gambling, casino, d) pornography and e) dead meat f) Bill of Lading should be Consigned to the Order of the bank (if LC is by Murabaha facility) so that to transfer ownership title by endorsement.	a) Alcohol, b) pork, c) gambling, casino, d) pornography and e) dead meat

Documentary Credit

Import

According to the concept of Wakalah: the bank will act on behalf of its client who will authorize the bank to represent him in issuing the letter of credit and all its subsequent operations. This includes the terms of the letter of credit that is issued and checking for compliance of documents when a payment claim is made. The bank receives payment/ commission or Ujra for the services provided.

The essence of Wakala is as follows:

a) The customer informs the bank to open the LC and authorizes it to act on his behalf under the Wakalah concept;

b) The customer deposits with the bank the full amount of the L/C to cover the import transaction

c) The bank issues the LC according to the instructions and the advice of its client and according to the terms and conditions agreed upon as found in documents /contract/ confirming the sale provided by the client;

d) After shipment of goods and submission of stipulated documents by the exporter, the bank makes payment using the client’s deposit.

e) The bank will charge its client fees as commission or (Ujra) for the services rendered.

According to the concept of Murabahah:

The bank at the request of their client imports goods for him through an LC established to the seller with whom the buyer has a contract. The bank entirely utilizes its own funds to open the LC and the terms of the LC are in accordance with the terms agreed between the seller and the buyer. The bank blocks the customer’s account by 30% of the invoice value for security purpose (security deposit). This contract is based on the Murabaha facility agreement.

a) Applying the Murabahah contract, the bank, in turn, sells the goods to their client at the price agreed upon, which includes the bank's profit (on mark-up basis). Depending on the terms of the Murabahah, payment can be prompt or deferred.

b) The bank may appoint the client or third party as its agent for importing the commodity/asset on its behalf and both parties sign an Arrangement of Agency.

This facility can be also operated with commission or service charge payments similar to the conventional mode

________________________________________________________________________________

Murabahah Post Shipment (Revolving Export) Facility
Murabahah Mode of Financing Practices in Major Ethiopian Banks
Murabahah Import Letter of Credit Facility: Features and Criteria
The Islamic Consumer Financing Products: Suggestions for Ethiopian IFB Services Providers to Start

Key Notes on Mudarabah account opening process in Ethiopian Banks

noreply@blogger.com (Mukerem) — Tue, 23 Apr 2019 08:42:00 +0000

Mudarabah shall mean a form of partnership where one party (i.e. the Rabul Mal) provides the funds while the other (i.e. the Mudarib) provides expertise and management. Any profits accrued are shared between the two parties on a pre-agreed Profit Sharing Ratio (PSR), while loss is borne by the provider of the Fund (i.e the Rabul Mal). The account can be generally classified in to two major groups which have sub account types. These are Mudaraba Saving Accounts and Mudarabah Deposit accounts.

Mudarabah Saving Accounts shall refer to saving accounts operated in line with Mudarabah principles. Mudarabah Deposits shall refer to all available list of Term Deposits, the contract of which is created in line with Mudarabah principles.

Key points to notice regarding these accounts

The Bank maintain certain certain percentile of the monthly Net Income of a pool as Profit Equalizer Reserve (PER) which should not exceed 30% of the funds in the pool;
The Bank also maintain some percentage of their profit for Investment Risk Reserve (IRR) (mostly up to 1%) of the profit available for distribution to customers;
Customers have no any right to claim the share in PER and IRR (if any) after withdrawal of deposit;
The Bank apply various rates of Profit Sharing Ratio (PSR) and weightages across the various types/tiers of Mudarabah Saving and Deposits Accounts;
Profit is calculated based on Average Daily Balance;
All savings and deposits shall be assigned under a single pool. Income derived from all financing and investment activities of the Bank shall be shared among all Mudarabah savings and deposits products in line with the approved PSR;
The allocation of deposit to a pool shall be performed at the time of opening an account or creating a deposit contract;
Mudarabah Saving and Deposit Accounts have minimum initial deposit amount set by each bank;
Mostly, the amount of the minimum balance of Mudarabah Deposit Accounts are higher than Mudarabah Saving Accounts,
Mudarabah deposit set for 3, 6, 12, 24 and more than 24 months

Table 1: Investment period and PSR Ratio of Mudarabah saving and Deposit accounts existed in one of the major banks in Ethiopia.

S.No.	Account or Deposit Type	Investment Period	PSR Ratio
S.No.	Account or Deposit Type	Investment Period	Bank	Customer(S)
1	Mudarabah Saving Accounts	Not Applicable	65	35
2	Mudarabah Deposits	3 months	60	40
		6 months	55	45
		12 months	50	50
		24 months	45	55

How to Oppen Mudarabah Account (Saving and Deposits)

Intiation to open the Mudarabah Account can come from the customer or the bank,
The customer can request to open the account by filling the Standard Application Form and on submitting all other documents and information as may be requested by the Bank;
Customer(s) shall be notified about the applicable PSR ratios on the standard application form;
The Bank may provide Product Disclosure Sheet (PDS) to the Customer(s) at the time of application. The sheet shall contains information on the product features, benefit packages associated with a product, PD Procedure, applicable fees and charges, applicable provisions and reserves, risk issues;
The applicable PER shall be displayed on the notice board of the Branches or on the Standard Application Form or through any other convenient means before start of the relevant period;
Changes to PSR and Weightages (if any) will be communicated to the Customer through any of the available and convenient means, at the Bank’s disposal, including notice boards, mass media, websites, telephone calls etc. The Bank will provide a notice period of Eight days to Customers. If Customer(s) do not approach the Bank for withdrawal of funds or renewal of deposit contracts within the stated notice period, this is considered, under the term to be included in the Mudarabah contract signed by the depositor, as a tacit approval of the new PSR, and the new ratios shall be applied in the next profit distribution.
Customer(s) shall sign contracts prepared for the respective Mudarabah Account or Deposits;
Customer(s) shall make a deposit using the standard deposit formats of the banks.

Islamic Banking and Finance Business Review - Ethiopia

Coming Back Soon!

Permissibility of Online Financial Dealings with its various aspects

The various aspects pertaining to Online Financial Dealings

Shari'ah Standard (5): Guarantee (Revised)

Shari’ah ruling and basis for the standard on Guarantees

Shari’ah Standard (3): Procrastinating Debtor (Revised)

Shari’ah Standard (2): Debit Card, Charge Card and Credit Card

1.3. Credit card

Shari’ah Standard (1): Trading in Currencies

Islamic Microfinance: A Missing Component in Ethiopia's National Strategy of Financial Inclusion

Islamic Microfinance: A Missing Component in Ethiopia's National Strategy of Financial Inclusion

The Relationship between Financial Inclusion and Microfinance

Islamic Microfinance

Murabahah Revolving Financing Facility: Major Features and Criteria - Ethiopian Case

Major Features of Murabahah Revolving Financing

Specific Eligibility Criteria for Murabahah Revolving Financing

You may also like

Murabahah Pre-Shipment Export Financing Facility in Interest Free Banking Service Providers in Ethiopia

You might also like

General Requirements for Murabahah Import Letter of Credit Settlement Financing by IFB Service Providers in Ethiopia

Unique features of Mudarabah Import Letter of Credit Settlement Financing

Specific Eligibility Criteria

You might also like

Bai Salam Financing Process in Interest Free Banking Service Providers in Ethiopian

Bai Salam Financing/Advance Payment against Deferred Delivery of Goods /

Conditions of Bai Salam Financing Mode of Financing by Most Ethiopian Banks

Eligibility Criteria for Bai Salam Financing Mode of Financing set by most banks

Murabahah Post Shipment (Revolving Export) Facility

Unique Features

Murabahah Post Shipment Facility Process

You may also like

Murabahah Mode of Financing Practices in Major Ethiopian Banks

Terms and Conditions of Murabahah Mode of Financing

You may also like

Major Islamic Banking Products and Services Currently Available in Ethiopia

You may also like

Islamic Banking and Finance: Why it is important for Ethiopia?

What Is Interest Free Banking?

Motivations to Start IFB in Ethiopia

You may also like

Murabahah Import Letter of Credit Facility: Features and Criteria

You may also like

Qard Al Hassan (Benevolent Loans)

The objective of Qard-al-Hassan / Benevolent Loans

Eligibility Criterion (in Ethiopian Banks that Provide Islamic Banking)

You may also like

Bai Salam Financing: Conditions and Eligibility Criteria

Conditions for Bai Salam Financing

You may also like

Kafala (Letter of Guarantee) Facility

Terms of the Kafala/Letters of Guarantee

Issuance of Kafala/Letters of Guarantee

Types of Kafala/Letters of Guarantee

i. Bid Bond

ii. Performance Bond

iii. Advance Payment Guarantee

iv. Suppliers' Financing Guarantee

v. Retention Guarantee

vi. Steamers' Guarantees/Letters of Indemnity for Missing Documents

vii. Customs Duty Guarantee

You may also like

Istisna (Work in Progress) Financing

Definitions and Interpretations of General Terms of Islamic Banking and Finance

You may also like

General Requirements for Murabahah Term Financing by IFB Providers in Ethiopia

Types and Unique Features of Murabahah Term Financing

Murabahah Financing Eligibility Criteria

You may also like

Interest Free Banking Marketing Principles

Islamic Marketing Product

You may also like

Criteria for Import/Export Services set by Interest Free Banking Service Providers in Ethiopia

Eligibility Criteria for Islamic Banking Import/Export Service Facility

Product Restrictions set by Interest Free Banking Service

Documentary Credit

Import

The essence of Wakala is as follows:

According to the concept of Murabahah:

You might also like