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Presentation Outline-Tijarah
What is Tijarah
Salient Features of Tijarah
Finished Goods as a Mode of Finance
Financing to Local Customers
-Process Flow
-Graphical Process Flow
Risk Mitigation in Finished Goods Financing
Legal Documentation
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What is Tijarah?
“Tijarah is a Sale & Agency based financing facility for Customers who sell Finished
Goods on Credit basis”.
The facility will enable the Customers to sell their Finished Goods stock, meet their
working capital requirements and
enjoy the benefits of Cash sales.
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What is Tijarah?
• Under this concept the Bank will purchase the finished goods of the Customers and
will appoint the Customer as its agent to sell the same goods in the market generally on
Credit basis.
• It is necessary for the validity of Finished Goods transaction that the price is fixed
with the consent of the parties and that the necessary specification of the required
items is fully settled between them.
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Salient Features
Salient Features of Tijarah under the Finished Goods Financing Agreement
A Finished Goods contract is permitted for Completed/ Finished Goods that have been
transformed from their natural state by a manufacturing or construction process
involving labor.
The price of a Finished Goods contract is ideally paid on the spot with immediate
delivery of goods.
The delivery of the subject matter may take place through constructive possession. At
this point, the liability of the Customer in respect of the subject matter comes to an end
and the liability of the Bank begins until its sale to the ultimate purchaser.
The parties may agree on a period during which the Customer will be liable for any
defects.
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Finished Goods as a mode of Finance
Finished Goods Agreement can be used for providing financing facility in transactions
where final / transformed goods are available for sale.
It is just like a normal sale purchase transaction where a seller (the Customer) sells a
good to a buyer (the Bank) on cash basis.
The Bank then appoints the Customer as its Agent to sell the same goods to a third
party.
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Finished Goods as a mode of Finance (Continue..)
The Goods through Finished Goods Agreement can be sold by the Bank in one of the
following manners:
1. Outright sale by the Bank to some 3rd party after receipt of delivery of goods.
2. Appoint the Customer as an Agent to sell the goods in the market.
3. The Bank can also have a promise to buy Finished Goods from some 3rd party
for the goods having same specifications as the ones available with the Bank.
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Financing to Local Customers
Option 2 - Appoint the Customer as an Agent to sell the goods in the market.
A Customer (Manufacturer/ trader) has a stock of specified goods that are generally
sold on credit. Since the Customer will be short of funds during the credit period and
this will affect his working capital. The Customer has approached the bank for
financing facility based on Sale & Agency.
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Process Flow
Stages of Process Flow
A. Credit Approval Stage
B. Transaction Stage
C. Agency Stage
D. Independent Guarantee
E. Sale of Goods & Collection of Sales
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A. Credit Approval Stage
1. After proper Credit and Shariah approvals; the bank and the Customer will enter into
a Master Finished Goods Agreement – a MOU where the customer agrees on the
general terms & condition related to sale of the Finished Goods stock to the bank
from time to time via proper Sale.
2. The Customer and the bank will also enter into an Agency Agreement through which
the Customer, acting as Bank’s Agent, will sell the Finished Goods to creditworthy
buyers on credit basis.
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B. Transaction Stage
3. Upon requirement of funds, the Customer (usually a manufacturing/ trading
concern) will offer to sell a specific stock of Finished Goods to the bank. The
Customer will give Written Offer (Appendix A) to sell the finished good and
specify the quantity, price, specification and place of delivery and the delivery date.
4. Upon acceptance of the offer, the bank will pay the Finished Goods price (X% less
than the selling price) to the Customer.
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B. Transaction Stage (Continue..)
5. The bank will take the delivery either by physical or constructive possession of the
Goods purchased. In case of constructive possession the storage facility or warehouse
of the customer would be used.
A representative of the bank will inspect the goods to ensure that existence of goods,
its proper identification & separation from the customer’s owned stocks (i.e. goods
not sold).
(Note: This step is very important to ensure proper Shariah Compliance of the
transaction).
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B. Transaction Stage (Continue..)
6. A Goods Receiving Note (Appendix B) will be executed at this moment by the
representative of the bank & Customer to evidence the delivery of the Finished Goods to
the bank.
The risks and rewards associated with the Goods will be transferred to the bank at this
stage.
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C. Agency Stage
7. After delivery of Goods to the bank, through the ‘Notice’, as mentioned in the
Schedule I of the Agency Agreement, shall authorize the customer to sell the Finished
Goods at the price declared in the Notice.
The Agent will arrange Takaful/permissible Insurance of the Goods.
The Agent will now be responsible for recovery of Sale price and its payment to the
bank with a certain number of days.
8. As per the Agency Agreement, the Agent will be required to sell the goods on
CREDIT[1] basis according to the terms agreed between the Bank and the Agent (i.e.
Schedule 2 of the Agency Agreement).
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C. Agency Stage
8. The Agent will sell the Goods in --------- days[2] upon receiving the ‘Notice’ and
collect the payment with in the specified time frame.
[1] As agreed upon in the specific process flow of the Customer.
[2] As agreed upon in the specific process flow of the Customer.
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C. Agency Stage (Continue..)
9. The Agent will be entitled to a fixed Agency Fee for providing the services as per
Agency Agreement (including Takaful cost, transportation costs, storage etc).
In addition to the Agency Fee, the Agent will also be entitled to an Incentive Fee for
arranging the proceeds earlier than the agreed schedule. This increase or decrease in
the fee may be on a daily basis. The incentive will be reduced if the Agent fails to
arrange the proceeds on the due date.
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E. Sale of Goods & Collection of Sales
11. The Agent will sell the goods on bank’s behalf and will confirm the Bank that it has
sold the goods on behalf of the Bank via the “Confirmation of Sale of Finished
Goods” (Schedule 3 of the Agency Agreement). As per the payment terms, the buyer
will pay the selling price to the Agent. After receiving the payment, the Agent will
pass on the proceeds (net of applicable Agency & Incentive fee) to the bank.
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Graphical Process Flow
Customer
1. Finished Goods Agreement
The Bank2. Delivery of Goods
3. Agency Agreement
Local Buyer
4. Sale of Goods
5. Sale Proceeds
6. Agency / Incentive Fee
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Legal Documentation for Finished Goods
Legal Documents in Finished Goods Financing comprises of:
- Master Finished Goods Agreement
- Finished Goods Agency Agreement
- Finished Goods Corporate Guarantee
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Legal Documentation for Finished Goods
Master Finished Goods Agreement
Purpose: This is the main Agreement through which the Customer sells the
Finished Goods to the Bank.
Components:
A. Written Offer:
Description of Goods including quantity, quality, delivery date, cost price, place of
delivery etc
B. Goods Receiving Note:
Date, time, address, description of goods received.
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Legal Documentation for Finished Goods
Finished Goods Agency Agreement:
Purpose : The Bank appoints the Customer (manufacturer/ trader) its Agent to sell
the ready-to-sell goods.
Components :
A. Notice
The Bank authorizes the Agent to sell the Assets as its
undisclosed Agent and details of the Assets are mentioned.
B. Agency Fee
Comprises of Agency fee and Incentive Fee
C. Confirmation of Sale of Finished Goods
It is the confirmation of Sale of the bank goods.
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Legal Documentation for Finished Goods
Finished Goods Corporate Guarantee
Purpose : An independent Corporate Guarantee from the Agent regarding the credit
worthiness of the end buyer(s)
