2 Presentation Outline What is Meezan Tijarah Salient Features of Meezan TijarahFinished Goods as a Mode of FinanceFinancing to Local CustomersProcess FlowGraphical Process FlowRisk Mitigation in Finished Goods FinancingLegal Documentation
3 What is Meezan Tijarah“Meezan 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.
4 What is Meezan TijarahUnder 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. The Finished Goods price is ideally paid on Spot with immediate delivery of Goods.
5 Salient Features of Meezan Tijarah Salient Features of Meezan Tijarah under the Finished Goods Financing AgreementA 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.
6 Salient Features of Meezan Tijarah 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.
7 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.
8 Finished Goods as a Mode of Finance The Goods through Finished Goods Agreement can be sold by the Bank in one of the following manners:Outright sale by the Bank to some 3rd party after receipt of delivery of goods.Appoint the Customer as an Agent to sell the goods in the market.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.
9 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 MBL for financing facility based on Sale & Agency.
11 Credit Approval StageAfter proper Credit and Shariah approvals; MBL 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 MBL from time to time via proper Sale.2. The Customer and MBL 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.
12 Transaction StageUpon requirement of funds, the Customer (usually a manufacturing/ trading concern) will offer to sell a specific stock of Finished Goods to MBL. 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, MBL will pay the Finished Goods price (X% less than the selling price) to the Customer.
13 Transaction StageMBL 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.MBL representative 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).
14 Transaction StageA Goods Receiving Note (Appendix B) will be executed at this moment by the Bank representative & Customer to evidence the delivery of the Finished Goods to MBL.The risks and rewards associated with the Goods will be transferred to MBL at this stage.
15 Agency StageAfter delivery of Goods MBL, 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 MBL with a certain number of days.
16 Agency StageAs per the Agency Agreement, the Agent will be required to sell the goods on CREDIT basis according to the terms agreed between the Bank and the Agent (i.e. Schedule 2 of the Agency Agreement). The Agent will sell the Goods in days upon receiving the ‘Notice’ and collect the payment with in the specified time frame. As agreed upon in the specific process flow of the Customer. As agreed upon in the specific process flow of the Customer.
17 Agency StageThe 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.
18 Independent Guarantee The Customer in an independent capacity will also provide an independent Corporate Guarantee to MBL for guaranteeing the credit worthiness of the Buyer and will undertake to compensate the bank in case of failure the Buyer to pay the sale price to the Bank.Note: As per Shariah Supervisory Board’s ruling, this independent Corporate Guarantee will be given after identification of the Creditworthy Buyer and not before that. (i.e. The Guarantee cannot be given for an unknown buyer.)
19 Sale of Goods & Collection of Sales 11. The Agent will sell the goods on MBL’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 MBL.
20 Graphical Process Flow 1. Finished Goods Agreement Customer1. Finished Goods AgreementMBL2. Delivery of Goods3. Agency AgreementLocal Buyer4. Sale of Goods5. Sale Proceeds6. Agency / Incentive Fee
21 Risk Mitigation in Finished Goods Financing RISKSMITIGANTS1Delivery RiskDelay in delivery of goods from the Customer to MBLCustomer is liable to pay back the full amount to MBL2Quality RiskThe Customer delivers defected/inferior goods, which is realized by MBL only when the ultimate purchaser points it out.MBL has recourse on the Customer for an agreed time period OR Khiyar-e-Aib may be exercised by MBL by asking Customer to rectify the defect.3Price RiskMarket price of the subject matter decreases after MBL enters into Finished Goods agreement.Parallel Finished Goods or promise to purchase from a 3rd party will mitigate the risk.4Order CancellationThe ultimate purchaser cancels the order based on which MBL entered into Finished Goods Agreement with the Customer.The subject matter of Finished Goods may be sold in the market to a 3rd party.
22 Risk Mitigation in Finished Goods Financing RISKSMITIGANTS5Storage RiskThe goods once delivered by Customer will be at MBL's risk before the same are sold to the ultimate purchaserThis may be covered through Takaful of the goods and by minimizing the time duration between acceptance of delivery under Finished Goods and delivery to the ultimate purchaser.6Non - performance of AgentAgent is unable to arrange sale proceeds within a specified time period or delays in passing on to the proceeds to MBL.The Incentive Fee will be reduced on daily basis.7Default by ultimate PurchaserThe ultimate purchaser refuses to make payment on time or goes bankrupt.The Customer (in its independent capacity as MBL’s Agent) may be asked to provide Corporate Guarantee to guarantee payment obligations of ultimate buyers.
23 Legal Documentation for Finished Goods Financing
25 Legal Documentation for Finished Goods Master Finished Goods AgreementPurpose : 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 etcB. Goods Receiving Note:Date, time, address, description of goods received.
26 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. NoticeThe Bank authorizes the Agent to sell the Assets as its undisclosed Agent and details of the Assets are mentioned.B. Agency FeeComprises of Agency fee and Incentive FeeC. Confirmation of Sale of Finished GoodsIt is the confirmation of Sale of MBL goods.
27 Legal Documentation for Finished Goods Finished Goods Corporate GuaranteePurpose : An independent Corporate Guarantee from the Agent regarding the credit worthiness of the end buyer(s)