Credit Agreement - Appendix C (Definitions)

Transcription

1. Shari ’ah Standard No. (37): Credit Agreement Appendix (C) Definitions Financing Financing takes place only when one of the two objects of the transaction is deferred such as loan, discounting of bills, simple credit, Murabahah, Salam and Istisna’a. Financing may not take place in suretyships suretyships,, letters of guarantee, letters of documentary credits and bank acceptances. Therefore, the term financing is more special than the term credit. That is to say, any financing is credit, but any credit does not always lead to financing. Indebted-Current This is one of the traditional forms of extending loans to customers. In this case the customer (borrower) is given access to draw from an account opened for this purpose (the indebted-current account) up to a certain maximum limit which constitutes the amount of the loan, and within a specific period. A maximum date will also be specified for repayment of the drawn amounts. Such account is usually made subject to the following terms: ■ The customer has to pay interest on the amounts he draws actually. ■ The customer should pay a commitment fee calculable as a percentage of the total amount of the loan. Such amount is paid in addition to interest and is considered as Riba (usury). The indebted-current account differs from the direct loan in that interest in the case of the former is paid at the end of the transaction’s period. In the indebted-current account also interest is calculable on the basis of the amounts that have been actually used by the customer (the debit balance). Facility Limits The maximum limit of the facility is the total amount of the facility that has been approved by the institution. Such amount is extended through a specific mode of financing (Murabahah, Ijarah, letter of guarantee, documentary 940
2. Shari ’ah Standard No. (37): Credit Agreement credit ….etc.). It constitutes the maximum exposure limit for the institution with regard to the specific client. Credit Policy Credit policy refers to the precautionary measures adopted by the Institution with the aim of safeguarding its funds in the light of rules and regulations and in view of the resolutions of its Shari’ah Supervisory Board and the prevailing principles and traditions in the field of its activities. Credit Study The credit study is the process of identifying the credit worthiness of the client and his ability to honor his commitments within the specified period. It also aims to assess the suitability of the type, size and currency of the requested financing to the activity to be financed, and to what extent the financing is commensurate with the resources and capabilities of the client in general. Moreover, the credit study indicates - subject to the nature of financing operations - the suitable guarantees to be requested from the client, whether for the debts and entitlements stemming from the operations or against transgression and negligence from his part. The final result of the study presents a clear recommendation on whether the client is to be offered the facility subject to certain conditions, or his application should be rejected on the basis of specific reasons. The credit study covers the financial standing, cash flow, activity results, income, and expenses of the client. It also covers other various aspects such as past experience of the institution with the same client, image of the client, and his ability to manage his activity and stand any difficulties he may encounter while practicing such activity. Facility Agreement This agreement is signed between the client who applies for the facility and the institution when the decision to offer the facility is issued. The agreement indicates the type and amount of the facility as well as the guarantees and profit margin, or profit sharing ratio in case of Musharakah in Islamic transactions. Such agreement is not considered to be binding for the client before entering into the actual contracts. 941