Credit Agreement - Scope of Standard

Transcription

1. Shari ’ah Standard No. (37): Credit Agreement Statement of the Standard 1. Scope of the Standard This standard covers credit facilities and the returns and commissions arising from them, whether such facilities are practiced between the Institution and its clients or between the institution and other institutions. 2. Definition of Credit Facilities 2/1 The term credit refers to the financial transaction according to which one of the two parties becomes indebted to the other. Indebtedness in such transactions can arise at the beginning of the transaction, and this is known as direct cash credit such as loans and discounting of commercial papers. Instead, indebtedness could be only probable at the end of the transaction, and that is incidental credit, such as bank suretyship suretyship,, letters of guarantee, bills of acceptance, and letters of documentary credit. The term “credit facilities” is used to denote credit in both cases. The concepts of credit and credit facilities are more comprehensive than the concept of financing which relates to the case of actual deferment of one of the two transacted objects. 2/2 According to this standard, credit facilities in institutions can be divided into the following types: 2/2/1 Cash facilities: This type includes the transactions in which the Institution presents funds, whether in the form of cash - as is the case in Qard Hasan (benevolent loan), Musharakah and Mudarabah; or in the form of an asset or usufruct - as is the case in Murabahah and lease financing. It should be noticed here that Musharakah and Mudarabah do not result in a debt owed by the client except in case of transgression or negligence. 2/2/2 Incidental facilities: This type includes the transactions which result in an incidental commitment owed by the Institution such as suretyship and letters of guarantee. 926
2. Shari ’ah Standard No. (37): Credit Agreement 2/3 Transactions that entail instant delivery of the transacted objects are not considered as part of credit facilities. 2/4 The decision of granting credit facilities: It refers to the approval of the Institution to enter into a credit facility with a specific client. The approved facility will be subject to a specific financial limit that can be used during a specific period of validity and subject to a certain date of maturity. The credit facility would also comprise specific conditions relating to guarantees, method of repayment and regulatory requirements. The decision of granting the facility is usually issued in the form of a letter addressed from the Institution to the client, indicating that the letter does not constitute any commitment from the part of the Institution unless transactions are actually commenced. Similar to letters of granting facilities, letters for renewal or extension of the period of already approved facilities also carry the same conditions. 2/5 Using credit facilities It refers to commencement of the client to utilize the facility by submitting a request for a letter of guarantee or a letter of credit, or making a pledge to purchase a commodity or hire an asset through the Institution. 3. Types of Credit Facilities 3/1 Types of traditional credit facilities used by banks: 3/1/1 Loans Loans refer to facilities payable on a specific date agreed upon between the traditional financial Institution and the client. Loans can be extended directly to the client, or through participation with other traditional financial Institutions, or through acquisition of bonds issued by the client. 3/1/2 Overdraft Overdraft is a facility which the traditional financial institution puts at the disposal of the client to draw from it on need, up to a specific limit and within a given period. 927
3. Shari ’ah Standard No. (37): Credit Agreement 3/1/3 Discounted papers Discounted papers comprise commercial papers and bonds to order discounted in the traditional financial institution. 3/1/4 Issued credit cards In this traditional form of credit facility, the indebtedness which can arise from using the credit card is determined for each client within a certain limit, and he can repay it in installments along with the interest. 3/1/5 Documentary credits Documentary credits are among the facilities which traditional financial Institutions extend to their clients. In this case the Institution assumes the commitment to pay to beneficiaries the value of the credits opened for its client, whether the value of such credits is due on sight of the documents or on a date thereafter. 3/1/6 Bank acceptances This type of facilities which traditional financial Institutions offer to their clients entails a commitment from the Institution, for the benefit of a client or for its own benefit, to pay to beneficiaries the value of the accepted papers when they are due. 3/1/7 Bank guarantees Traditional financial Institutions offer this type of facility to their clients. In such facility the bank, upon request of its client, undertakes to pay to a third party the amounts indicated in the guarantees, on request and within a specific period. 3/1/8 Foreign exchange operations Foreign exchange operations constitute a traditional facility offered to clients in deferred contracts of buying and selling foreign currency. 928
4. Shari ’ah Standard No. (37): Credit Agreement 3/2 Types of Islamic credit facilities used by institutions 3/2/1 Murabahah and Musawamah Murabahah and Musawamah are two types of sale transactions which constitute methods of financing used by Islamic financial institutions to cater for client needs for owning moveable as well as immovable assets. Contrary to Musawamah, in Murabahah the cost incurred by the Institution for obtaining the good must be indicated. [see Shari’ah Standard No. (8) on Murabahah] 3/2/2 Mudarabah Mudarabah is a method of financing which institutions use for financing various economic activities. According to this method the institution enters the deal as the partner who subscribes the funds (Rab al-Mal) while the other partner (Mudarib) subscribes the work and performs the managerial duties. The two parties agree, within the contract, on a specific method for profit sharing, while the entire loss has to be borne by Rab al-Mal al-Mal, unless it is due to transgression or negligence of the Mudarib. [see Shari’ah Standard No. (21) on Financial Papers: Shares and Bonds] 3/2/3 Permanent Musharakah and diminishing Musharakah Musharakah is a method of financing in which the institution joins the client as a shareholder in the capital of a certain project or operation. In this case the two parties share the profits and losses according to a predetermined method specified in the contract. 3/2/4 Operational-cum-financing Ijarah It is a method used for financing clients’ needs for usufructs and assets. According to this method the institution purchases the assets and rents them to clients for specific periods, against periodical amounts of rent stipulated in the contract. [see Shari’ah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek] 929
5. Shari ’ah Standard No. (37): Credit Agreement 3/2/5 Istisna’a Istisna’a is a method through which the institutions provide finance to their clients. In this case the institution assumes the commitment of manufacturing the equipment or the good, or constructing the buildings or the different types of capital assets according to the specifications agreed upon. The institution which provides finance in this manner has the right to sign a Parallel Istisna’a contract with another party to manufacture the asset in question. 3/2/6 Salam Salam is a method of financing which institutions use for extending finance to owners of farms and merchants who want to spend on their business as well as on their personal needs. Under this mode of financing the Institution has the right to arrange Salam with another party through a parallel Salam contract. 3/2/7 Other financing operations Finance can also be extended to clients through other financing operations which include among others: Qard Hasan, Hasan, customer overdraft balances, letters of guarantee and letters of credit. 4. Shari’ah Status of Offering Credit Facilities The decision to offer a credit facility and the facility agreement are considered as means of mutual understanding and exchange of non-binding promises for entering into transactions. The Shari’ah status of actual utilization of the facilities depends on the type of contract to be used. 5. Shari’ah Rulings on Credit Facilities 5/1 It is impermissible to use any of the traditional facilities mentioned in item 3/1 if it involves interest or would lead to an interest-bearing loan as is the case in guarantees and uncovered credits, or it would result in deferment of one of the two transacted objects as is the case in currency exchange contracts. [see Shari’ah Standard No. 930
6. Shari ’ah Standard No. (37): Credit Agreement (14) on Documentary Credit; Shari’ah Standard No. (2) on Debit, Charge and Credit Cards; and Shari’ah Standard No. (1) on Trading in Currencies] 5/2 The institution is not committed to pay any compensation to the client on rejection of his application to utilize the approved facilities, whereas the client also is free to use the facilities within the specified period or not. When the client refrains from using the facilities, he is not committed to pay any compensation to the Institution. 5/3 Returns and commission on credit facilities 5/3/1 First type: Commissions and returns which arise before contracting 5/3/1/1 Commission for credit study The institution is permitted to take commission for the credit study it prepares internally or through an external party, so as to know the credit worthiness of the client and his ability to honor his commitments within the period agreed upon. Entitlement of the Institution to such commission is due to fact that the client has benefited from the study regardless of whether the study has led to acceptance or rejection of his request. The study shall become the property of the client who has the right to take it. 5/3/1/2 Commission for offering credit facilities This commission refers to the amount which the Institution charges against allocating and specifying the limit of the facility. The institution usually charges such commission whether the deal is finalized or not. However, it is impermissible for the Institution to obtain commission for offering credit facilities, because the mere indication of willingness to enter into a lending and borrowing transaction does not justify remuneration. [see item 2/4/2 of Shari’ah Standard No. (8) on Murabahah] 931
7. Shari ’ah Standard No. (37): Credit Agreement 5/3/1/3 Commission for renewal or extension of credit facilities This type of commission should be treated in the same way like commission for offering credit facilities. [see item 5/3/1/2 above and Shari’ah Standard No. (8) on Murabahah] 5/3/1/4 Cost of preparing the contracts and forms pertaining to the transaction 5/3/1/4/1 The cost of preparing the contracts to be signed between the Institution and the client should be shared between the two parties, unless the contract indicates otherwise. Such charge should be fair and commensurate with the actual work load so as not to comprise an implicit fee for commitment or for offering the credit facility. 5/3/1/4/2 When Murabahah (or any other mode of financing) is used through syndicated financing the arranging Institution has the right to charge arrangement fees which has to be borne by the participants of the syndication. [see items 2/4/3 and 2/4/4 of Shari’ah Standard No. (8) on Murabahah] 5/3/1/5 Cost of the feasibility study of the project The institution has the right to charge the cost of the feasibility study it prepares, when the client requests such a study for his own interest, and the cost of the study is agreed upon beforehand. [see item 2/4/5 of Shari’ah Standard No. (8) on Murabahah] 5/3/1/6 Hamish Jiddiyyah (security deposit) The institution may charge the seriousness margin which refers to an amount of earnest money forwarded by the client at the stage of offering his binding pledge in Murabahah. In case of retreatment of the client 932
8. Shari ’ah Standard No. (37): Credit Agreement from concluding the contract the amount of actual harm caused to the institution shall be deducted from the seriousness margin. [see item 7/8/2 of Shari’ah Standard No. (5) on Guarantees] 5/3/2 Second type: Commissions and returns which arise on signing of the contract 5/3/2/1 Commitment fee The institution should not charge the commitment fee which relates to traditional facilities of interest-bearing loans, whether in the case of direct loans or the indebtedcurrent (overdraft) loans. Such fee which traditional institutions charge to the client even if he has not used the facility, is also known as the “loan fee”, or the “indebtedcurrent facility fee”, or the “financing fee”. [see item 2/4/1 of Shari’ah Standard No. (8) on Murabahah] 5/3/2/2 ’Arboun (Earnest Money) It is permissible for the institution to charge such earnest money which constitutes part of the price paid in advance in sale and lease contracts. Such amount is owned by the seller or the landlord when the buyer or the tenant uses his right of terminating the contract. [see item 7/8/3 of Shari’ah Standard No. (5) on Guarantees] 5/3/2/3 Guarantee return The institution should not obtain any returns on the guarantee relating to documentary credits, letters of guarantee, and bank suretyship suretyship,, except actual expenses, whereas it can obtain returns for agency in documentary credits. [see item 7 of Shari’ah Standard No. (5) on Guarantees; and item 3/3 of Shari’ah Standard No. (14) on Documentary Credit] 933
9. Shari ’ah Standard No. (37): Credit Agreement 5/3/2/4 Return on debt rescheduling 5/3/2/4/1 The institution should not obtain returns against extending the date of repayment of debts in all credit facilities. It should charge only the actual expenses of the rescheduling transaction. [see item 5/7 of Shari’ah Standard No. (8) on Murabahah; Shari’ah Standard No. (3) on Procrastinating Debtor, and item 3/3/1 of Shari’ah Standard No. (14) on Documentary Credit] 5/3/2/4/2 Renewal and extension of facilities should be done by entering into new contracts, rather than by extending the duration of the ongoing ones. 6. Obtaining Guarantees on Credit Facilities The institution has the right to use permissible forms of guarantee in order to ascertain the fulfillment of the commitments of its client. [see item 3/4/1 of Shari’ah Standard No. (14) on Documentary Credits, and item 4/1/1 of Shari’ah Standard No. (5) on Guarantees] 7. Date of Issuance of the Standard This Standard was issued on 17 Rabi’ I, 1430 A.H., corresponding to 15 March 2009 A.D. 934