Tijarah

(Finished Goods)

Muhammad Umar
 Presentation Outline

• 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
 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.
 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.
 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.
 Salient Features

• 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.
 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.
 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:

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.
 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.
Process flow
 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.
 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.
 B. Transaction Stage

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).
 B. Transaction Stage

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.
 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.
 C. Agency Stage

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). 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.

 C. Agency Stage

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.
 D. Independent Guarantee

10. The Customer in an independent capacity will also provide an

independent Corporate Guarantee to the bank 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.)
 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.
 Graphical Process Flow

6. Agency / Incentive Fee

1. Finished Goods Agreement

Customer 2. Delivery of Goods The Bank

3. Agency Agreement

4. Sale of Goods

Local Buyer 5. Sale Proceeds

 Risk Mitigation in Finished Goods Financing

RISKS MITIGANTS

1 Delivery Risk Delay in delivery of goods from the Customer is liable to pay back the full
Customer to the bank amount to the bank

The Customer delivers the bank has recourse on the

defected/inferior goods, which is Customer for an agreed time period
realized by the bank only when the OR Khiyar-e-Aib may be exercised
2 Quality Risk ultimate purchaser points it out. by the bank by asking Customer to
rectify the defect.

Market price of the subject matter Parallel Finished Goods or promise

3 Price Risk decreases after the bank enters into to purchase from a 3rd party will
Finished Goods agreement. mitigate the risk.

The ultimate purchaser cancels the The subject matter of Finished

4 Order order based on which the bank Goods may be sold in the market to
Cancellation entered into Finished Goods a 3rd party.
Agreement with the Customer.
 Risk Mitigation in Finished Goods Financing

RISKS MITIGANTS

The goods once delivered by
Customer will be at the bank's
5 Storage Risk risk before the same are sold
to the ultimate purchaser
This 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.

Agent is unable to arrange

Non - sale proceeds within a The Incentive Fee will be reduced on daily
6 performance of specified time period or delays basis.
Agent in passing on to the proceeds
to the bank.

The ultimate purchaser The Customer (in its independent capacity as

Default by refuses to make payment on the bank’s Agent) may be asked to provide
7 ultimate time or goes bankrupt. Corporate Guarantee to guarantee payment
Purchaser obligations of ultimate buyers.
Legal Documentation for

Finished Goods Financing

 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

 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.
 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.
 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)
‫جزاک ہللا خیرا‬