Developing Process FlowsFlows - Murabaha

Developing Process Flows

Four Pre-Requisites
a) Strong Commitment towards Islamic Banking a) Full Product Knowledge a) Market Knowledge b) Customers Business Processes

Developing Process Flows

Strong g Commitment Towards Islamic Banking: g

It is the most important factor behind developing Shariah Compliant process flows. flows A less competent but strongly committed personnel is likely to ensure strong Shariah Compliance. Compliance Less Committed person will take Shariah Compliance a formality and not t a responsibility. ibilit RM/RO has additional responsibility of Shariah Compliance over and above b hi role his l as an RM/RO. RM/RO

Developing Process Flows

Strong g Commitment Towards Islamic Banking: g

RM/RO must understand that he is responsible for passing Halal income to all the Deposit Holders of the Bank. Bank If someone is not convinced about the principles of Islamic Banking than he must leave the job as Strong commitment to the cause is the most important pre-requisite for a front staff.

Product Knowledge

Product Knowledge:

Strong Command over the Product Manuals and policies. Sequential flow of Murabaha Events must be known

Product Knowledge
Sequential q Flow of Transaction Documents
Placement of Order Form:

Before the dispatch of goods from supplier Before or at the time of placing Order with supplier Order Form represents a situation where customer wants to purchase some assets and have not yet acquired possession of the asset. Misconception p that Order Form is p placed only y when disbursement is required by Customer.

Product Knowledge
Sequential q Flow of Murabaha Events
Placement of Order Form: Example: Al-Noor Traders-Dealer of Pesticides Date of Order Form: 20th January 2012 Date of Dispatch note : 17th January 2012 Declaration date: 20th January 2012 Result: Res lt The Order form was as submitted s bmitted after the reciept of goods by b the customer therefore the transaction is Invalid

Product Knowledge
Sequential Flow of Murabaha Events
Timing g of Disbursement

Must be done at the time when payment is required by supplier. It is a misconception that disbursement must be done before the dispatch of goods but indeed disbursement may be done before or after the dispatch of goods, goods as per the transaction terms. terms In reality the disbursement may be done before or after the dispatch of goods, goods as per the transaction terms. terms Eg Some suppliers of Macter requires payment upfront whereas some require payment after the delivery of goods therefore in formal cases disbursement was made upfront whereas in later case the disbursement was made after the receipt of goods.

Product Knowledge
Sequential q Flow of Murabaha Events
Execution of Declaration and Murabaha Contract

Must be executed at the time of reciept of goods and before the consumption/sale of the goods. Purchase Evidences must be attached with the Declaration and Murabaha Contract If in case invoices are not available at the time of delivery than Goods receipt evidence along with the name of supplier and amount of purchase will be taken, however invoices/bills will be taken as soon as they are received.

Product Knowledge
Sequential q Flow of Murabaha Events
Execution of Declaration and Murabaha Contract

In case of sugar cane declaration was used to be executed after 7 to 8 d days of f reciept i of f sugar canes. Later L on it i was revealed l d that h sugar cane is directly put into the crushing machine therefore all the previous transactions were in valid. For future transactions MBLs representative was placed at the factory to ensure declaration and Murabaha Contract before putting sugar canes into the crushing machine.

Market Knowledge
Market Knowledge:

Types of Suppliers- Organized or Un-organized e.g. Seeds, phutti are usually ll supplied li d by b unorganized i d farmers, f b k brokers. What is meant by Cash in the market? In leather market usually payment is made after quality testing. This mode of payment is usually considered cash in the market but in actual it is a credit sale. General Delivery terms in the market e.g. Suppliers provide free deliveries in case of large orders., Point of risk transfer? Shell usually provides Patrol in its own carrier and assumes risk of oil till they are off-loaded.

Market Knowledge
Market Knowledge:

Type of documentation prevailing in the market e.g. In Agri I Inputs market k Bills Bill are usually ll not given i b growers but by b customers self made bill is usually signed by the growers. Mahmmod cotton ginners makes the bill when phutti is accepted at their godown and suppliers signature is taken over the bill. This process was incorporated in their Murabaha process flow. Government regulations regarding the market e.g. Sales Tax policies for a particular market. Any other Market specific practice e.g. Mudda in Phutti Market; sale based on Delivery Orders in yarn market

Issues in Murabaha
Customer Business Practices
Following information must be obtained about customers business practices. practices

Payment Terms with the suppliers M d of Mode f Payment P to Supplier: S li Direct Di or Indirect I di Delivery Terms Goods Receipt Evidences P h Evidences Purchase E id Goods Identification method Customers relationship with Suppliers Inventory Holding Period

Payment Terms with Supplier

Payment terms of customer with its major supplier must be understood b f before d fti the drafting th Process P Fl of Flow f the th customer. t Payment to suppliers can be made in the following different methods: Full Advance Payment: Payment is made to supplier before the dispatch of goods Impact on Disbursement: Disbursement is made at the time of placement of Order to supplier and before the dispatch of goods. Eg. Fertilizer Companies usually delivers fertilizers after 1 to 6 months of receiving advance payment.

Payment Terms with Supplier

Partial Advance Payment: y Partial advance p payment y is made at the time of Order while partial payment is made after delivery of goods. Impact on Disbursement: This implies that partial disbursement will be made before the dispatch of goods while partial disbursement will be made after the dispatch of goods. Implication on Profit Calculation: If first disbursement (eg Rs 5 Million) is made on 1st Jan and 2nd Disbursement (eg Rs 10 Million) is made on 15th January and maturity date is 30th Jan than profit calculation will include profit on Rs 5 million for 15 days and profit on Rs 15 million for 15 days. This profit amount will be agreed at the time of execution of Murabaha Contract.

Payment Terms with Supplier

Credit Payment: Payment: Credit Payment is made to suppliers after certain number of days from the receipt of goods. goods Eg. Iqbal Rice Mills, a rice processing unit, makes payment to its supplier after 3 4 days of reciept of goods. 3-4 goods Iqbal rice mill was guided to provide Order Form at the time of placing order with supplier while disbursement was made after 3-4 3 4 days of execution of Declaration and Murabaha Contract. p on timing g of Order form: Impact Order form must be provided at the time of placing order with supplier and before the dispatch of goods Impact on disbursement: Disbursement will be made after the execution of murabaha contract and upon expire of the credit period even by supplier.

Payment Terms with Supplier

Implication p on p profit calculation: Profit will be calculated for the period between the disbursement date and maturity date but agreed at the time of execution of murabaha contract i.e. before disbursement The profit will be the calculated on the basis of expected disbursement date and maturity

Payment Terms with Supplier

Cash Payment: Payment terms of Cash Cash usually imply a credit period of 1-7 days in most industries/markets.

This should be clearly determined at the time of PF development P Process and d sequence in i such h case will ill be b same as i in case of f credit di payment. Spot Payment: Payment is made at the time of receipt of goods. Impact on disbursement: Disbursement can be made on the date of receipt or goods

Mode of Payment
Mode of payment
1. Pay Order/Cross cheque (a/c payee only) /Online transfer within MBL 9 These Th are classified l ifi d as direct di modes d of f payment , which hi h ensures that h funds are directly paid to the supplier only. 9 Ideally Direct Payment should be made to ensure proper utilization of f d funds. 9 Eg. Purchases from Public limited companies 2. Open cheque/Self / Cheque/Cash / 9 These are indirect modes of payment where additional checks are required to ensure proper utilization of funds. 9 A cash receipt acknowledgement from the supplier must be obtained in these cases 9 E.g Phutti, surgical instruments, steel sheet

Mode of Payment
M d of Mode f payment p nt
3. Payment in other accounts 9 As per the market norms many supplier do not want payment at their company accounts but demand payments on the personal accounts of director/ manager/ g employee p y for the company. p y
9 This mode can be acceptable but certified copy of the list of such

individuals must be obtained from the supplier pp and incorporated p in the process flow.
9 Al Haye y Medicos p purchases medicines from different suppliers pp who

demand payment in the personal accounts of directors/proprietors therefore same was incorporated in their process flows.

Issues Related to Payment y to Suppliers pp

Late p presentation of cheque q by y supplier: pp
Some time agent delivers cheque to the supplier but supplier presents the cheque late to the bank. bank In this scenario order form will be accepted at the time of placing order with the supplier but disbursement will be made on the date when cheque will be presented for clearing. If goods are delivered before the presentation of cheque the declaration and murabaha contract must be executed before the disbursement.

Issues Related to Payment y to Suppliers pp

Partial payment by customer:
S Some m time tim customer st m r makes m k s some s m payment p m nt from fr m is own n sources s r s and nd some payment from the funds taken from the bank. I In this hi case bank b k and d the h customer will ill share h the h ownership hi of f the h goods as per their proportionate share in the payment. This Thi ownership hi ratio i will ill be b reflected fl d in i the h schedule h d l of f assets. For e.g. if bank pays Rs 50. and customer pays Rs 50 to purchase watch worth Rs 100, Than MBls ownership share in the watch will be 50% while customers share will be 50%. Premier Agencies purchases medicines on daily basis. On any particular Order they usually involve their own funds and in case of any shortfall funds from bank is also taken. The goods received are owned by both as per their proportion the payment.

Delivery Terms with Suppliers

Delivery Terms
Delivery Terms help in determining the point where ownership transfers from supplier to client. It must be understood at which point risk is transferred to the customer i.e. at which point customer bears the risk of loss / damage of the goods

Delivery Terms with Suppliers

Delivery Terms
Some of the common delivery terms are as follows. Transit risk borne by supplier: In this case ownership transfers to the customer after delivery of goods at customer p premises. Therefore Declaration & the Murabaha Contract must be executed after the delivery of the goods. Transit risk borne by y customer: In this case ownership of goods transfers to the customer immediately upon dispatch from supplier premises. Declaration and Murahabha contract can be executed while the goods are in transit.

Delivery Terms with Suppliers

Example p of Transit Risk borne by y Customer:
For e.g. masood and company purchases diesel from caltex. Caltex delivers oil through its approved rented carriage whose rent is paid by masood and company. It take 3 days for the diesel to be transported from Karachi to Faisalabad. M Masood d and d company receives i d li delivery i ti ti intimation, i immediately di t l upon dispatch of goods from Karachi. At that point Masood and Company declares the receipt of oil to the bank and execute a Murabaha Contract by providing the detail of the dispatched oil on its letter head accompanied by copy of delivery note if available. Later on invoices are provided by the customer upon their receipt from supplier.

Delivery Terms with Suppliers

Place of Delivery y
a) at customer godown. b) some 3rd party processing unit c) at the place of buyers of our customer If goods are delivered at some 3rd party processing unit than it must be incorporated in the process flow and the Declaration and Murabaha Contract must be executed through physical inspection at the processing unit It must be ensured the Declaration and Murabaha Contract must be unit. executed before the stat of processing. Eg. Processing of yarn, Wet blue process of Hides, Cutting and molding of steel are usually outsources by m n companies. manu mp ni s

Delivery Terms with Suppliers

Place of Delivery y
If goods are delivered directly to the buyer of our customer, customer under the risk of the supplier, than murabaha cannot be offered as ownership was not transferred to the customer. Eg. Central Trading, large sized trading unit based in Lahore, used to deliver the goods directly to their customers without taking the risk of goods Ignorance of this fact causes loss to the Bank in the form of goods. Charity.

Delivery Terms with Suppliers

Timing of Delivery
Time taken by the supplier to deliver the goods after reciept of Order/Payment must be also be incorporated in the process flows to be able t ensure strong to t Sh i h Compliance. Shariah C li Some customers make full delivery of good in single while other delivers the goods d in i multiple l i l trenches h In cases where goods are delivered in multiple trenches MBL will not wait till the h completion l i of f full f ll delivery d li of f goods d but b will ill execute partial i l Declaration D l i and Murabaha on the delivered lot immediately. In cases of bulk supplies in multiples trenches a time interval may also be defined for declaring the goods.

Goods Receipt Evidences

Goods Receipt Evidence
Timing of receipt of goods: Goods Receipt p Evidence ( (G.R.E.) ) info V.s. Purchase Evidence ( (P.E.) ) info? Misconception regarding invoice date and delivery date. Some of the common good receipt Evidences are as follows. External goods receipt/ delivery evidences : Delivery notes / Delivery y Challan / /Builty/ y/ Truck Receipt p Internal goods receipt evidences: Computerized inventory management system/ goods receiving notes/ manual good receives register

Goods Receipt Evidences

Ideally both external and internal goods receipt evidence must be received in any transaction. In cases where external good receipt evidence is not provided internal good Reciept evidence must be obtained along with the Declaration. In case of unavailability of both, customer must confirm the date of receipt of goods over the invoice/ bills. E.g. . Nur Enterprises, distributor of Reckits product in Lahore, receives Pick slip along with delivery and generates a computerized Material Receipt N (MRN) internally. Note i ll Both B h these h evidences id are incorporated i d in i the h process flow. Al Haye medicos recieves medicines through TCS and no receiving is available and customer does not maintain any internal GRN system. In this case customer will confirm the date of receipt of goods over the Invoices.

Purchase Evidences
Purchase Evidences
Some of the common types of purchased evidences are as follows. 1. Sales taxes invoice (Usually issued by public limited suppliers) 2 Computer 2. Comp ter generated invoice in oice / bills (Usually (Us all issued iss ed by b Private Pri ate Ltd Companies) 3. Hand written bills over letter head of suppliers (Small scall suppliers/Partnership concerns) 4. Katchi Purchi with signs of suppliers. ( Un-organized suppliers) We must determined which types yp of p purchase evidences are received by y the customer and incorporate their nature in the process follows. In case of katchi purchi or no evidences a transaction summary sheet will be obtained from the customer.

Purchase Evidences
Timing of purchases evidences
a) Purchase evidences delivered along with the receipt of goods: If purchase evidences are delivered after some days of receipt of goods d than h Declaration D l i the h Murabaha M b h contract must be b executed d on the basis of available goods Receipt evidences E.g. In Fertilizer Industry b) Purchase evidence delivered after some days of receipt of goods. Customer will mention the PKR value of the goods over the good receipt evidences. Invoices will be provided to the bank as soon as they are received by the Customer. E.g Usually in case of purchase from Limited companies the Invoices are issued after 10 to 15 days of receipt of goods.

Goods Identification Method

Good identification method
Identification of goods at the time of sale is a must for a valid Sale. Customers business process and storage facility must be visited to determine the method of identification of goods Some of the common method goods identification are: 1. Separate stacking of goods (Bags of seeds can be stacked seperately) 2 Lot no identification in schedule of assets (Purchase of cotton by large 2. Corporate units) 3. Bag no. 4 Color 4. C l of f packing ki 5. Designating separate area for MBLs goods (Hides, skins) 6. Tank no. (separate allocation of tank for patrol/oil purchase)

Example of Separate Stacking

Identification by Inventory Card

Customer Supplier Relationship

Buyer y Seller Agent/Broker Principal Parent Subsidiary Majority holding Minority holding E.g. US Apparel purchases goods from US Denim, which was a majority holding subsidiary of US Apparel Apparel. The transaction was put into charity. E.g. Indus Dying purchases goods from Fashion Net, Minority holding subsidiary of Indus Dying Dying. The same is incorporated in the process flow.

Things to Remember
9 Acceptance of Order Form means a financial commitment to the customer, t where h customer t can demand d d Payment P t against i t Order O d Form F at t any time 9 Back-dated/ B k d d/ Blank Bl k Order O d Form F should h ld not be b accepted d in i any case. 9 RM should submit the Order Form (either Hard Copy / email Scanned Copy) to CAD A immediately d l (by b the h end d of f the h day) d after f receipt of f Order d Form from the customer. 9 Upon reciept of Order Form, limit of the customer must be earmarked/blocked in the system. This is built in T24 system. 9 Customer must be asked to sign and stamp over the copies of Purchase evidences provided to the Bank.

Things to Remember
9 Minimum Inventory Holding period means the minimum time during which hi h that h particular i l commodity di will ill remain i in i its i original i i l form f at customers premises. 9 A common mm mistake mi t k is i that th t average r I Inventory t r holding h ldi period p ri d as per p r the th balance sheet is calculated which is not required as we are interested in only the inventory holding period of the purchased goods and average inventory y holding gp period reflects the inventory y holding g of all the raw materials 9 If it is not possible to obtain Invoices in the name of bank than its J ifi i must be Justification b mentioned i d in i the h process flow. fl 9 If formal Invoices are not issued by supplier than its justification must also l be b obtained bt i d in i the th process flow. fl

Things to Remember
9 During Physical Inspection MBLs owned goods must be clearly identified before signing Murabaha Contract 9 In case of Physical Inspection Murabaha Contract must be executed during physical inspection but if not possible during physical inspection then at most at the same day provided that it must be ensured that goods are not consumed/sold. 9 RM must communicate the acceptance of Murabaha Contract to the customer only after MBL signs on customer customers s offer to Purchase merely submission of Purchase evidences does not concludes Murabaha transaction automatically. 9 If the procurement cycle of the customer changes with the passage of time and/or change in economic conditions, RM should get the Murabaha Process Flow revised and approved from PDSC so as to incorporate p the change g in p procurement cycle. y

Things to Remember

9 RM should get the Murabaha Process Flow accepted from the customer. RM should explain each and every step of the Process Flow to the customer so as to avoid any mistake in the execution of the Murabaha transactions. 9 RM should remain in constant touch with the customer even after approval of PF to be aware regarding changes PF ground realities.

Case Studies

Case Studies for Murabaha

Some case studies of Murabaha Financing are as follows and will be covered in detail in the presentation: p
1. 2. 3.

Novatex Nishat Power Abdullah Textile Mills

Novatex Limited

NOVATEX LTD.
Company Background: Novatex is the leading manufacturer of Pet Resin and pre-forms. Major Raw material of Novatex is PTA, which is procured from Lotte Pakistan. Background of the Procurement Cycle: Customer own around 9 specially designed containers for delivery of PTA from Lotte Pakistan to customers premises. Delivery y of PTA is round the clock at Novatex p premises and PTA is received in specially designed containers mostly in BULK form. PTA is directly y decanted to the storage g area from the containers where it is mixed with the previously procured PTA.

NOVATEX LTD.
Problems: Following issues were faced in offering Murabaha Financing 1. Identification of goods - Mixing of PTA with previously procured PTA 2. Constant Usage of goods from the storage area 3 Timing of signing of Murabaha Contract 3. 4. Customers unwillingness on placing Muqaddam for signing of M b h Contract Murabaha C t t

NOVATEX LTD.
Problems: 1. Identification of goods 2. Timing of signing of Murabaha Contract Solution 9 Specially Spec a y des designed g ed Murabaha u aba a Co Contract t act d drafted a ted for o s signing g g o of Murabaha Contract before consumption i.e. mixing of MBL goods with customers own stock 9 Murabaha is executed for each Truck on per Tonne basis i.e. Cost per Tonne, Profit per Tonne and Sale Price per Tonne of PTA is agreed for each Truck. Truck

NOVATEX LTD.
Problems 1. Identification of goods 2. Timing of signing of Murabaha Contract Solution (Continued) 9 Customers Custo e s aut authorized o ed representative ep ese tat ve offer to p purchase (by s signing g g the respective row of Special Murabaha Contract) PTA from MBL, loaded in a specific vehicle. 9 MBLs representative accept the offer by countersigning respective row of Special Murabaha Contract.

Special Murabaha Contract Summary of PTA PURCHASED by NOVATEX as Agent of Meezan Bank Limited with reference to MMFA & Agency Agreement dated (DD/Mm/YYYY) Date 19 Jan 12 19-Jan-12 Disb Dated 29-Jan-12 Maturity Dat 12-Feb-12 Tenor 14
Cost Price of PTA / Tonne (A)

KIBOR SPREAD

11.81% 11 81% 0.20%

S. Truck # / N Container # o.

Time of Arrival

Profit Rate (B)

Profit per Tonne [C = A * B * Tenor / 365]

Gross Weight in Tonnes (Loaded vehicle) (D)

Offer to Purchase by NOVATEX's representative

Acceptance of Offer by MEEZAN's representative

110.43 110.43 110.43 110.43 110.43 110 43 110.43 110.43 110.43

Total

12.01% 12.01% 12.01% 12.01% 12.01% 12 01% 12.01% 12.01% 12.01%

0.51 0.51 0.51 0.51 0.51 0 51 0.51 0.51 0.51

With reference to our purchase of above-mentioned Assets having a Cost Price of Rs___________________(Rupees _ from you for a Contract Price ; calculated on the basis of Cost Price + [ ]% Profit Margin; which is equal to Rs: __

NOVATEX LTD.
3. Novatexs unwillingness g on p placing g Muqaddam q for signing g g of Murabaha Contract

Nomination of factory personnel for signing of Offer to Purchase Novatex nominated 10 different factory personnel (of different shifts) for signing s g go of Offer to Purchase Murabaha u aba a goods from o Bank a o on Novete Novetexs s behalf.

Novatex Ltd.
3. Novatexs unwillingness on placing Muqaddam for signing of Murabaha Contract (Continued.) Agency Agreement with customers representatives 9 MBL signed Agency Agreement with 10 different customers representatives of factory (of different shifts) for performing following g activities Write Truck #, Gross Weight, Time and Actual Weight Signing of Acceptance of Offer 9 Their names were placed on the Notice board near decanting station

Nishat Ni h t Power P Li Limited it d

Nishat Power Ltd.

Company Background: Nishat Power Limited (NPL) is contributing economical power to the national grid. Major Raw material of NPL is Furnace Oil which is procured from PSO, Oilco etc. Background of the Procurement Cycle: The procurement of Furnace Oil is being made through Different suppliers on Advance / Credit Payment When the oil tankers arrive they y are weighed g on Weigh g Bridge g at NPL. A weight receipt is generated and issued to the tanker driver. The risk of oil is transferred to NPL at the time when the oil is dumped p from the oil tanker into the Storage Tank at NPL; before dumping of oil, the risk is borne by the supplier.

Nishat Power Ltd.

Background of the Procurement Cycle: (Continued.) There are 3 storage tanks at NPLs plant, each having capacity of 10,000 metric tons of furnace oil. Additionally, there are two day tanks and two buffer tanks. Day tanks have capacity of 500 metric tons each, while buffer tanks have capacity of 200 metric tons each. The furnace oil is pumped from storage tanks to buffer tanks, from where it is treated for impurities and then pumped to day tanks for ultimate consumption. p

Nishat Power Ltd.

Problems Oil procured on any day is first decanted in the Storage tanks of the customer The decanted oil may (or may not ) pumped to the buffer tank. customer. tank Chances of consumption, i.e. pumping of oil from Storage tank to buffer tank of Oil procured on MBL tank, MBLs s behalf is possible Murabaha Contract cannot be executed on per container basis as the risk of the goods transfers to the buyer after the oil is decanted in customer customers s storage tank

Nishat Power Ltd.

Solution Keeping in view the working capacity of NPL, which is 1000 metric tons per d MBL day, MBLs RM will ill evaluate l t th the daily d il stock t k to t make k sure that th t there th is i sufficient stock of oil already owned by NPL available for current production of NPL (that is minimum 2000 MT, which is sufficient for 2 d ) before days) b f decanting d i of f MBLs MBL oil. il MBLs RM will then identify the storage tank of NPL with minimum level of oil il sufficient ffi i for f current production. d i

Nishat Power Ltd.

Solution ( (Continued) ) Oil is then dumped in the storage tank as identified above, thereby creating Shirkat ul Milk of oil in the tank. NPL will be allowed to utilize oil from the tank up to its share in the tank till the Murabaha Contract is signed. The customer will provide the stock report in the next morning. morning The stock report will show present status of oil in Storage Tank as identified by the RM initially and the additions of MBLs oil during last day and quantity used by NPL during this period period.

Nishat Power Ltd.

Solution (Continued.) The customer will sign a Declaration for receipt of oil as MBLs agent, mentioning the percentage holding of Furnace Oil of MBL in the Storage Tank and subsequently sign the Murabaha Contract for purchase of the same quantity. Following points should be taken care of while signing of Murabaha Contract and Schedule of Asset 9 The Schedule of Assets along with the Murabaha Sale Contract must include the accurate p percentage g of oil owned by y MBL. Q Quantity y of Oil should be mentioned as percentage of the total oil, in metric tons, present in the tank. 9 Number of Storage Tank Identified for Decanting should be mentioned on Murabaha Contract.

Abdullah Abd ll h Textile T til Mill Mills Ltd

Abdullah Textile Mills

Company Background: Abdullah Textile Mills is a spinning unit, established in 1991 with installed capacity of 234 spindles & 400 rotors. The Company is engaged in manufacturing of ring spun cotton yarn ranging from 10/S to 72/S . The company Factory is located at Abdullah Nagar Chak No 85/15-l, District Khanewal It purchases cotton bales and cotton waste from local market. Problem: Abdullah Textile usually y make advance payment py to supplier pp on the basis of market rate of Cotton Bales.

Abdullah Textile Mills

During the transit of cotton bales from supplier to Abdullah Textile the PKR value of the bales decreases because weight of the bales drops as a result of drying of moisture during the transit. Therefore the problem is that exact value of goods purchased is determined only after the second weight at customers premises. Solution: Average g deterioration of weight g as a result of drying y g of moisture is determined which comes out to be 20%. Abdullah Textile Mills was required q to give g Order form for 20% less value than the Ordered Quantity i.e Order form of Rs 80,000 against order of Rs 100,000.

Abdullah Textile Mills

Upon delivery of bales, when the value of delivered lot is finalized after weighing, Ownership ratio of MBL is specified over the lot which will be represented in the Schedule of Assets. MBL will sell its ownership share in the lot of bales to the customer through Murabaha Contract. For example: If Order form of Rs 80,000 was given for the Order of Rs 100,000 and after second weight at customers godown the value of the goods is Rs 90,000 than MBL share in the goods g g will be 80,000/90,000= 88.8%.

Thank You