IIFM-BAFT Master Participation Agreements - Key legal aspects

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Rosanna Stone
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1 IIFM-BAFT Master Participation Agreements - Key legal aspects M. Delwar Hossain Senior Associate - Bahrain office What is a Participation? An arrangement between two banks/financial institutions whereby: the originating bank offers and the participating bank accepts a participation in a trade finance transaction; on an (i) unfunded or (ii) funded basis of an agreed amount; the originating bank (as principal for its own share of the participation and as an agent of the participating bank for the share of the participating bank) enters into the transaction documents with the obligor / customer; and the originating bank passes to the participating bank its share of any fees, commissions or payments upon receipt from the obligor / customer. 2 1

2 Difference between a Conventional and an Islamic Participation Conventional sub-participation / participation 1. Participant in a conventional participation transaction becomes a creditor of the grantor 2. Participant takes a double credit risk, against the borrower and the grantor. Participant's return is conditional on the borrower complying with its payment obligations under the loan agreement and on the grantor complying with its payment obligations under the participation agreement 3. Participant does not benefit from security the borrower has granted the lender, unless otherwise agreed. Islamic participation 1. Both participant and grantor are obligor s creditors as grantor acts as participant s agent 2. Since grantor acts as participant s agent, participant does not take grantor s credit risk 3. Grantor enters into the transaction documents on its behalf and on behalf of participant. As such, participant fully enjoys benefits from security provided by obligor 3 Parties in an Unfunded / Funded Participation Unfunded / funded Participation Grantor / Originator Trade finance instruments Transaction documents Beneficiary Obligor / Customer Trade transaction Participant 4 2

3 Unfunded Participation: Process Flow 1. Entry into MUPA: Master unfunded participation agreement (MUPA) is entered into between grantor and participant 2. Unfunded trade transaction by grantor to obligor: Grantor agrees to provide unfunded trade transaction to obligor 3. Offer: Grantor offers to participant to participate in an unfunded transaction on an agency (wakalah) basis 4. Acceptance: Participant accepts grantor s offer 5. Unfunded transaction documents: Unfunded transaction documents entered into between grantor and obligor 6. Default: If obligor defaults, grantor requires to pay to beneficiary and grantor demands participant to pay its share of participation 5 Funded Participation: Process Flow 1. Entry into MFPA: Master funded participation agreement (MFPA) is entered into between grantor and participant 2. Funded trade transaction by grantor to obligor: Grantor agrees to provide funded trade transaction to obligor 3. Offer: Grantor offers to participant to participate in a funded transaction on an agency (wakalah) basis 4. Acceptance: Participant accepts grantor s offer 5. Funded transaction documents: Funded transaction documents entered into between grantor and obligor whereby grantor acquires title to goods from beneficiary before sales/leases to obligor 6. Demand for payment by beneficiary & grantor demands participant to pay its share: Following a demand for payment by beneficiary upon grantor, grantor demands participant to pay its share and participant makes such payment 6 3

4 Permitted Trade Finance Instruments 1. Permitted trade finance instruments for unfunded participation: (e) (f) Letters of credit issued or confirmed, drafts accepted and deferred payment or negotiation obligations incurred under letters of credit (excluding any discounting arrangement); Confirmations or guarantees of letters of credit; Irrevocable reimbursement undertakings, letters of indemnity, letter of guarantees; Advance payment guarantees; Performance and bid bonds; and Any other Shari ah compliant trade financing instruments. 2. Permitted trade finance techniques for funded participation: (e) (f) (g) Murabahah; Musharakah; Salam; Musawamah; Ijarah; Mudarabah; Istisna a, wakalah; and any other Shari ah compliant trade financing instruments. 7 Upfront Fee sharing with Participant Justifications for the Participant's share in upfront fee: Services rendered by the Participant to the Grantor in connection with the Participated Transaction and such services include examining any relevant documents related to the Participated Transaction and advising the Grantor of any discrepancies in the Transaction Documentation provided that any services rendered by the Participant shall be directly or indirectly for the benefit of the parties involved in the Participated Transaction including the Obligors; and/or Preparation or issuance of any documents, reports or feasibility studies by the Participant related to or in connection with the Obligors and/or the Participated Transaction and the parties involved in the Participated Transaction including the Obligors can receive a copy of such documents, reports or studies upon request. 8 4

5 Amendment & Restructuring, Assignment & Transfer 1. Binding amendment and restructuring Transaction documentation related to a participated transaction subject to: any amendment or waiver of any term; any refinancing; or any restructuring or re-organisation, must be Shari ah compliant. 2. Assignment and transfer Subject to compliance with the principles of Shari'ah, any rights or obligations of a party under a Participation Agreement can be assigned or transferred. 9 What is not covered in an Islamic Participation 1. NOT a sale/assignment/transfer of debts mechanism 2. NOT all trade finance instruments can be subject matter of an Islamic participation agreement. The following trade finance instruments may not be permitted: purchases of claims under letters of credit; discounts of drafts; bankers acceptances; and all instruments dealing with discounting arrangement. 10 5

6 Thank you 11 Baker & McKenzie Limited is a member firm of Baker & McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome Baker & McKenzie Limited 6

Client Briefing 23 January 2019

Client Briefing 23 January 2019 Launch of Master Participation Agreements by IIFM and BAFT as new standard documentation The publication of the two long-awaited master participation agreements mentioned