SA ADAT BAI SALAM (Islamic Alternate for Export Sight Bill Discounting) PRODUCT MANUAL MARCH, 2014 ISLAMIC BANKING DIVISION SINDH BANK LIMITED HEAD OFFICE Page 1 of 20
Table of Contents I. Bai Salam (Islamic Alternate for Export Sight Bill Discounting) 1. Introduction & Definition. 4 2. Purpose of Use..4 3. Conditions of Salam 4 & 5 II. III. IV. Bai Salam as a Financing Mode used in Sindh Bank Ltd. 1. Process Flow of Bai Salam..6 & 7 2. Bai Salam Flow Chart..8 Important Checklist.. 9-12 Accounting..13 V. Master Agreement for Purchase of Foreign Currencies / MAPFC (Bai Salam)...15-20 Appendices A & B.19&20 Demand Promissory Note..21 Page 2 of 20
Bai Salam (Islamic Alternate for Export Sight Bill Discounting) Introduction & Definition This mode of financing can be used by the modern banks and financial institutions especially to finance the agricultural sector. In Salam, the seller (known as Rab us Salam or Muslam ilaihi) undertakes to supply specific goods to the buyer (known as Rab ul Maal)at a future date in exchange of an advanced price fully paid at spot. The price is in cash but the supply of purchased goods is deferred. Purpose of Use To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest. When Allah declared Riba haram, the farmers could not take usurious loans. Therefore Holy Prophet (PBUH) allowed them to sell their agricultural products in advance. To meet the needs of traders for import and export business. Under Salam, it is allowed for them that they sell the goods in advance so that after receiving their cash price, they can easily undertake the aforesaid business. Salam is beneficial to the seller because he received the price in advance and it was beneficial to the buyer also because normally the price in Salam is lower than the price in spot sales. The permissibility of Salam is an exception to the general rule that prohibits forward sale and therefore it is subject to strict conditions, which are as follows: Conditions of Salam It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of sale. In the absence of full payment, it will be equivalent to sale of a debt against debt, which is expressly prohibited by the Holy Prophet (PBUH). Moreover, the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If it s not paid in full, the basic purpose will not be achieved. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified e.g. Precious stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible. Salam cannot be effected on a particular commodity or on a product of a particular field or farm e.g. supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity, which may lead to a dispute. It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only, meaning what is normally weighed cannot be quantified and vice versa. The exact date and place of delivery must be specified in the contract. Salam cannot be effected in respect of things, which must be delivered at spot. The commodity for Salam contract should remain in the market right from the day of contract up to the date of delivery or at least till the date of delivery. There is no minimum period for the validity of Salam. It is all right to have an earlier date of delivery if the seller consents to it. Page 3 of 20
Since price in Salam is generally lower than the price in a spot sale; the difference in the two prices is a valid profit for the bank. A security in the form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller delivers. The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealing in commodities. Page 4 of 20
BAI SALAM USED IN SINDH BANK AS FINANCING MODE After shipping goods according to the terms and conditions of the Letter of Credit, Exporters usually do not wish to wait for the LC proceeds that are expected at a future date. They bring the export documents to a Conventional Bank s counter and get them discounted. However, as per the rules of Shariah, Bill Discounting is not permissible. Sindh Bank, Islamic Banking will use an alternate of Export Sight Bill Discounting based on Bai Salam. In this transaction, the Bank purchases the Foreign Currency from the Exporter to be delivered on a future date against immediate payment in Local Currency (Pak Rupees: PKR). Process Flow of Bai Salam Exporter comes to the Bank s counter and a formal approval for Bai Salam will be sought as per the standard credit approval policy of the Bank. After approval, Master Agreement for Purchase of Foreign Currencies (MAPFC) / Bai Salam for the overall facility will be signed between the Bank and the Customer. Whenever, the Exporter has need for PKR, he will bring his export LC bills (within approved limits) to the Bank/Branch counter. All Export documents e.g. Bill of Lading, Commercial Invoices etc. to be submitted as collateral. The Bank s Treasury based on market prices (available on Reuters page PKR=PK), will set a range for the spot rates and publish it on the rate sheet. This rate range will be used for conversion (purchase) rate negotiation between the Bank and Customer. The branches cannot quote any rate other than the one given by Treasury to the Customer. The transactions should be settled at any rate between the Bid & Ask Spot Rate range. After finalization of the deal the Bank purchase the Foreign Currency to be delivered at a future known date (due date) and pay the price in PKR as per the agreed rate. For Each Transaction Appendix 'A of MAPFC will be signed between the Bank and the Customer in which details of LC will be listed along with the due date of the proceeds, Foreign Currency and its amount. Appendix B Declaration of Sale of MAPFC. This Annexure will be used for carrying out each individual Bai Salam transaction for purchase of foreign currency against PKR under the Master Agreement. It will serve as an evidence of Offer & Acceptance for each sale transaction. The authorized signatories of the Bank and the Customer must sign this Appendix on the date of transaction. It is important that this declaration is signed the same day to record the Purchase of Foreign Currency in which the Bank will offer to purchase the said Foreign Currency payable on a specific future date (maturity date of the LC) against PKR. The Customer on the other hand will sign the declaration and accept the offer. To extend the facility, Sindh Bank may ask the Exporter to assign its receivables (under this LC) to the Bank. It may also ask the Exporter to furnish other securities to protect it in case the Exporter defaults. Page 5 of 20
The Customer will deliver the Foreign Currency to Sindh Bank on the due date, but will not be contingent to the arrival of LC proceeds. In case LC proceeds do not arrive on time, the Customer will have to arrange Foreign Currency from his own sources and ensure payment on due date and the transaction will conclude. In case of delay, the Bank may ask the Customer to pay an amount toward the Charity account (under clause 5 of MAPFC). These charges will be utilized by the Bank for charitable purposes under its approved Shariah complaint Charity Policy. The related IT system and accounting entries should also reflect the above process. The above process of Bai Salam is also acceptable for Export Contracts subject to required credit approval. Page 6 of 20
BAI SALAM: FLOW CHART Sindh Bank LTD HO/Branch Signing (MAPFC) Customer/Exporter On the need of PKR, Exporter will bring his export LC bills (within approved limits) to Branch counter The bank s treasury will negotiate the rate with the customer and the same will be given to the customer by the branch After finalization of the deal the Bank will purchase the Foreign Currency to be delivered at a future known date (due date) and pay the price in PKR as per agreed rate To extend the facility, Sindh Bank may ask the exporter to assign its receivable to the bank The customer will deliver the Foreign Currency to Sindh Bank on the due date, but will not be contingent to arrival of the LC proceeds. Page 7 of 20
IMPORTANT CHECKLIST The approved Manual should be used for execution of all Bai Salam transactions. Appendix A of MAPFC will be signed between the Bank and the Customer. The date should be same as on Master Agreement. Should match with the documents submitted by the Exporter. Foreign Currency should be mentioned (e.g. US Dollar, Pound Sterling, Japanese Yen etc.). The absence of Due Date, Sale Price (in PKR) & FC will result into a MAJOR Shariah Audit observation. Appendix B Declaration of Sale of Foreign Currency. The date should match MAPFC date. The date on which the Transaction was executed should be clearly mention, which is essential in tracking the transaction from the deal slip. Foreign Currency should be mentioned. The absence of Due Date, Sale Price in PKR & FC will result into a MAJOR Shariah Audit observation. The rate should be same as quoted in the deal slip of the branch and should be between the Ask & Bid rate of Reuters Sheet. The date of acceptance should always be after the offer date. A brief and a detailed checklist are made, which should be used while conducting Bai Salam transaction. Bai Salam Foreign Currency Bill Discounting CHECKLIST Date: Branch / Department Departmental Head / Branch Manager S.No Description Yes No N/A Remarks/Reasons 01. Master Agreement for Purchase of Foreign Currency (MAPFC) is signed with the Exporter (Required to be obtained ONE TIME for the facility amount, in case of any Upward CHANGE in limit, MPFC needs to be REVISED. 02. Appendix A is properly filled for every transaction. (Required to obtained for EVERY foreign bill purchased) 03. Appendix B is properly filled for every transaction. (Required to be obtained for EVERY foreign bill purchased) 04 Rates taken for conversion should lie between the SPOT rate range and should be the rates present on the Reuters screen PKR=PK 05 Is the level of understanding of the product clear at the branch staff level? Page 8 of 20
Detailed Checklist Bai Salam Transaction Bai Salam (Foreign Currency Bill Discounting) 1. Master Agreement for Purchase of Foreign Currencies (MAPFC) Master Agreement is signed with the Exporter (Responsibility: CAD) (Required to be obtained ONE TIME for the facility amount, in case of any Upward CHANGE in limit, MAPFC needs to be REVISED). I. Agreement Date II. III. IV. Exporter Name Exporter Address Requested Amount in Pak Rupees (to be purchased by Exporter) V. Signature on Contract s Page # 3 by: 1. Exporter/its Agent 2. SNDBL Agents 3. Signature of both parties at every page 4. Witness # 1 5. Witness # 2 VI. Witness Names written 1. Witness # 1 2. Witness # 2 VII. Witness CNIC number written 1. Witness # 1 2. Witness # 2 Page 9 of 20
2. Appendix A (Responsibility: TRADE FINANCE DEPARTMENT) (Required to be obtained for EVERY foreign bill purchase) 1. Date 2. Exporter Name 3. Exporter Address 4. Export LC Details 5. Dates of LC(s) 6. Expected dates of payments and amount of bill 7. Exporter s Signature 8. Match Amount with Appendix B 9. Match Currency with Appendix B 3. Appendix B (Responsibility: TRADE FINANCE DEPARTMENT) (Required to be obtained for EVERY foreign bill purchase) 1. Date 2. Exporter s Name 3. Declaration Date 4. Foreign Currency amount to be purchased written 5. Equivalent Pak Rupee Amount written (At Spot Rate) 6. Due Date for Foreign Currency mentioned 7. Authorized Signatures are mentioned a. From SNDBL b. From Customer / Exporter c. On the Date of Transaction 8. Match Amount with Appendix A 9. Match Currency with Appendix B Page 10 of 20
4. Demand Promissory Note (Responsibility: CAD) (Required to be obtained ONE TIME for the face value of facility amount + 20% Margin Amount) 1. Pak Rupee amount equivalent to Foreign Currency purchased 2. Exporter s Authorized Signatures taken 3. Witnesses details taken a. Witness # 1 i. Name ii. Address iii. CNIC # b. Witness # 2 i. Name ii. Address iii. CNIC # 4. Margin Amount 20% (Pak Rupees) 5. Any Other Security taken from the Exporter YES NO 6. If yes, Details Page 11 of 20
Accounting ACCOUNTING TREATMENT OF SALAM FINANCE Debit Credit Account Type Recording of Commitment-At the time of approval of the Murabaha and completion of documentation Commitments-Customers Commitment (Salam Finance) xxx Contingent Commitments-Bankers Commitment (Salam Finance) xxx Contingent Enter in the relevant sub-head. Select relevant Pool name At the time of disbursement On Disbursement of funds Financing against Bills-Bai Salam* xxx Assets Islamic Deposits-Current Deposit-LCY (customer's account) xxx Liabilities Unearned Income-Financing against Bills-Bai Salam xxx Liabilities *At the Rupee equivalent of FCY purchased. Enter in the relevant sub-head. Select relevant Pool name On reversal of Commitment Commitments-Bankers Commitment (Bai Salam-Foreign Bills) xxx Contingent Commitments-Customers Commitment (Bai Salam-Foreigh Bills) xxx Contingent Enter in the relevant sub-head. Select relevant Pool name On recording of Monthly Accrual of Income Unearned Income-Financing against Bills-Bai Salam xxx Liabilities Profit earned on Salam Finance-Bai Salam (Bills) xxx Assets Enter in the relevant sub-head. Select relevant Pool name TRANSACTIONS-RECORDED AT THE END OF TREASURY DEPARTMENT IN THE PERIOD TILL REPAYMENT Contingent Account entries to be recorded-entering into a new contract Transaction for forward leg of purchase of FCY to be recorded by Treasury and simultaneous forward sale of FCY in the interbank market:. Forex Forward Purchases-Customer (relevant currency subhead) xxx Contingent Forex Forward Sale-Bank (relevant currency sub-head) xxx Contingent Enter in the relevant sub-head. Revaluation gain/loss entries (both legs) to be recorded by Treasury Gain on Revaluation of Nostro Accounts-Gain/(loss) on forward revaluation accounts xxx Income Gain on Revaluation of Nostro Accounts-Gain/(loss) on forward revaluation accounts xxx Income Enter in the relevant sub-head. Page 12 of 20
At the time of settlement: Receipt of Proceeds in Bank's Nostro Account and FCY sold against future Contract-(recorded by Treasury) Deposits with Banks-Nostro Balances (FCY) xxx Assets Deposits with Banks-Nostro Balances (FCY) xxx Assets Enter in the relevant sub-head. Reversal of entries for forward contracts: Forex Forward Sale-Bank xxx Contingent Forex Forward Purchases-Customer xxx Contingent Enter in the relevant sub-head. Receipt of Rupee funds against FCY sold, transfer of funds required for settling Financing and recording exchange gain/(loss), if any Balances with Banks (relevant sub-head) xxx Assets Other Creditors-Branch Funding Account xxx Liabilities Gain on Revaluation of Nostro Accounts-Gain/(loss) on forward revaluation accounts xxx Income At the Islamic Banking Branch-entries to settle the financing Settling the Financing against funds transferred from Treasury Other Creditors-Branch Funding Account xxx Liabilities Financing against Bills-Bai Salam xxx Assets Enter in the relevant sub-head. Select relevant Pool name Recording any un-accrued Income/Profit that remains: Unearned Income-Financing against Bills-Bai Salam xxx Liabilities Profit earned on Salam Finance-Bai Salam (Bills) xxx Income Enter in the relevant sub-head. Select relevant Pool name Page 13 of 20
Annexure A MASTER AGREEMENT FOR PURCHASE OF FOREIGN CURRENCIES (BAI SALAM) SINDH BANK LIMITED Bai Salam A Shariah Compliant Alternate For Sight Export Bill Discounting Islamic Banking Division, Sindh Bank Limited Page 14 of 20
MASTER AGREEMENT FOR PURCHASE OF FOREIGN CURRENCIES THIS AGREEMENT is made on this day of,20 By and between a company incorporated under the laws of Pakistan, having its registered office at (hereinafter referred to as the Customer ); of the one part And SINDH BANK LIMITED, a banking company incorporated under the laws of Pakistan, having its SNDBL ); of the other part. WHEREAS the Customer is an exporter, who has entered/shall enter in to export contracts with importers for the export of finished goods/other items (the export contracts are herein after collectively referred to as Export Contracts and more particularly detailed in Appendix A hereto, which may be amended from time to time so as to include new export contracts). AND WHEREAS the Customer has exported/shall export the finished goods/other items as per the terms of the Export Contracts and the relevant bills of lading and other documents that may be delivered to SNDBL to the collecting bank of the importer. AND WHEREAS payment in foreign currency including without limitation US$, Euros, GB Pounds and/or other currencies (hereinafter collectively referred to as the Foreign Currency ) will be payable as per the relevant bills details whereof shall be appended in Appendix A hereto from time to time. AND WHEREAS the Customer has requested SNDBL to purchase Foreign Currency up to equivalent PKR /- (Rupees Only) against Pak Rs. from time to time as requested by the Customer upon the terms and conditions appearing herein. NOW, THEREFORE, this Agreement witnesses and it is hereby agreed by and between the Parties as under: 1. The Customer shall approach SNDBL from time to time for the sale of foreign exchange to SNDBL. The transaction contemplated herein shall take place as follows: (a) SNDBL shall purchase Foreign Currency ( Purchased Foreign Currencies ) from the Customer in consideration of Pak Rupees. To be delivered immediately against prevailing spot rate of Foreign Currencies in question as intimated by SNDBL to the Customer to be delivered on deferred basis as per schedule appearing in Appendix A hereto from time to time. (b) The Customer shall make available to SNDBL the Purchased Foreign Currencies on the due dates stated in Appendix B hereto (hereinafter collectively referred to as Due Dates ) Page 15 of 20
(c) The Customer shall irrevocably and unconditionally authorizes SNDBL to appropriate the export proceeds to be paid under the Export Contracts as and by way of payment of the Purchased Foreign Currencies due by the Customer to SNDBL under clause (a) herein above. (d) In case of any of the export proceeds under the Export Contracts are not available or have not been remitted due to any reason whatsoever, the Customer shall make payment of the Purchased Foreign Currencies to SNDBL from other sources. (e) The purchase of Foreign Currencies shall be evidenced by the Declaration of Sale appearing in Appendix B. The Appendices A and B for any transaction shall be filled attached to this agreement upon execution of the said agreement. 2. Notwithstanding anything contained in this Agreement, it is hereby clarified that the Customer is the primary obligor for the payment to SNDBL of the Purchased Foreign Currencies on the Due Dates and its liability to SNDBL to make available the amounts due as per the Due Dates shall continue irrespective of any breach of contract by or dispute arising in respect of the Export Contracts, the insolvency of the importer under the Export Contracts or if payment is not available on the Due Dates as per the Export Contracts for any reason whatsoever. 3. The purchase of the Foreign Currency and the sale of the Pak Rupees hereunder shall be a provision of finance by SNDBL to the Customer under the provisions of the Financial Institutions (Recovery of Finance) Ordinance, 2001. 4. As security for payment by the Customer of the Purchased Foreign Currencies along with any other amounts due hereunder, the Customer has already provided various securities to SNDBL for and in respect of banking facilities provided/to be provided to the Customer and agrees to provide any further securities as may be acceptable to SNDBL. 5. If the Purchased Foreign Currencies or any installment thereof or other amounts payable by the Customer to SNDBL on a Due Date is not paid by the Customer to SNDBL by that date, and the Bank is of the opinion that the delay is without a valid reason, then the Customer undertakes to pay to SNDBL, amounts by way of charity at the rate of 20% per annum of the due amount. Such amounts shall be utilized by the Bank for charitable purposes as approved by the Shariah Advisor of the Bank. 6. The demand promissory note executed by the Customer and delivered to SNDBL and any other securities provided to SNDBL by the Customer hereunder shall be continuing security for the payment of the Purchased Foreign Currencies remaining unpaid and other amounts payable by the Customer hereunder and the Customer shall remain liable on the said Promissory Note and securities notwithstanding the fact that by payments made to SNDBL from time to time, the liability may be reduced or extinguished or even that the account may at any time have been in credit. 7. That the Customer hereby agrees to hold SNDBL harmless and indemnified against any loss, damage, or expenses which SNDBL may incur by reason of (i) the non-payment/non- Page 16 of 20
availability of the export proceeds under the Export Contracts due to any reason what so ever (ii) non-payment of the Purchased Foreign Currencies as required hereunder. 8. This Agreement is governed by the applicable laws of Pakistan and the directives of the State Bank of Pakistan in respect of the sale and purchase of foreign exchange in force from time to time. IN WITNESS WHEREOF the parties have executed this Master Agreement for Purchase of Foreign Currencies on the date first above written. For and on behalf of For and behalf of SINDH BANK LIMITED Authorized Signatory Authorized Signatory Witnessed By: 1. Name: Address: CNIC NO: 2. Name: Address: CNIC NO: Page 17 of 20
APPENDIX A This Appendix shall be attached to and form an integral part of the Master Agreement for Purchase of Foreign Currencies (via Salam) dated BETWEEN AND SINDH BANK LIMITED S.No Details of Export LC(s) Date of LC(s) Expected Dates of Payments and Amounts of Bill(s) Due Date(s) Foreign Currency Amount of Foreign Currency Signed by: For & on behalf of Date: Page 18 of 20
APPENDIX B This Appendix shall be attached to and form an integral part of the Master Agreement for Purchase of Foreign Currencies (via Salam) dated BETWEEN SINDH BANK LIMITED Declaration of Sale under clause 1(a) and (e) Date: We offer to purchase the following Foreign Currencies at the price stipulated herein: Foreign Currency Sale Price in Pak Rupees * Due Date(s) For and on behalf of SINDH BANK LIMITED * As per today s prevailing spot rate Date: To, SINDH BANK LIMITED We accept your offer and hereby sell the above mentioned Foreign Currency to you at the stipulated price. We shall make available the Foreign Currency amount on the Due Date mentioned above. For and on behalf of Page 19 of 20
DEMAND PROMISSORY NOTE Rupees. /= On demand we, ABC Company promise to pay SINDH BANK LIMITED, Karachi, or order the sum of Rupees /= (Rupees Only) for value consideration received. Date: For and on behalf of Witnesses: 1. Name Address CNIC NO 2. Name Address CNIC NO Page 20 of 20