Working Capital Finance Solutions
for short term financing requirements
Amongst the wide range of Shariah-complaint solutions for our customers, Murabaha and Istisna are designed to meet working capital requirements. For example, if a customer needs finance for purchasing raw materials for their industry or are trading in goods then they could use Mudarabah or Istisna to meet their financial needs.
One of the most common modes of finance employed by Islamic Banks, Murabaha is based on the exact requirements of each customer. It can be defined as a sales transaction where Meezan Bank purchases the commodity and sells it after adding an agreed profit. Thus, it is not a loan given on interest - it is sale of a commodity on a deferred price.
Murabaha involves the purchase of a commodity by Meezan Bank on behalf of a customer and subsequent sale to the customer on cost-plus-profit basis. The cost and profit margin to the bank is expressly disclosed to the customer.
Simply put, rather than advancing money to the customer, Meezan Bank buys the commodity from a third party and sells it to the customer at an agreed price, which includes an element of profit.
So what is the difference between Murabaha and a Sale?
A simple sale in Arabic is called Musawamah - a sale that does not involve disclosing or referring to the cost of goods sold. However, when the cost price is disclosed to the client, such a sale is called Murabaha.
A short-term financing facility for meeting liquidity requirement of the customers (including local businesses and exporters), in which the Bank purchases the finished/manufactured goods of the customer. The goods are delivered to the Bank. After taking delivery, these goods are then sold to the local buyer or exported to the foreign buyer by the customer acting as the Bank's agent.
Istisna’a is a sale transaction where an asset is sold before it comes into existence. It is an order to manufacture a specific asset for the purchaser. The manufacturer (our customer) uses its own material to manufacture the required goods. In Istisna’a, price is fixed with the consent of all parties involved. Similarly all other necessary specifications of the finished product are agreed beforehand.
Istisna’ as a mode of financing
Istisna Finance is used to cater for the working capital requirements of a business involved in the manufacturing of goods. It is ideally suited for exporters and manufacturers who have export orders in the shape of Sight/Usance Letter of Credit/ Sight Export Contract D/P/ Usance Export Contract D/A.