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Current Issues in Current Issues in Istisna TransactionsIstisna Transactions

Some major issues related to Istisna Financing are as follows and will be coveredin detail in the presentation:

Issues in Istisna

1. Specification of goods at the time of Written Offer2. Specification of goods at the time of signing of Goods Receiving Note3. Addendum to Written Offer4. Timing of signing of Goods Receiving Note (GRN)5. Identification of Istisna goods at the time of signing of GRN6. Timing of issuing Notice to the customer7. Advising Schedule for Incentive Fee at the time of Notice

f /8. Submission of GRN & Notice to CAD / TFD9. Tracking Sale of Istisna goods at the time of Confirmation of Sale of Goods10. Payment terms on which Istisna goods are sold11. Advance Payments in Istisna transaction12. Settlement of Istisna Financing13. Extended tenure in IERS Transactions14. Calling of Corporate Guarantee

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1. Specification of goods at the time of Written Offer

Issues in Istisna

As Istisna is a sale of nonexistent goods where Deferred Delivery of goods isallowed provided specification of goods is defined at the time of Sale.

Thus, in order to make the transaction Shariah Compliant, specification ofIstisna goods should be mentioned in the Written Offer.

For the purpose enough specification of goods should be described so that For the purpose, enough specification of goods should be described so thatchances of conflict is omitted.

APPENDIX A WRITTEN OFFER

[Date] To: [Insert name and address of the Bank] Dear Sirs, Written offer for manufacture of Goods [insert description] (1) We (the Manufacturer) are pleased to confirm our willingness to manufacture the Goods

subject to the following terms and conditions:

(a) Description of the Goods: -------------------------------------------------------------------------------------------------------------------------------------------------------------

(b) Detail of Goods and Istisna Cost Price (cost of manufacture):

(c) Point of Delivery:

(2) We also attach the original and valid [Letter of Credit][Purchase Order] (if available). (3) All terms and conditions (including the definitions) of the Master Istisna Agreement shall

apply to this Written Offer. IN WITNESS WHEREOF, the Manufacturer has executed and delivered this Written Offer as of the date mentioned hereinabove

S.no Specification of Goods Quantity Per Unit Istisna Price

Total Istisna Price

Delivery Date

1 100% Cotton Flannel Dyed 5000 158 5,000,158 14 Feb 2011 2 100% Cotton Flannel Dyed 6900 285 1,966,500 14 Feb 2011 3 100% Cotton Flannel Dyed 7200 352 2,534,400 14 Feb 2011

the date mentioned hereinabove.Yours faithfully, For and on Behalf of the Manufacturer ______________________ WITNESSES:

1. __________________________ 2. __________________________

Acceptance of the above Written Offer We, Meezan Bank Limited accept the Written Offer of the Manufacturer dated ___ on the terms and conditions contained in the Master Istisna Agreement. ______________________ For and on Behalf of Meezan Bank Limited Dated: ________________

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2. Specification of goods at the time of signing of GRN

Issues in Istisna

It is observed that in some cases there is a difference in the specification ofgoods delivered compared to the specification agreed at the time of WrittenOffer.

This practice is against the essence of Istisna transaction.

However minor differences can be accommodated However minor differences can be accommodated

3. Addendum to Written Offer

Issues in Istisna

Istisna is a transaction in which the specification of goods, price of goods, qtyof goods and delivery date of goods is agreed at the time of execution ofIstisna contract (i.e. Written Offer in case of MBLs documentation structure)through negotiation and mutual consent.

Hence after the signing of the Written Offer these parameters cannot bechanged and the customer should be clearly advised from the start that nochanged and the customer should be clearly advised from the start that nochanges can be made to the parameters after the signing of the WrittenOffer no matter what the market situation and the customer must make awell informed decision.

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3. Addendum to Written Offer (Cont..)

Issues in Istisna

However in case of extreme situation where market conditions changeconsiderably and there no other solution is possible the parameters of theWritten Offer may be changed through bilateral agreement between theparties by signing an Addendum to Written Offer provided:

(i) A prior written approval of Head of PDSC through an IOM is taken;(ii) The Addendum to Written Offer is signed before taking the delivery

of goods.

ADDENDUM TO WRITTEN OFFER [Date] To: [Insert name and address of the Bank] Dear Sirs, Addendum to Written offer for Manufacturing of Goods [insert description] Please refer to written offer for manufacturing of ________ dated _________ detailed as follows:

a) Description of the Goods: ________________________________________

b) Quantity of Goods: ________________________________________

c) Specification of Goods: ________________________________________

d) Delivery Date (Max): ________________________________________

e) Istisna Cost Price: ________________________________________

f) Point of Delivery:f) Point of Delivery: ________________________________________

Currently we are facing following problems

i. _____________________________________________________________________________

ii. _____________________________________________________________________________

Due to the above-mentioned reasons we hereby request to accept the following changes in the Specification (mentioned in the above-mentioned Written Offer) of goods

a) Description of the Goods: ________________________________________

b) Quantity of Goods: ________________________________________

c) Specification of Goods: ________________________________________

d) Delivery Date (Max): ________________________________________

e) Istisna Cost Price: ________________________________________ IN WITNESS WHEREOF, the Manufacturer has executed and delivered this Addendum to Written Offer as of the date mentioned hereinabove. Yours faithfully, For and on Behalf of the Manufacturer ______________________ ABC Company WITNESSES:

1. __________________________ 2. __________________________ Acceptance of the above Addendum to Written Offer We, Meezan Bank Limited accept the Addendum to Written Offer of the Manufacturer dated ___________ on the terms and conditions contained therein. ______________________ For and on Behalf of Meezan Bank Limited ated: ________________

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4. Timing of signing of Goods Receiving Note (GRN)

Issues in Istisna

The purpose of Physical Inspection in Istisna Transactions is to take physicaldelivery of goods at Manufacturers premises.

Hence GRN must be signed at the time of physical delivery upon which theownership of goods is transferred to MBL.

Not signing GRN or any delay in the signing of GRN will not transfer the Not signing GRN or any delay in the signing of GRN will not transfer thegoods in MBLs ownership and in the meantime if these goods are sold MBLwill not be entitled to the earn the income from the goods sold.

APPENDIX B GOODS RECEIVING NOTE

(for ISTISNA Transactions)

[Date] To: [Insert name and address of the Manufacturer] Dear Sirs, Master Istisna Agreement dated [______] (Agreement) Goods Receiving Note (1) We confirm having received the Goods contracted to be delivered by you as per the

following details:

a) Date of Receipt:a) Date of Receipt: b) Time:

c) Address:

d) Description of Goods received: The quantity, quality, and other specifications of the

Goods have not been ascertained.

e) Specification of Goods received:

cription Qty

(Units) Specification Value in PKR

(Per unit) ow Case 5000 100% Cotton Flannel Dyed 158 le Fitted Sheet 6900 100% Cotton Flannel Dyed 285

uble Fitted Sheet 7200 100% Cotton Flannel Dyed 352

f) Goods identification Method: NOTE: The specifications of the Goods must match with the specifications mentioned in the Written Offer i e Appendix A of) g) Date of Physical Inspection: h) Additional remarks: This receipt of Goods is subject to the Goods being inspected and

found in order and Meezan Bank Limited reserves its rights to claim any remedies under the law and in terms of the aforementioned Agreement from the Manufacturer if the Goods are found not to be in order and as per the specifications agreed upon. Meezan Bank Limiteds acceptance of the Goods hereunder does not amount to a waiver of any of its rights under the law and/or under the Agreement.

Yours faithfully, ______________________________________ For and on Behalf of Meezan Bank Limited

specifications mentioned in the Written Offer i.e. Appendix A of the Master Istisna Agreement (This text box is not a part of the agreement.)

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5. Identification of Goods at the time of signing of GRN

Issues in Istisna

MBL representative conducting Physical inspection must ensure theexistence of goods, its proper identification & separation from the customerowned stocks

While taking the delivery of goods in Istisna the goods must be separatelyidentified from other goods (of the manufacturer) which are not beingdetermined. In case of export of goods which are packed in cartons or bagsor buckets; the carton/bag/bucket number of the identified goods should beor buckets; the carton/bag/bucket number of the identified goods should bewritten in the GRN.

In case of local goods in which there is no bag/carton/bucket number forinstance in case of sugar, etc. the delivery of bags/cartons/bucket must betaken in a manner that MBLs goods are separately identified throughseparate stacking, storage or through any other manner

5. Identification of Goods at the time of signing of GRN

Issues in Istisna

In case separate identification is not possible due to the nature of the goodsfor instance for goods which are in liquid form an appropriate percentage ofMBLs goods in the lot should be written on the GRN and the lot itself shouldbe separately identified.

It should also be made sure by the related RM and PDSC at the time ofprocess flow approval that the form of delivery (carton form; bag form; etc)is written in the process flow Along with this the method of separateis written in the process flow. Along with this the method of separateidentification (like through carton number; etc) should be mentioned in theprocess flow.

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6. Timing of issuing Notice to the customer

Issues in Istisna

After delivery of goods, MBL appoints customer as its agent to sell the Istisnagoods to credible buyers.

MBL representative should advice Notice to the customer and takeacknowledgment of the customer while conducting Physical inspection ofIstisna goods.

Advising of Notice should be advised to the customer well before the sale ofIstisna goods to the credible buyers

SCHEDULE 1 (Agency Agreement) Notice

(for ISTISNA Transactions) [Date] To, [Agent] [Address] Attention: [ ] From: [ ] Re: Authorization to Sell the Goods as Undisclosed Agent We refer to the Agency Agreement between [ ] and us dated [ ](Agency Agreement) In pursuance of Clause 3 of the Agency Agreement, we hereby authorize you to sell the following Goods (Sale Goods) on our behalf as our undisclosed agent and following the sale of the Sale Goods collect and pay us the Sale Price immedietaly upon receipt of the Sale price. We hereby advise and authorize you to take possession of the Sale Goods from [Point of Delivery] on [ ] so as to be able to execute the sale contemplated by this Notice and the Agency Agreement. Your Agency Fee and Incentive Fee shall be as per attached Schedule 2

Description Qty (Units) Specification

Minimum Target Selling Price (PKR

/ Unit) Pillow Case 5000 100% Cotton Flannel Dyed 158 Single Fitted Sheet 6900 100% Cotton Flannel Dyed 285 Double Fitted Sheet 7200 100% Cotton Flannel Dyed 352 Total

Buyer (If identified) [ ] Terms: Advance ____ days before sale (advance payment to be received after Notice) Advance ___ days before sale (advance payment already received before Notice) Spot (Cash) Credit ____ days from Sale Sale Price Payment Date (If identified): [ ]

NOTE: The specification and quantity of the Goods must match with the specifications mentioned in the Goods Receiving Note. (This text box is not a part of the agreement.)

Payment Instructions: [to be credited to our account [ ] with [ ] Without limiting the applicability of any other provision of the Agency Agreement or any of the other related transaction documents) the provisions of the Agency Agreement shall apply (mutatis mutandis) to this Notice as if the same were herein set out in full. In addition to the terms of the Agency Agreement, the above authorization to sell as our undisclosed agent is subject to the following conditions: a. b. c.

Examples of conditions include:

Sale price below Rs. 40 per unit not allowed

(This text box is not a part of the agreement.)

IN WITNESSES WHEREOF, the Principal has executed and delivered this Notice as of the [*] day of[*] For and on behalf of ______________________________________ For and on Behalf of Meezan Bank Limited WITNESSES:

1. _____________________ 2. _____________________

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7. Advising Schedule for Incentive Fee at the time ofN ti

Issues in Istisna

Notice

Schedule of Incentive fee should be advised to the client along with theNotice; the Notice is redundant and incomplete with out attaching the filledin Schedule of Incentive Fee and Fixed Fee.

Working Model is for Internal working only.

8. Submission of GRN & Notice to CAD/TFD

Issues in Istisna

The executed GRN and the Notice should be immediately submitted to CADand TF Dept (in case of export of Istisna goods) either on the same day or thenext working day so that appropriate entries related to inventory and Istisnafinancing are booked.

In some cases it has been observed that the documents are not timelysubmitted to CAD/TF Dept which creates doubts over the Shariahsubmitted to CAD/TF Dept which creates doubts over the Shariahcompliance level of the transaction.

In case back dated documents are being submitted to CAD/ TF Dept; thepersonnel of these departments should immediately report theseobservations to PDSC and do not accept these documents before approval istaken from PDSC

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9. Tracking of Sale of Istisna goods & Confirmation of Salef G d

Issues in Istisna

of Goods

Sale of Istisna goods should be tracked and evidence of the same should alsobe taken from the customer at the time of signing of Confirmation of Sale ofGoods

In case of Export cases / Local sale against LC, customer should route theshipping documents through MBL counter only.

10. Payment terms on which Istisna Goods are sold

Issues in Istisna

Payment terms for Sale of Istisna goods should be understood at the time of initiation of Istisna Financing.

Different treatment for Advance, Spot and Credit Sale.

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11. Advance Payment in Istisna transactions

Issues in Istisna

In case advance Payment is received by the Agent against sale of IstisnaAsset, Advance should be booked right after issuance of Notice and ouragent assigning the advance payment received from the buyer of MBL. In thiscase MBLs goods should then be delivered to that assigned buyer. Delivery ofgoods other than MBLs will make the transaction invalid.

The advance shall be recorded as liability The advance shall be recorded as liability.

On the day the Istisna goods are sold to the buyers, Istisna Financing shouldbe booked and subsequently settled through the Advance already booked.

12. Settlement of Istisna Financing

Issues in Istisna

Istisna Financing can only be settled through proceeds received from the saleof Istisna goods.

If the customer pays to MBL before the receipt of proceeds from the actualbuyer; such payment by the customer will be deemed as Qard and anyincremental Incentive Fee paid to the customer will be riba paid by MBL tothe customerthe customer.

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13. Extended Tenure in Istisna transaction

Issues in Istisna

In case Istisna was initially disbursed on different rate and later the rate wasrevised due to the extended tenure, Revised rate should be catered at thetime of delivery.

At the time of delivery, Schedule of Incentive Fee should be Revised to caterthe changed rate for the extended tenure.

No change in rate/ incentive fee/ agency fee can be made once the goodshave been sold.

14. Calling of Corporate Guarantee

Issues in Istisna

Customer in an independent capacity guarantees the credit worthiness ofthe Buyer and will undertake to compensate the Bank in case of failure fromthe Buyer to pay the sale price to the Bank.

Corporate Guarantee can only be called when Istisna Goods are sold tocredible buyers and the Credit Period, if any, is exhausted.

Thus, at the time of issuance of Notice, Payment terms should notdeliberately be changed to accommodate Corporate Guarantee.

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Thank You