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Appendix 8.1

Lease Ending with transfer of Ownership Financing Instrument

Name of the Product:
Corporate Ijara Muntahiya Bil Tamleek (lease ending with transfer of ownership) Financing Product
Product Sponsor:
Product Task Force:
Background
1. The bank strives to provide innovative products and services that cater to the financial needs of society. In order to cater to the needs of our customers, we aim to provide our clients with exceptional and innovative sharī‘ah-compliant banking products.
2. Sharī‘ah prohibits the payment or acceptance of interest. For the transaction to be sharī‘ah-compliant both the underlying assets and the contract between the bank and the client have to be in accordance with sharī‘ah precepts.
Guidelines:
1. This refers to any regulator and SSB-issued guidelines.
Summary:
1. The objective of this product paper is to introduce the product along with its sharī‘ah structure, key features, tentative operating process flows, relevant documentation, pricing, and security structure.
Ijara Muntahiya Bil Tamleek (Ijara MBT)
Introduction
1. Ijara MBT is a sharī‘ah-compliant financing tool where the bank leases an asset that is owned by the bank to corporate customers to facilitate short- or long-term financing.
Sharī‘ah Structure
1. In Ijara MBT the lessor leases the asset to the lessee against specified rental payments. The agreement includes a promise from the lessor to transfer to the lessee the title of the leased asset at the end of the lease term through a sale for an agreed price or other arrangements. During the tenor of the lease the bank retains ownership of the asset and is liable for risks related to it, and benefits from proceeds associated with the asset.
2. The following sharī‘ah guidelines must be observed:
  - Underlying asset: The asset must be specified and non-consumable.
  - Ownership of the asset: The bank must acquire the asset before leasing it to the customer. It must remain under the bank’s liability during the tenor of the ijara facility. The bank is entitled to proceeds from the asset. If any damage or loss is caused by the customer due to negligence then they will be borne by the lessee.
  - Ijara rentals only become payable when the asset is delivered to the lessee in operative form.
  - Takāful Insurance: The asset remains in the name of the lessor (bank) and the costs of takāful insurance are to be borne by the owner. However, the lessee (customer) could be authorized to arrange the insurance on behalf/account of the bank. Should takāful be available then it is not permitted to use conventional insurance. The lessor is permitted to incorporate these costs in calculating the lessee’s rental payments.
  - The ijara facility could be terminated before the end of the tenor with mutual consent of both parties.
  - Either party could make a unilateral promise to buy/sell the assets upon expiry of the ijara facility; however, the ijara agreement is not conditional upon this sale.
  - The rental payments must be agreed to in advance of the rental period. In case lease payments are made variable, the lease amount for the first period must be specified as a determined amount and succeeding periods linked to an unambiguous index.
  - The ijara contract ceases to exist if the underlying assets become inoperative, unless a similar asset is substituted for the first. Similarly, the contract remains valid if the asset is damaged but could be repaired; however, the lessee must be compensated for the lost time.
  - In case of delays in paying the rental installments, the bank is neither allowed to increase the rental amount nor permitted to add any amount to the outstanding debt. However, the customer could be penalized with late payment charges (for number of days overdue). Such amounts would be transferred to a charity account that is supervised by the SSB, and may not be used to benefit the bank in any way.
  - The lessee’s negligence or misconduct which leads to damage or destruction of the asset entitles the lessor to charge the lessee for actual losses caused. Should takāful insurance proceeds be paid, then the lessor would be entitled to them and would cover the difference between such losses and the proceeds by charging the lessee.
  - It is not permitted to agree in the lease agreement or in a subsequent document on a rate for discounting the due rentals in case of early settlement of the lease. The parties could amend future payments, however, and could at the time of prepayment agree to the amount.
  - The title deed is transferred at the end of the lease term by a sale or gift contract.
Key Features
- Ijara financing could be conveniently utilized for fixed asset financing requirements, such as real estate, machinery, automobiles etc.
- Salient features (like tenor) must comply with central bank guidelines.
Process Flow
1. The below outlines the tentative process flow for this transaction; however, the same could be amended in line with the specific transaction/commodity.
  - The customer identifies an existing or non-existing asset, which it wishes to acquire but needs financing to do so.
  - The customer approaches the bank to request financing and provides the bank with financial details. Should the asset exist in the future, then parties would agree to its description and specifications.
  - Should the bank agree to provide financing, the customer would enter into a formal promise to lease the intended asset once it has been purchased by the bank and would agree to the terms as well as the lease payment schedule.
  - The customer would pay an earnest money amount to demonstrate commitment to the transaction.
  - The bank would purchase the desired existing asset or agree with a contractor to manufacture it, and have the title transferred into its name.
  - The bank would enter with the customer into a lease agreement. In case of an asset that is to be manufactured and delivered, the bank would sign a forward lease agreement with the customer and could start receiving monthly payments “on account” for future usufruct.
  - The customer would pay periodic installments in compensation for current or future usufruct.
  - After successful completion of the lease contract, ownership of the leased asset would be transferred to the lessee through a sale or gift contract.
Documentation
1. The primary documentation for this financing facility could include the following:
  - Promise to Lease
  - Purchase Agreement
  - Ijara Agreement
  - Service Agency Agreement
  - Undertaking to Sell
  - Sale Agreement
  - Counter Deed
Pricing
1. Pricing would be determined in line with customer’s risk profile and other credit-related factors. Rentals could be based on fixed rates or Index + spread.
Security
1. The security structure would primarily include: (a) ownership of the asset (b) security deposit.
Requirements
- System development
  - Necessary process flow requirements
  - System parameters including calculation of profits and accounting models
  - Review system reports and ensure compliance with local regulatory requirements.
- Legal counsel’s review of terms and conditions of documentation.
- Negotiation of takāful agreements for coverage.
- Review and approval of Product Committee.
- Review and approval of SSB.
- Staff training – front and back office.
- Review and approval of the Central Bank.
Market Analysis:
- Target market:
  - Corporate customers.
- Competitor products:
  - Similar products offered by other banks in the local market.
- Proposed pricing
  - Pricing would remain in line with the risk-based pricing strategy.
Sales and Servicing:
- Account executives.
- Branch staff.
Communication Requirements:
- Development of standard marketing material in line with product approvals.
- Update bank website.
Risk Considerations:
- Establish risk parameters and financing criteria.
- Ensure proper calculation of recovery costs.
- Ensure processes and systems comply with sharī‘ah requirements.
- Ensure proper credit valuation is completed for each customer/facility. This should address standard credit risk along with sharī‘ah guidelines.
- Mitigate risks arising from owning the asset.
- Ensure profit margins benchmarks are transparent and easily understood by clients.
- Ensure rebate calculations are standardized internally.
Compliance Considerations:
- Review products and services to ensure:
  - Terms and conditions as well as policies and procedures are in compliance with sharī‘ah and local regulatory requirements
  - Reporting is periodic and in compliance with both sharī‘ah and local regulatory requirements.
Legal Considerations:
- Drafting of terms and conditions in line with requirements.
  - Consult with external law firm, if needed.
Finance Considerations:
- Establish accounting framework and entries.
- Ensure that standard financial reports are available.
Proposed Launch Timetable:
- Product approval and sign offs.
- IT software development.
- Staffing/training.
- Marketing campaign.
Key Players:
- Product Committee.
- Corporate Banking.
- Risk Management.
- Legal Counsel.
- Finance.
- Internal Sharī‘ah Audit.
- Compliance.
- Operations.
- IT.
- SSB.

BOD and Regulatory approvals required?

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Table of Contents for Appendix 8.1: Lease Ending with transfer of Ownership Financing Instrument

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Lease Ending with transfer of Ownership Financing Instrument

Table of Contents for
Appendix 8.1: Lease Ending with transfer of Ownership Financing Instrument