Musharaka Letter of credits

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Definition of Participating in the Purchase of a Commodity:
The Bank may participate with a partner or more in the purchase of a specified commodity with a capital defined prior to signing the participation contract; in addition to signing a separate contract stating the promise of the partner to buy the Bank's share in Murabaha formula.

Participation Credits:
This is one way which the Bank uses to offer its participation in providing a commodity not available at local markets. So, this financial instrument helps in buying the commodity by involving the Bank and the client in the same transaction together through opening a documentary credit account in the name of the two partners, or their delegates. The value of the credit shall be deducted from the participation account where the two capitals of the partners are mixed and mingled as one un-distinguished account.

Special Terms and Conditions for Participation Credits:
  • In the event the Bank wants to participate with the client to buy the goods before opening the credit account, and before the client (the Bank's partner) has signed the contract, the credit account may be opened in the name of either of the two parties.
  • The concerned goods of participation may be sold to the partner, in cash or on future date on the condition that the sale to the partner will not be a binding promise or provisioned in the participation contract.
  • The documentary credit may be opened in the name of the Bank or the partner.

Administrative Procedures for the Product:
  1. The client shall submit a request to the Bank- according to the form to buy a commodity in participation No. (M.Sh.S.1).
  2. An invoice detailing the price and description of the related commodity shall be attached with the request.
  3. The client shall put forward an acknowledgement stating the commodity is not in his possession yet and that there are no standing financial liabilities between him and the source of the commodity concerning the same invoice, according the form No. (M.Sh.S.2).
  4. The client shall put forward in written a promise to buy the Bank's share in the commodity with a predefined mark- up (profit) margin according to the form No. (M.Sh.S.3).
  5. The client shall complete and put forward the other required documents for individuals, companies, establishments and public agencies.
  6. The branch shall study the request submitted by the client to form and express an opinion. The application shall be referred to the competent management to approve or refrain from entering the participation transaction.
  7. In the event the management approved to enter the participation transaction with the client to own the commodity, the percentage of the participation of both the Bank and the client in the capital of the participation shall be defined; a special separate account shall be opened for this regard to complete the transaction; both parties shall sign the participation contract according to the form No. (M.Sh.S.4).
  8. Checking that the shares of both the Bank and the partner are deposited in the participation account.
  9. Checking the ownership documents of the commodity to make sure that the owner and the source of the invoice are the same.
  10. The agreement of both sides of the partnership on the terms and conditions to buy the commodity from the source.
  11. The purchase of the commodity by the partners from the source.
  12. Acquiring a copy of the ownership documents of the commodity (Customs Clearance, Bill of Lading and any other documents related to the commodity.
  13. Method of payment to the source:
    Payments will be done via opening a joint documentary credit which will require in addition to the previous mentioned conditions and procedures and before opening the documentary credit account, submitting the required documents for opening the documentary account. Any incurring values on the credit and expenses for importing the commodity shall be deducted from the joint account.
  14. The commodity shall be received from the source according to the previously agreed upon terms and conditions.
  15. The partner shall submit a written request to the Bank according to the form No (. M.Sh.S.6) asserting his wish to buy the Bank's share in the commodity.
  16. Signing the contract to sell the Bank's share in the partnership commodity to the client according to Murabaha formula (the cost of the share plus the previously agreed upon profit margin) – according to the contract to sell the share by Murabaha formula, form No. (M.Sh.S.7).
  17. Handing over the commodity to the client.
  18. Settlement of the accounts concerning the participation transaction.
  19. Follow up the collection of installments from the client.
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